Opinion ID: 1876539
Heading Depth: 1
Heading Rank: 18

Heading: spector motor service decision distinguished

Text: 7. Taxpayer contends, however, that since the rendition of the decision in Spector Motor Service v. O'Connor, 340 U.S. 602, 71 S. Ct. 508, 95 L. ed. 573, no tax, even though it be fairly apportioned and nondiscriminatory, may be levied on the net income of a foreign corporation engaged exclusively in interstate commerce. It is the position of the taxpayer that such a tax may be levied only in those cases where the foreign corporation is engaged in both intrastate and interstate commerce. We cannot agree with this interpretation of the Spector case. The Spector case did not turn on the fact that the foreign corporation was solely engaged in interstate commerce. The nub of the decision is that a net-income tax, even though it be fairly apportioned and nondiscriminatory, may not be imposed on the privilege of engaging in business that is exclusively interstate in character. The Connecticut Supreme Court construed its statute as involving a direct imposition of the tax upon the franchise or privilege of engaging in interstate commerce. The United States Supreme Court clearly accepted this construction as controlling its interpretation. This is not unusual. In Memphis Natural Gas Co. v. Stone, 335 U.S. 80, 84, 85, 68 S. Ct. 1475, 1477, 92 L. ed. 1832, 1838, the court expressly declared that it was bound by the construction of a state statute by the state court. Although the United States Supreme Court has on occasion looked behind a state court's holding that a tax is not a burden upon interstate commerce, it has not done so where the state court has by its construction admitted or declared the tax to be a burden upon that commerce. Since the incidence of the tax in the Spector case was the privilege itself of engaging in interstate commerce, it fell before the commerce clause. The court carefully distinguished those cases in which, as an exception to the general rule that no tax may be levied upon the privilege of engaging in interstate commerce, a state, where a taxpayer is engaged in both intrastate and interstate commerce, is permitted to tax the privilege of carrying on intrastate business and, within reasonable limits, is permitted to apply a fair proportion of the tax to the taxpayer's business which is done within the state. The court refused to extend the application of these hybrid cases to a taxpayer, like Spector, who is engaged exclusively in interstate commerce. The majority expressly stated that (340 U.S. 610, 71 S. Ct. 513, 95 L. ed. 579) the federal privilege of carrying on exclusively interstate commerce must be kept free from state taxation. (Italics supplied.) The court, in the Spector case, carefully pointed out that whether a state may validly make interstate commerce pay its own way depends first of all upon the constitutional channel through which it attempts to do so, citing Freeman v. Hewit, 329 U.S. 249, 67 S. Ct. 274, 91 L. ed. 265, and McLeod v. Dilworth Co. 322 U.S. 327, 64 S. Ct. 1023, 88 L. ed. 1304. Apparently in an effort to prevent misunderstanding of the rule of its holding, and for the purpose of indicating that a constitutional channel is available to the states, the court said (340 U.S. 609, 71 S. Ct. 512, 95 L. ed. 578):    The State is not precluded from imposing taxes upon other activities or aspects of this business which, unlike the privilege of doing interstate business, are subject to the sovereign power of the State. Those taxes may be imposed although their payment may come out of the funds derived from petitioner's interstate business, provided the taxes are so imposed that their burden will be reasonably related to the powers of the State and nondiscriminatory. (Italics supplied.) It follows that the Spector decision makes it reasonably clear that there is a constitutional channel for making interstate commerce pay its own way and that this channel gives the state a right to impose taxes upon other activities and aspects of the interstate commerce business which, unlike the privilege of doing interstate business, are subject to the sovereign power of the state despite the fact that such taxes may be derived out of income from interstate business.