Court Opinion

ID: 3320847
Source: CourtListenerOpinion
Date Created: 2016-07-05 17:38:27.325727+00
Date Added: 2024-06-11T13:58:52.211860
License: Public Domain

It is necessary in the first place to determine the nature of the tax complained of. The State contends that it is in the nature of an excise tax, the plaintiff that it is a tax on property, and the brief filed by the amicus curiae that it is an income tax. We think the State is right in its characterization of the tax. It is not a tax on property; the plaintiff pays a separate local tax on its property. This tax falls on income and *Page 55 
not on property. If the plaintiff had made no net income for the year 1915, it would have escaped this tax altogether, although its taxable property in Connecticut on July 1st, 1915, remained the same as before.
It is not an income tax, as such, because it is assessed only if and when the corporation does business within the State, and in the case of domestic corporations doing business in this and other States there is no attempt to assert personal jurisdiction for the purpose of taxing their entire income. Foreign and domestic corporations are treated alike, and the entire income is not taxed unless the entire business of the corporation is done within the State. It is apparent, therefore, that the basis of the tax is not jurisdiction over the property or over the person of the corporation, but jurisdiction over its business; and that it is a tax in the nature of an excise tax levied against domestic and foreign corporations alike, for the privilege of doing business in a corporate capacity within this State. In 1917 the General Assembly (Chap. 298, § 6, General Statutes, § 1401) characterized the tax as follows: "The tax . . . shall be in lieu of all other taxes upon the franchises of the domestic corporations included in the companies defined in said Part IV, except the tax on capital stocks provided by section 61 of Chapter 194 of the Public Acts of 1903 [General Statutes, § 3506], and shall be in lieu of all other taxes on the privilege of doing business within this State upon the foreign corporations included in the companies defined in said Part IV." The legislative construction thus put upon Part IV of the Act, although not in itself conclusive, is consistent with its practical consequences, and accords with the conclusion already stated. The fact that the tax is measured by a percentage of net income, or, in the case of a corporation engaged in interstate commerce, by a percentage of a part of its net income proportioned to the amount *Page 56 
of its tangible property in this State, does not, of course, prevent it from being an excise or privilege tax.
The next question is whether the tax, regarded as an excise or privilege tax is, in its application to the plaintiff corporation, an unlawful restraint on interstate commerce. This question appears to us to have been answered in the negative by the recent case ofUnited States Glue Co. v. Oak Creek, 247 U.S. 321,38 Sup. Ct. 499, wherein the Supreme Court took occasion to point out some of the things which a State might lawfully do in levying taxes on the net incomes of corporations engaged in interstate commerce. We quote from page 326: "But property in a State belonging to a corporation, whether foreign or domestic, engaged in foreign or interstate commerce, may be taxed, or a tax may be imposed on the corporation on account of its property within a State, and may take the form of a tax for the privilege of exercising its franchise within the State, if the ascertainment of the amount is made dependent in fact on the value of its property situated within the State (the exaction, therefore, not being susceptible of exceeding the sum which might be leviable directly thereon), and if payment be not made a condition precedent to the right to carry on business, but its enforcement left to the ordinary means devised for the collection of taxes." And again, on page 329: "A tax upon gross receipts affects each transaction in proportion to its magnitude and irrespective of whether it is profitable or otherwise. Conceivably it may be sufficient to make the difference between profit and loss, or to so diminish the profit as to impede or discourage the conduct of the commerce. A tax upon the net profits has not the same deterrent effect, since it does not arise at all unless a gain is shown over and above expenses and losses, and the tax cannot be heavy unless the profits are large. Such a tax, when imposed *Page 57 
upon net incomes from whatever source arising, is but a method of distributing the cost of government, like a tax upon property, or upon franchises treated as property; and if there be no discrimination against interstate commerce, either in the admeasurement of the tax or in the means adopted for enforcing it, it constitutes one of the general and ordinary burdens of the government, from which persons and corporations otherwise subject to the jurisdiction of the States are not exempted by the Federal Constitution because they happen to be engaged in commerce among the States."
The plaintiff contends that the Glue Co. case is authority for the taxation of net incomes of domestic corporations only. But this ignores the plain statement above quoted, that a tax which is in form a tax for the privilege of exercising its franchise within the State may be levied upon a corporation whether foreign or domestic engaged in interstate commerce, if the ascertainment of its amount is made dependent in fact on the value of its property within the State, and if it does not exceed the sum which might be leviable directly thereon.
Of course, no tax at all can be laid by any State which is in form or effect a direct tax on interstate commerce. And for the purposes of this case the significance of the quotation from page 329 of the opinion is that the tax on net income — as distinguished from a tax on gross receipts, condemned in Oklahoma v. Wells,Fargo  Co., 223 U.S. 298, 32 Sup. Ct. 218, and inCrew Levick Co. v. Pennsylvania, 245 U.S. 292,38 Sup. Ct. 126 — is not in form or effect a direct tax on interstate commerce. It is, therefore, a tax which a State may assess against persons or corporations engaged in interstate commerce, provided it keeps within its jurisdiction in other respects and within the limitations noted in the opinion. *Page 58 
As we read the opinion in the Glue Co. case it decides that within the limitations stated a State may tax the entire net income of a domestic corporation engaged in interstate commerce; and it points out as a logical consequence of this decision that a State may, under the form of a privilege tax, tax some fractional part of the net income of a foreign corporation engaged in interstate commerce, provided the apportionment is made dependent in fact on the value of its property situated within the State, that the amount of the tax is not excessive regarded as a tax on property within the State, and that there is no discrimination against interstate commerce in the admeasurement or enforcement of the tax.
The tax in question complies with every requisite pointed out. It is made dependent in fact on the value of the plaintiff's tangible property in Connecticut at the close of its fiscal year next preceding the assessment; and in determining its reasonableness from the jurisdictional standpoint, the fact should be regarded that all corporations deriving profits principally from the sale of tangible personal property, and most, if not all, corporations deriving profits principally from the use of such property, will almost necessarily have on hand at any given time and place but a small part of the property which constituted their entire local stock in trade for the year.
It is so in this case, for the schedules show that the plaintiff's typewriter products manufactured in this State and sold during the year 1915, brought approximately six millions of dollars over and above manufacturing costs. All of this property was within the protection and the taxing jurisdiction of Connecticut for some part of the year 1915; and the plaintiff was not otherwise taxed in this State on any part of it, except the relatively small part which happened to be *Page 59 
on hand on the day when its property was valued for local taxation in Hartford. Adding this value, or any reasonable part of it, to the agreed value of the plaintiff's tangible property in this State on January 1st, 1916, the tax complained of cannot amount to two-tenths of one per cent of the plaintiff's total taxable property located in this State during the year 1915.
The payment of the tax is not made a condition precedent to the right to carry on the business, but its enforcement is left to the ordinary means for the collection of taxes, and there is evidently no discrimination against interstate commerce or foreign corporations.
Since we rest our decision, so far as the commerce clause of the Federal Constitution is concerned, squarely on the opinion in the Glue Co. case, it is useless for us to review the authorities whose aggregate effect is authoritatively summed up in that opinion. It is enough to say that no later decision of that court has been brought to our attention which in any way qualifies or restricts the fundamental proposition that a State tax which is otherwise within the constitutional and jurisdictional limits of its taxing power, is not unconstitutional because it takes the form of a tax on the entire net income of a domestic corporation engaged in interstate commerce, nor because it takes the form of a tax on a part of the net income of a foreign corporation engaged in interstate commerce.
It may be added that the provisions for the apportionment of net income according to the relative value of tangible property within and without the State, distinguish our statute from those which were under consideration in Western Union Tel. Co. v. Kansas,216 U.S. 1, 30 Sup. Ct. 190; Looney v. Crane Co.,245 U.S. 178, 38 Sup. Ct. 85, and International Paper Co. v.Massachusetts, 246 U.S. 135, 38 Sup. Ct. 292. In each of these cases a State tax which was in form a permit *Page 60 
or excise tax was assessed as a percentage on the entire capital stock of foreign corporations, and was held to be "essentially and for every practical purpose a tax on the entire business of the corporation, including that which is interstate, and on its entire property, including that in other States; and this because the capital stock of the corporation represents all its business of every class and all its property wherever located."246 U.S. 142, 38 Sup. Ct. 292.
The case of Baldwin Tool Works v. Blue, 240 F. 202, may be briefly referred to for it is directly in point. In that case the West Virginia statute, which was upheld, required every corporation doing business both in and out of the State to pay a percentage tax on a part of its net income apportioned according to the value of all its property within and without the State.
The brief filed by the amicus curiae calls attention to the fact that Professor Powell has criticised the opinion in Baldwin Tool Works v. Blue. 31 Har. Law Rev. 760-765. But in a later article the learned author admits that the United States Glue Co. case "shakes the criticism heretofore passed upon Baldwin ToolWorks v. Blue," and explains in a footnote that his former criticism assumed that there was no distinction to be drawn between an excise measured by net profits and one measured by gross receipts. 32 Har. Law Rev. 645.
The first question submitted to us also raises the issue that the tax complained of violates theFourteenth Amendment, because it is a tax upon the net income of business done and sales made outside of the State. The issue thus stated erroneously assumes that the tax is an income tax, as such, and not a tax for the privilege of carrying on a manufacturing business in this State. It also ignores the fact that the tax is *Page 61 
not assessed upon the entire net income of the plaintiff, but upon 47% only of its entire income, the remaining 53% being automatically exempted by the statutory rule of apportionment.
The real question is whether a privilege tax of 2% on 47% of the plaintiff's net income, is a tax on its business done, or its property located, outside of this State. Speaking generally, the situation is that the plaintiff carries on its entire manufacturing business within this State. Its gross receipts from the sale of its products manufactured in this State amount to about 90% of its total receipts, and after deducting manufacturing costs its gross profits from the sale of this product amount to about 80% of its total receipts from all sources. Its selling business is managed from its main offices in New York, to which all orders for the sale and rental of typewriters and other products are forwarded. The plaintiff's officials at its main office direct its factory managers in Hartford to ship typewriters and other products direct to the various branch offices for the purposes of making deliveries to the purchasers and lessees thereof. It thus appears that the bulk of the plaintiff's products is also warehoused in Connecticut until sold, and in that way receives additional protection from the State.
It is plain that a privilege tax, if otherwise reasonable, might be levied upon every dollar of net income derived from the sale of goods thus manufactured, or manufactured and warehoused, in Connecticut, without justifying the complaint that the plaintiff is taxed upon business done or property located outside of the State.
Regarded as a tax on property, no claim can well be made that the tax is so unreasonable in amount as to justify the complaint that it practically results in taxing property without the State; it amounts to less than *Page 62 
two-tenths of 1% of the market value of the plaintiff's typewriter products manufactured in Connecticut after charging off manufacturing costs. Regarded as a tax on the privilege of doing business in this State, the same answer applies to any complaint that the tax is in substance a tax on business done without the State. A corporation whose manufacturing business produces an annual product exceeding $6,000,000 in market value, cannot reasonably complain that a privilege tax of $12,000 is too large to be reasonably allocated to that part of its business.
The argument against the constitutionality of the statutory apportionment must come, we think, to the point of successfully showing that 47% of the plaintiff's net income cannot reasonably be attributed to its manufacturing and warehousing and shipping operations in Connecticut. Incidentally the plaintiff also received about $100,000 from sales and rentals in Connecticut. But laying that aside, the plaintiff's argument on this branch of the case carries the burden of showing that 47% of its net income is not reasonably attributable, for purposes of taxation, to the manufacture of products from the sale of which 80% of its gross earnings was derived after paying manufacturing costs. Upon this record the plaintiff has made no attempt to shoulder such a burden and if it had been possible, by expert evidence or otherwise, to lay any basis of evidence for such a claim, we should suppose that the plaintiff would have, at least, attempted to do so. As the record stands we are asked to take judicial notice of the fact that 47% of the net income of the plaintiff corporation cannot reasonably be attributed to its operations in Connecticut, and to declare the statute unconstitutional upon the bare assertion that the statutory method of apportionment as applied to the plaintiff's income, taxes property and business without *Page 63 
the State, although 53% of the plaintiff's income is exempted by the apportionment.
The only specifications which the plaintiff's brief furnishes in support of its charge that the statutory apportionment results in the taxation of its property and business in other States, are based upon the allegation that the income taxed necessarily includes receipts from repairs made in other States, from profits on the sale of adding machines manufactured by third parties, from dividends, discounts and interest received outside of Connecticut and from the sale of desks, etc., manufactured outside of this State. The receipts from these items aggregate less than 10% of the plaintiff's total gross receipts, and except for the items of dividends and interest the extent to which they produced net income is wholly uncertain. As to the other 90% of the plaintiff's gross receipts, it is tacitly admitted that some part of them, and therefore some part of the net income resulting therefrom, is attributable to the plaintiff's property and business in Connecticut. On this record the amount of the plaintiff's net profit attributable to its operations in Connecticut cannot be ascertained. It is a matter of estimate and approximation rather than of mathematics. The most that can be expected is that a statutory rule should be laid down intended and adopted to produce a fair and constitutionally lawful apportionment. Then the rule must be tested by the results which it produces, but with due regard to the impossibility of producing anything but approximate results; in the present instance, it seems clear that the result is not unreasonable, oppressive or unconstitutional.
Some general criticisms of the rule of apportionment are made. It is said that the real defect in the law is that the income is apportioned with reference to the value of tangible property in Connecticut as compared *Page 64 
with tangible property elsewhere; whereas the apportionment should have been founded on the proportionate holdings of property of all kinds within and without the State. It is pointed out that if intangibles were included in the comparisons foreign corporations would fare better, since their intangible assets would have asitus at the domicil. But the suggestion that the rule was adopted for the purpose of getting the largest possible return from corporations engaged in interstate commerce is not tenable, because the rule applies to domestic as well as to foreign corporations. If the object of the legislature had been to get the largest return, it would have resorted to its personal jurisdiction over domestic corporations and taxed their entire net income from business wherever carried on.
A more reasonable explanation of the rule is to be found in the nature of the tax and in the class of corporations to which the particular rule in question is applied. As already pointed out, the tax is a tax on the privilege of doing business in a corporate capacity in this State. The legislature evidently intended to make the tax proportionate to the value of the privilege. Accordingly, it divided miscellaneous corporations doing an interstate business, without making any distinction between domestic and foreign corporations, into two classes (a) those deriving profits principally from the sale or use of tangible personal property, and (b) those deriving profits principally from the holding or sale of intangible property. As to class (a) the rule of apportionment is based on tangible property within and without the State, and as to class (b) on gross receipts within and without the State. The attempt to do substantial justice is manifest. The plaintiff's theory is that the real producing elements of net income depend on the executive management of the corporation, rather than on its plant. But the ordinary *Page 65 
trading or manufacturing corporation is commonly supposed to make its profit from the intelligent use and sale of tangible property, and other things being equal it is not unjust to allocate its net income, for purposes of estimating the value of the privilege of doing business here, with reference to the value of its tangible property in this and other jurisdictions.
A suggestion that the rule works injustice in this case is based on the plaintiff's return to the Tax Commissioner showing paid up capital stock of $13,000,000. The agreed fair cash value of the entire tangible property of the plaintiff within and without the State is only $6,300,000, and the plaintiff's brief assumes that the difference of $6,700,000 represents intangible assets of that value now owned by the plaintiff. There is, of course, no presumption that paid up capital represents existing assets, and except for the receipt of dividends and interest amounting to about $38,000 there is nothing in the record to show that the plaintiff owned any intangible assets on the taxing date in question.
These considerations dispose of the first and second questions submitted.
The third question requires no discussion. The Federal Income Tax Law is a domestic statute. No delegation of legislative authority is involved in adopting its definition of net income. It is a matter of convenience to taxpayers and economy to the State not to set up a separate standard and another administrative establishment for the measurement of taxable net income. No constitutional privilege of corporations is violated by requiring the production of the plaintiff's return to the Collector of Internal Revenue.
   The first, second and third questions are answered in the negative and the Superior Court is advised to render judgment for the defendant.