J. D. Adams Manufacturing Co. v. Storen

304 U.S. 307, 58 S. Ct. 913, 82 L. Ed. 1365, 1938 U.S. LEXIS 1096, 117 A.L.R. 429

• Court: Supreme Court of the United States
• Decided: May 16, 1938
• Docket: 641
• Status: Published

Opinions

Mr. Justice Roberts

delivered the opinion of the Court.

In this case we are called upon to determine whether the Indiana Gross lncome Tax Act of 1933¹ as construed and applied burdens interstate commerce and impairs the obligation of contract in contravention of Article I, §§ 8 and 10 of the Constitution of the United States.

Section 1 declares that the -phrase “gross income” as used in the Act means, inter alia, gross receipts derived from trades, businesses, or commerce, and receipts from investment of capital, including interest. Section 2 imposes a tax ascertained by the application of specified rates to the gross income - of every resident of the State and the gross income of every non-resident derived from sources within the State. Section 6 exempts “So much of such gross income as is derived from business conducted in commerce between¹ this state and other states of the United States, or between this state and foreign countries, to the extent to which the State of Indiana is prohibited from taxing under the Constitution of the United States of America.”

The appellant, an Indiana corporation, manufactures road machinery and equipment and maintains its home office, principal place • of business,' án&ífactory in the State. It sells eighty per cent, of its products to customers in other States and foreign countries upon orders taken subject to approval at the home office. Shipments are made from the factory and payments are remitted to the home office. Pursuant to a practice of investing surplus funds not immediately required in its business, the appellant owns and receives interest upon bonds and notes of Indiana municipal corporations which, at the time they were issued, were declared by statute to be exempt from taxation. . '

Upon the adoption of the Act, the appellant filed a petition in á state circuit court in which, after reciting these facts, it alleged that the appellees were demanding that it report and pay taxes upon income received in interstate and foreign commerce and income received as interest upon securities exempted from taxátion by the state law and that these demands, together with penalties specified in the statute for failure to make return and ’.pay the tax, would be enforced unless prevented by the judgment of the court. The prayer was for a declaratory judgment that the Act, as construed and applied by the appellees, is unconstitutional. After issue joined the facts were stipulated and the court made findings and entered a judgment in favor of the appellant. The Supreme Court of Indiana reversed the judgment, nolding that the tax demanded does not unconstitutionally burden the interstate commerce in which appellant is engaged and does not impair the obligation of any contract of the State exempting municipal securities from taxation.²

1. Will the threatened. imposition of the tax on the gross income from the appellant’s sales in interstate commerce contravene Article I, § 8 of the Constitution, which reposes in Congress power to regulate interstate and foreign commerce?. «

The title of the Act declares that it is a'revenue measure imposing a tax upon “the receipt of gross income.” The statute defines gross income as meaning the gross receipts derived from trades, búsinesses, or commerce.. The Supreme Court of Indiana in its'opinion states: “The statute here under consideration levies a tax upon all who are domiciled within the state, based upon the privilege of domicile, and transacting business, and receiving gross income, within the state, and measured by the amount of gross income.” ³

The tax is not an excise for the privilege of domicile alone, since it is levied upon the gross income of nonresidents from sources within the State. Nor is it for the transaction of business, since in .many instances it hits the receipt of income by one who conducts no business. It is not a charter fee or a franchise fee measured by the value of goods manufactured or the amount of sales, such as the State would be competent to demand from domestic or foreign corporations for the privilege conferred.⁴ If is not an excise upon the privilege of producing or manufacturing within the State, measured by volume of production or the amount of sales.⁵ It is not a tax in lieu of ad valorem, taxes upon property, which would be inoffensive to the commerce clause,⁶ since the appellant pays local and state taxes upon its property within.the State and it appears that these, as respects appellant and others similarly situated, have not been reduced. The Act, moreover, is silent as to the tax being in lieu of property taxes. The opinion of the Supreme Court suggests that the statute was adopted as part of a scheme for the reduction of local property taxes and the substitution of a gross income tax, but, as appellant points out, provision for reduction of property taxes was made by legislation passed in 1932.⁷

The regulations issued by the Department of the Treasury, pursuant to authority granted by the Act, treat the exaction as a gross receipts tax;⁸ and the Attorney General says in his brief that it is a privilege' tax upon the receipt of gross income. We think this a correct description.

We conclude that the tax is what it purports to be,— a tax upon gross receipts from commerce. Appellant’s sales to customers in other States and abroad are interstate and foreign commerce. The Act, as construed, imposes a tax of one per cent, on every dollar received from these sales.

The vice of the statute as applied to receipts from interstate sales is that the tax includes in its measure, without apportionment, receipts derived from activities in interstate commerce; and that the exaction is of such a character that if lawful it may in substance be laid to the fullest extent by States in which the goods are sold as well as those in which they are manufactured. Interstate commerce would thus be subjected to the risk of a double tax burden to which intrastate commerce is not exposed, and which the commerce clause forbids.⁹ We have repeatedly held that such a tax is a regulation of, and a burden upon, interstate commerce prohibited by Article I, § 8 of the Constitution.¹⁰ The opinion of the State Supreme Court stresses the generality and nondiscriminatory character of the exaction, but it is settled that this will not save the tax if it directly burdens interstate commerce.¹¹

The state court and the appellees rely strongly upon American Mfg. Co. v. St. Louis, 250 U. S. 459, as supporting the tax on appellant’s total gross receipts derived from commerce with citizens of the State and those of other States or foreign countries. But that case dealt with a municipal license fée for pursuing the occupation of a manufacturer in St. Louis. The exaction was not an excise laid upon the taxpayer’s sales or upon the income derived from sales. The tax on the privilege for the ensuing year was measured by a percentage of the past year’s sales.¹² The taxpayer had during the preceding year removed some' of the goods manufactured to a warehouse in another State and, upon sale, delivered them from the warehouse. It contended that the city-' was without power to include these sales in the measure of the tax for the coming year. The court held, however, that 'the tax. was upon the privilege of manufacturing within the State and It was permissible to measure the tax by the sales price of <the goods produced rather than by their value at the date of manufacture. If the tax there under consideration had been a sales tax the city could not have measured it by sales consummated in another State. That the tax in the present case is not a tax on the manufacture but a tax on gross sales, is evident from the regulations promulgated pursuant to the Act and confirmed by an amendment of the statute adopted in 1937 under which, if the appellant had shipped its products to another State and thence sold them (as did the American Manufacturing Company), the receipts from the sales would be exempt from the gross income reached by the Act.¹³

So far as the sale price of the goods sold in interstate commerce includes compensation for a purely intrastate activity, the manufacture of the goods sold, it may be reached for local taxation by a tax on the privilege of manufacturing, measured by the value of the goods manufactured,¹⁴ or by other permissible forms of levy upon the intrastate transaction.¹⁵ It is because the tax, forbidden as to interstate commerce, reaches indiscriminately and without apportionment, the gross compensation for both interstate commerce apd intrastate activities that it must fail in its entirety so far as applied to receipts from sales interstate.

We hold that, as respects the appellant’s sales of its manufactured product in interstate and foreign commerce, the statute cannot constitutionally be enforced.

2. Will the imposition of the tax in respect of interest on the bonds of Indiana municipalities violate Article I, § 10 of the Constitution of the United States?

By an Act of March 9, 1903, entitled “An Act to exempt from taxation all bonds, notes and other evidences of interest-bearing debt issued by the State or by municipal corporations,”, it was provided “That all /bonds, notes and other evidences of indebtedness hereafter issued by the State of Indiana or by municipal corporations within the State upon which the said State or the said municipal corporations pay interest. shall be exempt from taxation.”¹⁶ By an Act of March 11, 1919, tax laws of the State were codified and the Act of 1903 was incorporated without change as clause twentieth of § 5 of the codification.¹⁷ The section has* since been amended but the '.twentieth clause remained unchanged at the date of the passage of the Gross Income Tax Act of 1933.

' The appellant insists that the exemption granted in the Acts, of 1903 and 1919, constitutes , a contract with purchasers of municipal securities the obligation of which is unconstitutionally impaired by the attempt to tax the interest'they yield. The State replies that the Acts were not intended to create a contract and did not in fact do so, but that if they did, the covenant did not embrace interest payable on municipal obligations but only ad valorem¹ taxation upon them.

When the "exemption laws were adopted the State had no income tax law. Whatever may have been the background against which the Act of 1903 is to be construed, its setting, as a portion of the tax codification of 1919, is significant. The latter deals with two forms of taxation, — poll taxes and property taxes. It embodies a com-. prehensive écheme of annual assessment of real and personal property of individuals, partnerships, and corporations, including public utilities;’ makes provision for a return by taxpayers of complete inventories of property and, in the case of corporations, of the excess value of capital stock and surplus and of the value of franchises or privileges enjoyed; and provides for assessment .by public officials for the purpose of the application of a rate ad valorem by various public bodies. The statute has nothing to say with respect to license, occupation,', privilege or other excise taxes. In § 25 it provides that “Where bonds or stocks are now or may’hereafter bé exempted from taxation, the accrued interest on such bonds or dividends on such stock shall be listed and assessed, unless otherwise exempted, without regard to the time when the same is to be paid.” Thus the legislature distinguished between the bonds themselves and the interest accrued upon them as separate subjects of assessment and ad valorem taxation. The Supreme Court of Indiana has consistently held that exemptions from taxation are not favored but are to be strictly'bonstrued.¹⁸

In the light of the foregoing facts we are of opinion that the case is controlled by Hale v. Iowa State Board, 302 U. S. 95. We are unable, therefore, to hold that the decision of the Supreme Court is plainly wrong, even upon the assumption that in adopting the statutory exemption the legislature intended to, and in fact did, contract with purchasers of municipal bonds.

As-respects the tax demanded on appellant’s gross income from its business. in interstate commerce, the judgment is reversed and, as respects the tax on interest received from obligations issued by municipalities of. the State, the judgment is affirmed. The cause will be remanded for further proceedings not inconsistent with this opinion.

Reversed in part; affirmed in part.

Mr. Justice McReynolds is of opinion that the challenged judgment should be reversed in toto. Mr. Justice Cardozo took no part in the consideration or decision of this case.

1 Indiana Acts 1933, c. 50; Ind. Stat. Ann. (Burns) § 64-2601 ff.

2 212 Ind. 343 ; 7 N. E. (2d) 941.

3 Compare Miles v. Department of Treasury, 209 Ind. 172, 188; 199 N. E. 372, 379.

4 Compare Matson Navigation Co. v. State Board, 297 U. S. 441, 444.

5 Compare American Mfg. Co. v. St. Louis, 250 U. S. 459; Oliver Iron Co. v. Lord, 262 U. S. 172; Hope Natural Gas Co. v. Hall, 274 U. S. 284; Utah Power & Light Co. v. Pfost, 286 U. S. 165.

6 Compare Postal Telegraph Cable Co. v. Adams, 155 U. S. 688; United States Express Co. v. Minnesota, 223 U. S. 335; Pullman Co. v. Richardson, 261 U. S. 330.

7 Indiana Acts of 1932, c. 10, p. 17.

8 Article 2 of the Regulations states “The gross income tax of 1933 is primarily and in effect a gross receipts tax . . .” Article 16 ¡states that the “tax shall apply to and be levied and collected upon all gross income received . .

9 See Western Livestock v. Bureau of Revenue, 303 U. S. 250.

10 Cook v. Pennsylvania, 97 U. S. 566; Fargo v. Michigan, 121 U. S. 230; Philadelphia & Southern S. S. Co. v. Pennsylvania, 122 U. S. 326; Galveston, H. & S. A. Ry. Co. v. Texas, 210 U. S. 217; Meyer v. Wells, Fargo & Co., 223 U. S. 298; Minnesota Rate Cases, 230 U. S. 352, 400; Crew Levick Co. v. Pennsylvania, 245 U. S. 292; United States Glue Co. v. Oak Creek, 247 U. S. 321, 328; New Jersey Telephone Co. v. Tax Board, 280 U. S. 338, 349; Fisher’s Blend Station v. State Tax Commission, 297 U. S. 650, 655; Puget Sound Stevedoring Co. v. Tax Commission, 302 U. S. 90; Western Livestock v. Bureau of Revenue, 303 U. S. 250.

11 Crew Levick Co. v. Pennsylvania, 245 U. S. 292; Spalding & Bros. v. Edwards, 262 U. S. 66, 69; Cooney v. Mountain States Tel. Co., 294 U. S. 384, 393.

12 Compare Bass, Ratcliff & Gretton v. State Tax Comm’n, 266 U. S. 271, 280; Educational Films Corp. v. Ward, 282 U. S. 379, 387-8.

13 Regulations 193 (4) “Persons resident and/or domiciled in Indiana who are- engaged in business, the legal situs and location of which is in states other than Indiana, and the activities of such business are carried on in states other than Indiana, will not be required to pay tax upon the gross receipts therefrom.”

Acts of Indiana, 1937, c. 117, p. 609: “That with respect to individuals resident in Indiana and corporations incorporated under the laws of Indiana authorized to do and doing business in any other state and/or foreign country, the term ‘gross income’ shall not in-elude gross receipts received from sources outside the State of Indiana in cases where such gross receipts are received from a trade or business situated and regularly carried on at a legal situs outside the State of Indiana, or from activities incident thereto .'. .”

14 Oliver Iron Mining Co. v. Lord, 262 U. S. 172; Hope Natural Gas Co. v. Hall, 274 U. S. 284; American Mfg. Co. v. St. Louis, supra.

15 Utah Power & Light Co. v. Pfost, 286 U. S. 165; Federal Compress Co. v. McLean, 291 U. S. 17; Chassaniol v. Greenwood, 291 U. S. 584.

16 Acts of Indiana, 1903, c. CLXXIX, p. 322.

17 Acts of Indiana, 1919, c. 59, § 5 (twentieth) p. 203.

18 South Bend v. University, 69 Ind. 344, 348; Read v. Yeager, 104 Ind. 195, 199; 3 N. E. 856.

1 The generality of this tax is made clear in its definition of gross income as including, with minor exceptions, “the gross receipts of the taxpayer- received as compensation for personal services, and the gross receipts of the .taxpayer derived from trades, businesses or commerce, and the gross receipts proceeding or accruing from the sale of property, tangible or intangible, real or personal, or service, or any or all of the foregoing,- and all receipts by reason of the investment of capital, including interest, discount, rentals, royalties, fees, 'commissions or other emoluments, however designated, ... .” Section (f), c. 50, Indiana Acts 1933.