Stewart Dry Goods Co. v. Lewis

294 U.S. 550, 55 S. Ct. 525, 79 L. Ed. 1054, 1935 U.S. LEXIS 57

• Court: Supreme Court of the United States
• Decided: March 11, 1935
• Docket: Nos. 454—457
• Status: Published

Opinions

Mr. Justice Roberts

delivered the opinion of the Court.

These are four suits heard by a specially constituted District Court in Kentucky, to enjoin state officers from enforcing an act of that Commonwealth imposing a gross sales tax. The plaintiffs are, respectively, a domestic corporation conducting a department store in Louisville, a partnership operating a similar store in the same city, a Delaware corporation having 21 department stores in Kentucky, and an Ohio corporation maintaining 289 grocery stores within the Commonwealth. Nineteen individuals, partnerships and corporations, proprietors of one or more stores selling various lines of merchandise, intervened as plaintiffs. Interlocutory injunctions issued, but the district court of three judges dismissed the bills for want of equity, being of opinion there was/ an adequate remedy at law. Upon appeal this court reversed the decrees and remanded the causes.¹ At final hearing the district court found the remedy at law inadequate, but sustained the act and dismissed the bills.² The present appeals are upon the merits.

The statute became a law March 17, 1930. The title and certain sections are copied in the margin; other sections are there summarized.³ The tax imposed upon the first $400,000 of annual gross sales is l/20th of one per cent: The rate increases on each additional $100,000 of sales between $400,000 and $1,000,000, inclusive, being 17/20ths of one per cent, in the last bracket. On sales over $1,000,000 the rate is one per cent. The increased rates are applicable, however, only in respect of sales in each successive bracket, and therefore the tax burden attributable to $1,100,000 of sales is not one per cent., but a composite ascertained by adding the total tax for the sales falling within the various brackets, and dividing by the dollar-value of all sales. Thus the act requires the merchant to pay in the total .05 per cent, on $400,000 of sales, .305 per cent, on $1,000,000 of sales and .96 per cent, on $15,000,000 of sales.

The appellants charge that the statute violates several sections of the Constitution of Kentucky and several provisions of the Federal Constitution. We shall not stop to enumerate these, since we must sustain the claim that the classification made by § 2 denies the appellants the equal protection of the laws assured by the Fourteenth Amendment.

The trial court’s relevant findings are: The act is essentially a revenue measure. The tax is on gross sales, not on gross collections from vendees. Sales made by merchants taxed under any of the brackets of the act are made in competition with like sales of the same character of merchandise by those who are taxed under other brackets. As a general proposition increased volume of sales results in increased profits and increased ability to pay the tax. The rate of profit from retail sales generally varies with the character of the goods sold. The management of a store or stores is one of the fundamental factors in determining whether or not a profit is realized and the amount of profit. As a general proposition those merchants doing the largest amount of trade are enabled to secure the highest type of management.

In the light of these findings, does the act tax sales in an unequal and arbitrary way, classifying them for the imposition of different rates without reference to any real or substantial distinction, as appellants.insist; or does it impose an excise upon the conduct of retail business, reasonably adjusted in amount with regard to substantial differences in the nature of the privilege exercised, as appellees contend?*

In resolving the issue we are not concluded by the name or description of the tax as found in the act; our duty is to ascertain its nature and effect.⁴ “ The substance and not the shadow determines the validity of the exercise of the power.”⁵ The act does not impose an income or profits tax, or a license tax, is not an inspection measure, or a police regulation. The tax is not confined to a particular method of merchandising. All retailers, individual and corporate, selling every description of commodities, in whatever form their enterprises are conducted, make up the taxable class. And the excise is laid in respect of the same activity of each of them—the making of a sale. Although no difference is suggested, so far ,as concerns the transaction which is the occasion of the tax, between the taxpayer’s first sale of the year and his thousandth, different rates may apply to them. The statute operates to take as the tax a percentage of each dollar due or paid upon every sale, but increases the percentage if the sale which is the occasion of the tax succeeds the consummation of other sales of a specified aggregate amount. As found by the court below, the act of making a sale, which with all others made in the taxable year represents a total sales price of $400,000 or less, results in the imposition of a tax of 1/20th of one per cent, upon the price, whereas the making of the same sale by one who has theretofore sold $400,000 but less than $500,000 worth of goods entails a tax of 2/20ths of one per cent., or by one whose prior sales aggregate $900,000, a tax of 17/20ths of one per cent.

In connection with other provisions of the fundamental law, this court has had occasion to analyze similar acts. In Brown v. Maryland, 12 Wheat. 419, a tax on the occupation of an importer was held a tax on imports obnoxious to the commerce clause. Said the court (p. 444): “ It is impossible to conceal from ourselves, that this is varying the form, without varying the substance . . . All must perceive, that a tax on the sale of an article, imported only for sale, is a tax on the article itself.” In Cook v. Pennsylvania, 97 U. S. 566, a tax on the amount of an auctioneer’s sales was declared a tax on the goods sold. In Crew Levick Co. v. Pennsylvania, 245 U. S. 292, a state tax on the business of selling goods in foreign commérce, measured by gross receipts from goods so sold and shipped, was pronounced an impost upon exports. The court said (p. 297): “ . . . nor is it an occupation tax except as it is imposed upon the very carrying on of the business of exporting merchandise. It operates to lay a direct burden upon every transaction in commerce by withholding, for the use of the State, a part of every dollar received in such transactions.” Panhandle Oil Co. v. Knox, 277 U. S. 218, decides a privilege tax imposed on sellers of gasoline, fixed at so many cents per gallon sold, is a tax on sales. At page 222 the court said: “ Sale and purchase constitute a transaction by which the tax is measured and on which the burden rests. ... To use the number of gallons sold . . . as a measure of the privilege tax is in substance and legal effect to tax the sale.” And in Indian Motocycle Co. v. United States, 283 U. S. 570, a federal tax upon motorcycles “ sold ... by the manufacturer ” was held to be an excise on the sale, and the doctrine of the Panhandle case was reaffirmed.

Thus understood, the operation of the statute is unjustifiably unequal, whimsical and arbitrary, as much so as would be a tax on tangible personal property, say cattle, stepped up in rate on each additional animal owned by the taxpayer, or a tax on land similarly graduated according to the number of parcels owned.

The appellees seek to avoid the arbitrary character of the classification of sales for the purpose of imposing the levy by the claim that the act, properly construed, lays an excise upon the privilege of merchandising at retail and the exaction is made only for this privilege. They insist the amount of tax is merely measured by the volume of sales,⁶ and in this view the classification is not arbitrary if any reasonable relation can be found between the amount demanded and the privilege enjoyed. They endeavor to deduce such a relation from the alleged fact that a merchant’s net income and his consequent ability to pay increase as the volume of his sales grows. The argument does not advance the case for the validity of the statute. Even in this aspect the classification is arbitrary, for the claimed relation of gross sales—the measure of the tax— to net profits fails to justify the discrimination between taxpayers.

The district court found that “ generally speaking ” he who sells more is in receipt of a greater profit and hence has larger ability to pay, and upon this basis justified the classification. But it is to be remembered that the act in question taxes gross sales and not net income. As stated in United States Glue Co. v. Town of Oak Creek, 247 U. S. 321, 328:

“ The difference in effect between a tax measured by gross receipts and one measured by net income, recognized by our decisions, is manifest and substantial, and it affords a convenient and workable basis of distinction between a direct and immediate burden upon the business affected and a charge that is only indirect and incidental. 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.”

Argument is not needed, and indeed practical admission was made at the bar, that the gross sales of a merchant do not bear a constant relation to his net profits; that net profits vary from year to year in the same enterprise; that diverse kinds of merchandise yield differing ratios of profit; and that gross and net profits vary with the character of the business as well as its volume. The trial court made no finding that the relation between gross sales and net profits, or increase of net worth, was constant, or even that there was a rough uniformity of progression within wide limits of tolerance. Expert witnesses, using data assembled from various reporting agencies, endeavored to establish that net profits or net worth grow with increased sales. But their testimony not only indicated great variations within each class selected for comparison, but also showed that in some of the classes representing the greater amount of sales the net profit or addition to net worth is smaller than in a class having less aggregate sales. The best that can be said for this evidence is that, averaging the results of the concerns making the reports, it is true “ generally speaking,” as the court below put it, that profits increase with sales. The ratio of increase, however, differs in different lines of activity and even as between concerns carrying on the same business, and so many exceptions and reservations must be made that averages are misleading. The proofs submitted are insufficient to support the appellees’ contention that the graduation of the tax was adjusted with reasonable approximation to the net earnings of the taxpayers, and that such minor and incidental inequalities as may be found are those always incident in the application of any valid general rule of classification. We think the graduated rates imposed were not intended to bear any relation to net profits. The argument based upon the asserted analogy to a tax upon net income graduated in accordance with the size of the income is unconvincing, for the exaction here demanded is not of that kind.

We are told that the gross sales tax in question is in truth a rough and ready method of taxing gains under the guise of taxing sales; that it is less complicated and more convenient of administration than an income tax; and Kentucky for these reasons is at liberty to choose this form, and to ignore the consequent inequalities of burden in the interest of ease of administration. The argument is in essence that it is difficult to be just, and easy to be arbitrary. If the Commonwealth desires to tax incomes it must take the trouble equitably to distribute the burden of the impost. Gross inequalities may not be ignored for the sake of ease of collection.

The assertion that a graduated income tax, like the graduated sales tax under consideration, ignores the varying rates of return upon investment of those carrying on similar enterprises, is obviously inaccurate. An income levy, by its very nature, assures equality of treatment, because the burden of the exaction varies with increase or decrease of return on capital invested and with the comparative success or failure of the enterprise. If, as argued, larger merchants are more efficient, their efficiency will be correspondingly reflected in their net earnings. If, as claimed, they are able to procure better management, a tax upon gains will uniformly reflect the effects of such management. And the same principle holds true of every advantage said to inhere in the magnitude of a business.

As we have said, the statute does not purport to levy a tax on incomes. Plainly it does not in fact do so. A merchant having a gross business of $1,000,000, but a net loss, must pay a greater tax than one who has a gross of $400,-000, and realizes a substantial net profit. The record discloses such a situation. In the year 1930, 24,186 merchants were subject to the tax. Two of these, whose gross sales amounted to 8 per cent of the gross sales of all merchants, would have paid, but for the interlocutory injunction entered by the court below, more than half of the total tax due by all those subject to the impost. The payment by one of them would have been about $124,000, or $18,000 in excess of the total tax paid by the 24,163 merchants who reported $362,000 of gross sales, and of whom 24,128 had sales totaling less than $400,000; and this taxpayer had in Kentucky in that year a net income of approximately $172,000. The figures for 1931 and 1932 exhibit a like disparity. In the latter year the company last mentioned, though having sales in Kentucky amounting to $11,447,-611, would, after payment of the tax, have shown a net loss of over $9,000. To assert that a law, thus operating, reasonably equates the exaction to net income is to ignore the facts.

The appellees say there is no showing that the tax in its actual operation is unduly burdensome or harmful to any of the appellants or amounts to confiscation of their property. The assertion is irrelevant to the issue of inequality, and is, moreover, contradicted by the record. In the case of one plaintiff whose sales in Kentucky in 1930 were over $14,500,000, in 1931 over $13,400,000 and in 1932 over $11,400,000, the net profits in the same state, after deducting the sales tax, would have been in 1930, $48,677, in 1931, $39,358, and in 1932 it would have shown a loss of $9,023. In the light of this demonstration, it is difficult to follow the argument that the constitution of Kentucky, as construed by her courts, is a shield against any tax law imposing an excise, the effect of which is to extinguish all profits, when we are told by appellees in the next breath, that this very statute has been upheld by the Supreme Court of Kentucky against constitutional attack.⁷ But if that court had not spoken on the subject, these appellants are not to be denied relief under the Fourteenth Amendment, by resort to a forecast of possible amelioration of their situation by the state courts.

Ignoring the glaring inequalities of burden resulting from the statute, the appellees tell us that if and when the load becomes too heavy upon any taxpayer, he may with confidence invoke the Fourteenth Amendment.⁸ The position seems to be that different principles govern various forms of taxation, and that what has been held with respect to the unrestricted power of a legislature to determine the amount to be exacted by other forms of taxation has no application to an excise. We are unaware of any such distinction in logic and the authorities sanction none. Every taxing law must pass the constitutional test applied by the courts to the method of imposition, but the measure of the impost rests in the discretion of the legislature.

To condemn a levy on the sole ground that it is excessive would be to usurp a power vested not in the courts but in the legislature, and to exercise the usurped power arbitrarily by substituting our conceptions of public policy for those of the legislative body. In Veazie Bank v. Fenno, 8 Wall. 533, a táx of ten per cent, on the notes of state banks was upheld although it “ drove out of existence every State bank of circulation within a year or two after its passage.” See Loan Association v. Topeka, 20 Wall. 655, 663, 664. In Knowlton v. Moore, 178 U. S. 41, in sustaining an excise tax this court said, “ if a lawful tax can be defeated because the power which is manifested by its imposition may when further exercised be destructive, it would follow that every lawful tax would become unlawful, and therefore no taxation whatever could be levied.” (P. 60.) See also, Magnano Company v. Hamilton, 292 U. S. 40; Fox v. Standard Oil Co. ante, p. 87. Once the lawfulness of the method of levying the tax is affirmed, the judicial function ceases. He deludes himself by a false hope who supposes that, if this court shall at some future time conclude the burden of the exaction has become inordinately oppressive, it can interdict the tax.

The suggestion is made that the ad valorem property tax heretofore laid on Kentucky merchants bears more heavily upon the little dealer than upon his bigger competitor, as the real estate and stock of merchandise of the former is greater in proportion to the business done than is the case with the latter. This fact may indeed be a proper reason for adjusting the tax burden so as better to reflect the fruits of the enterprise; but it can afford no excuse for an arbitrary and unequal imposition as between persons similarly circumstanced. The record fails to show that an income tax or a flat tax on sales would not accomplish the desired end. The adoption of laws of the latter description by many of the states is a practical confirmation of the view that they are effective measures.⁹

The appellees refer to certain decisions of this court, but none of them rules this case. Those claimed to be particularly pertinent will be briefly noted.

In Clark v. Titusville, 184 U. S. 329, the tax levied consisted of a flat fee exacted for a license which entitled the merchant to conduct business for the ensuing year. The lowest fee was' $5.00, for a merchant who during the year preceding that covered by the license had made sales not in excess of $1,000. A $10.00 fee applied to one who had sales between $1,000 and $2,500; a $15.00 fee to one having sales between $2,500 and $5,000; a $25.00 fee to one whose sales were between $5,000 and $10,000; and so on to ,a fee of $100.00 for the seller of $60,000 worth or more. It is important to note the grounds of attack. One was that the classes were so defined that a merchant with sales of $2,499 would pay at one rate and another with sales of $2,501 would pay at a higher rate; that a merchant whose sales were $1,001 would pay the same fee as one whose sales were $2,499. In overruling this objection, the court relied upon the principle that some injustice is bound to result from any general rule of classification, and equal protection demands only reasonable uniformity in dealing with parties similarly circumstanced. A second objection was that the percentage of tax to sales was greater in the lower than in the higher brackets—that is, that a merchant selling goods for $60,0(30 or more paid a less percentage of his sales by way of tax than the smaller merchant who sold only $1,000 worth of goods. The objection was unavailing, because the tax did not purport to be fixed upon a percentage of sales. The purpose was to charge a larger license fee to a larger business. Any tax measured by a fixed and uniform percentage of gross sales would impose a heavier burden on the taxpayer having the greater volume of sales. The excise here involved is not of that sort, the sum exacted from the merchant doing the larger business being not only greater in gross amount but larger in proportion to sales, than that demanded of his smaller competitor.

In Metropolis Theatre Co. v. Chicago, 228 U. S. 61, a licensing ordinance provided for a greater license to be paid by theatres charging á higher rate for tickets than was exacted from those charging lower rates. This court sustained the classification upon the ground that the distinction between the sorts of theatres classified obtains in every large city of the country; and said (p. 69): “ It will immediately occur upon the most casual reflection that the distinction the theatre itself makes is not artificial and must have some relation to the success and ultimate profit of its business. In other words, there is a natural relation between the price of admission and revenue, some advantage certainly that determines the choice. . . . The reason for it must therefore be substantial, and if it be so universal in the practice of the business it would seem not unreasonable if it be adopted as the basis of governmental action.” The case falls within the principle that even a small difference in the method of conducting business may be availed of by government in imposing different taxes. It furnishes no support for a tax upon the sales of merchants at rates varying per sale or per dollar with the amount of their respective gross sales.

In several recent cases¹⁰ we sustained the classification of chain stores for taxation at rates higher than those applicable to single stores, and graduated upward on each store as the total number of units in one ownership increased. We found this classification reasonable because of advantages incident to the conduct of multiple stores and obvious differences in chain methods of merchandising as contrasted with those practised in the operation of one store. The instant cases present a classification of quite another kind. The Kentucky statute ignores the form of organization and the method of conducting business. The taxable class is retail merchants, whether individuals, partnerships or corporations; those who sell in one store or many; those who offer but one sort of goods and those who through departments deal in many lines of merchandise. The law arbitrarily classifies these vendors for the imposition of a varying rate of taxation, solely by reference to the volume of their transactions, disregarding the absence of any reasonable relation between the chosen criterion of classification and the privilege the enjoyment of which is said to be the subject taxed. It exacts from two persons different amounts for the privilege of doing exactly similar acts because the one has performed the act oftener than the other. We hold the act unconstitutional, and reverse the judgment.

Reversed.

1 287 U. S. 9.

2 7 F. Supp. 438; 8 F. Supp. 396.

3 Chapter 149, Acts of 1930, p. 475.

“An Act relating to revenue and taxation, imposing an excise or license tax on retail merchants, as the words ‘ retail merchants ’ are used in this act; providing for the collection of such tax; the distribution and use of the revenue derived therefrom; the administration of said law, fixing fines and penalties for the violation of this act; declaring an emergency to exist, and repealing all laws in conflict with the provisions of this act.

“ Be it Enacted by the General Assembly of the Commonwealth of Kentucky:

“ § 1. The words ‘ retail merchant,’ as used in this act, shall mean and include every person, firm, association, co-partnership or corporation opening, establishing, operating or maintaining any ‘ store,’ as defined herein, for the purpose of and selling goods, wares or merchandise at retail in this State, except those actually engaged in gardening or farming and selling garden or farm products raised by them in this State. The term ‘ store,’ as used in this act, shall be construed to mean and include any store or stores or any mercantile establishment or establishments in this State which are owned, operated, maintained or controlled by the same ‘ retail merchant,’ as defined herein, either domestic or foreign, in which goods, wares or merchandise of any kind, are sold at retail. The provisions of this act shall be construed to apply to every ‘ retail merchant ’ and ‘ store,’ as defined herein, which is controlled or held with others by majority stock ownership or ultimately controlled or directed by one management or association of ultimate management.

“ § 2. Every retail merchant, as defined herein, shall pay an annual license tax for the opening, establishing, operating or maintaining of any store or stores, as defined herein, determined by computing the tax on the amount of gross sales as follows:

“ One-twentieth of one per cent of the gross sales of Four hundred thousand ($400,000.00) Dollars or less; two-twentieths of one per cent on the excess of the gross sales over Four hundred thousand ($400,000.00) Dollars and not exceeding Five hundred thousand ($500,000.00) Dollars; five-twentieths of one per cent on the excess of the gross sales over Five hundred thousand ($500,000.00) Dollars and not exceeding Six hundred thousand ($600,000,00) Dollars; eight-twentieths of one per cent on the excess of the gross sales over Six hundred thousand ($600,000.00) Dollars and not exceeding Seven hundred thousand ($700,000.00) Dollars; eleven-twentieths of one per cent on the excess of the gross sales over Seven hundred thousand ($700,000.00) Dollars and not exceeding Eight hundred thousand ($800,000.00) Dollars; fourteen-twentieths of one per cent on the excess of the gross sales over Eight hundred thousand ($800,-000.00) Dollars and not exceeding Nine hundred thousand ($900,-000.00) Dollars; seventeen-twentieths of one per cent on the excess of the gross sales over Nine hundred thousand ($900,000.00) Dollars and not exceeding One million ($1,000,000) Dollars; one per cent on the excess of the gross sales over One million ($1,000,000.00) Dollars.”

•§ 3 provides for annual returns to the state tax commission, assessment and payment of the tax. § 4 allows certain credits for other taxes. § 7 makes it a misdemeanor, punishable by fine or imprisonment, to fail to file returns and pay the tax.

4 Galveston, H. & S. A. Ry. Co. v. Texas, 210 U. S. 217, 227; Choctaw, O. & G. R. Co. v. Harrison, 235 U. S. 292, 298; Crew Levick Co. v. Pennsylvania, 245 U. S. 292, 294; Shaffer v. Carter, 252 U. S, 37, 55; Dawson v. Kentucky Distilleries Co., 255 U. S. 288, 292; St. Louis Cotton Compress Co. v. Arkansas, 260 U. S. 346, 348.

5 Postal Telegraph Cable Co. v. Adams, 155 U. S. 688, 698.

6 Franchise taxes measured by net income have been sustained, as not constituting a tax on income: Educational Films Corp. v. Ward, 282 U. S. 379; compare Macallen Co. v. Massachusetts, 279 U. S. 620; Pacific Co. v. Johnson, 285 U. S. 480.

7 See Moore v. State Board of Charities and Corrections, 239 Ky. 729; 40 S. W. (2d) 349.

8 By Public Act No. 24, Laws of 1933, Vermont imposed a graduated gross sales tax increasing from % of one per cent on sales of from fifty thousand to one hundred thousand dollars to four per cent, on sales above two million dollars. A levy of a similar sort applied in Kentucky, as shown by the facts proved in the present record, would have deprived many merchants in various tax brackets of all net income from their stores. We were informed at the argument that this statute has been held unconstitutional by a court of first instance.

9 Arizona Laws, 1933, e. 18; California Laws, 1933, c. 1020; Georgia, Code 1930, Supplement, Act of 1929, § 993(316); Illinois, Act of June 28, 1933, Laws, 58th Gen. Assembly, p. 924; Indiana, Burns Ind. Stats., 1933, c. 26, § 64-2601; Iowa, c. 82, Laws 45th Gen. Assembly, Extra Sess., § 37ff; Kentucky, c. 25, Ky. Acts, Special Sess., 1934; Michigan, Public Acts, Sess. 1930, No. 167; Mississippi, G. L. 1934, c. 119; Missouri, Laws, Extra Sess. 1934, p. 155; New York, Cahill’s Consol. Laws, 1933 Supp., c. 61, Art. 17, § 390, p. 144; North Carolina, Sess. 1933, c. 445, p. 768; Ohio, Page’s Ohio General Code, § 5546-1, p. 859; Oklahoma, First Spec. Sess. 1933, c. 196, p. 456; Pennsylvania, Act Aug. 19, 1932, Special Sess. 1932, § 3, p. 92; South Dakota, Laws, 1933, § 184; Utah, Laws, 1933, e. 63 as amended by c.-20, Second Special Session, 1933; Washington, Laws, 1933, c. 191, p. 869; West Virginia, Act of May 26, 1933, Extra Session, c. 33, p. 219.

10 State Board of Tax Commissioners v. Jackson, 283 U. S. 527; Louis K. Liggett Company v. Lee, 288 U. S. 517; Fox v. Standard Oil Co., ante, p. 87.