INDIRECT ENCROACHMENT ON FEDERAL II. REGULATIONS OF INTERSTATE COMMERCE (concluded) IT T has already been disclosed that at the October, 1917, Term the Supreme Court in United States Glue Co. v. Oak Creek 2 sanctioned the inclusion of income from interstate commerce in a general state income tax measured by net income from all sources. The difference "between a tax measured by gross receipts and one measured by net income" was said to afford "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." 3 The United States Glue Company was a domestic corporation; and in propounding and answering the question to be decided, Mr. Justice Pitney included that fact. After summarizing the provisions of the statute and their application to the plaintiff, he said: "Stated concisely, the question is whether a State, in levying a general income tax upon the gains and profits of a domestic corporation, may include in the computation the net income derived from transactions in interstate commerce without contravening the commerce clause of the Constitution of the United States." 4 And the answer is stated as follows: "And so we hold that the Wisconsin income tax law, as applied to the plaintiff in the case before us, cannot be deemed to be so direct a 1 For preceding instalments of this discussion see 31 HARV. L. Rev. 321–72 (January, 1918); Ibid., 572-618 (February, 1918); Ibid., 721-78 (March, 1918); Ibid., 932-53 (May, 1918); 32 HARV. L. REV. 234-65 (January, 1919); and Ibid., 374-416 (February, 1919). 2247 U. S. 321, 38 Sup. Ct. Rep. 499 (1918). 3 247 U. S. 321, 328, 38 Sup. Ct. Rep. 499 (1918). 4 Ibid., 326. burden upon plaintiff's interstate business as to amount to an unconstitutional interference with or regulation of commerce among the States. It was measured not by the gross receipts, but by the net proceeds from this part of plaintiff's business, along with a like imposition upon its income derived from other sources, and in the same way that other corporations doing business within the State are taxed upon that proportion of their income derived from business transacted and property located within the State, whatever the nature of their business." 5 These portions of the opinion, taken alone, would confine the decision to the point that a domestic corporation, engaged in both local and interstate commerce, cannot exclude interstate income from a tax on net income from all kinds of business which is imposed equally on other corporations doing business in the state. This was as far as the court had to go to dispose of the controversy before it. It was not called upon to say whether the result would have been the same in the case of an individual, a partnership or a foreign corporation or of a business that was exclusively interstate. It might, however, have narrowed its decision still further, as we shall see later.6 While the decision involved a domestic corporation and the court confined the case to such a corporation, there is no intimation in the opinion that an individual or partnership or foreign corporation would have occupied a more favorable position. Indeed, there are hints to the contrary. It is thought important to mention that the plaintiff was taxed "in the same way that other corporations doing business within the State are taxed, . . . whatever the nature of their business." 7 The incidence of a similar burden on other corporations is one of the reasons why this corporation cannot complain. The reasonable inference is that the court, in seeming in part of the opinion to confine the decision to the kind 5 247 U. S. 321, 328, 38 Sup. Ct. Rep. 329 (1918). Infra, page 643-45. 7 247 U. S. 321, 329, 38 Sup. Ct. Rep. 499 (1918). This statement as to other corporations is not literally true, for, as we have seen from Northwestern Life Insurance Co. v. Wisconsin, 247 U. S. 132, 38 Sup. Ct. Rep. 444 (1918), 32 HARV. L. REV. 408 f., a gross receipts tax was levied on insurance companies in lieu of all other taxes except those on real estate. Public utilities are also excluded from the provisions of the income tax law and subjected to ad valorem assessment (note 34, infra). These exceptions, however, do not appear important, since the other methods of assessment are regarded as imposing burdens substantially equivalent to those which would result from subjection to the income tax. of corporation that was before it, does not mean to suggest any such distinction between foreign and domestic corporations as appears to be made in dealing with excises measured by total capital stock. And that the opinion is not confined to corporations is apparent from another paragraph in which reference is made to "persons." After distinguishing a tax on gross receipts from one on net income, Mr. Justice Pitney says of the latter: "Such a tax, when imposed 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 ordinary and general burdens of 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 qualifying phrase "otherwise subject to the jurisdiction of the state" opens the door to the inquiry whether a foreign corporation engaged exclusively in interstate commerce could be taxed on its net income earned within the state. Such corporations are "subject to the jurisdiction of the state" from the standpoint of service of judicial process,10 and taxation of property." But they 8 Compare Looney v. Crane Co., 245 U. S. 178, 38 Sup. Ct. Rep. 85 (1917), 31 HARV. L. REV. 600-18, with Kansas City, M. & B. R. R. Co. v. Stiles, 242 U. S. 111, 37 Sup. Ct. Rep. 58 (1916), 31 HARV. L. REV. 599–600. See also 33 POLITICAL SCIENCE QUARTERLY, 557, note 1. 9247 U. S. 321, 329, 38 Sup. Ct. Rep. 499 (1918). 10 International Harvester Co. v. Kentucky, 234 U. S. 579, 34 Sup. Ct. Rep. 944 (1914). 11 This does not appear to have been established by explicit decision, but the many cases holding that foreign corporations engaged partly in interstate commerce are not entitled to exemption from property taxation convey no hint that the result would be different if the business in which the property was employed was exclusively interstate. In St. Louis v. Wiggins Ferry Co., 11 Wall. (78 U. S.) 423 (1871), the only reason given for holding that the property of a foreign corporation engaged exclusively in interstate commerce was not taxable in St. Louis was that the property had no taxable situs there. In Henderson Bridge Co. v. Kentucky, 166 U. S. 150, 17 Sup. Ct. Rep. 532 (1897), in which Kentucky was allowed to tax the Kentucky part of an interstate bridge owned by a Kentucky corporation, it appeared from the statement of facts that Illinois had assessed that part of the bridge which lay within its borders. In Gloucester Ferry Co. v. Pennsylvania, 114 U. S. 196, 206, 5 Sup. Ct. Rep. 826 (1885), Mr. Justice Field declared: "It is true that the property of corporations engaged in foreign or interstate commerce, as well as the property of corporations are not subject to the jurisdiction so as to be liable to a privilege tax on the conduct of their business,12 or to certain police requirements set forth as a condition on bringing suit in the state courts.13 Are they so subject to the jurisdiction as to be liable to a tax on their net income? Mr. Justice Pitney plainly intimates that they are. A tax on net income, he says, is "like a tax upon property, or upon franchises treated as property." It is "but a method of distributing the cost of government "; it "constitutes one of the ordinary and general burdens of government." If the property of those engaged exclusively in interstate commerce is not exempt from state taxation, there is no reason to accord them immunity from a tax on their net income, which is "but a method of distributing the cost of government, like a tax upon property." The important thing in the mind of the court seems to be the generality of the burden, with the consequent impossibility of discrimination against interstate commerce. The result of this venture at mind-reading coincides with the analysis previously given of state taxes on property assessed by capitalizing the income earned from its use. To repeat Mr. Carter's concession in his brief for the companies in the Ohio Express cases: "Inasmuch as the existence of the States is necessary to the existence of interstate commerce, that ordinary system of taxation which is engaged in other business, is subject to State taxation, provided always it be within the jurisdiction of the State." As the case before the court involved a foreign corporation engaged exclusively in interstate commerce, it is fair to presume that the dictum above quoted was uttered with such a corporation in mind. In Old Dominion Steamship Co. v. Virginia, 198 U. S. 299, 25 Sup. Ct. Rep. 686 (1905), the inference from the statement of facts is that the tug "Germania," which was one of the vessels of a foreign corporation held taxable in Virginia, was engaged exclusively in interstate commerce, though this fact is not mentioned in the opinion. Property owned by a foreign corporation and employed exclusively in work for the United States government is taxable. Gromer v. Standard Dredging Co., 224 U. S. 362, 32 Sup. Ct. Rep. 499 (1912). The conclusion is irresistible that the many declarations that property is not exempt from state taxation because it is employed in interstate commerce are intended to apply to property of foreign corporations engaged exclusively in that commerce. 12 Cheney Brothers Co. v. Massachusetts, 246 U. S. 147, 38 Sup. Ct. Rep. 295 (1918); York Manufacturing Co. v. Colley, 247 U. S. 21, 38 Sup. Ct. Rep. 430 (1918). 13 International Text Book Co. v. Pigg, 217 U. S. 91, 30 Sup. Ct. Rep. 481 (1910); International Text Book Co. v. Lynch, 218 U. S. 664, 31 Sup. Ct. Rep. 225 (1910); Buck Stove Co. v. Vickers, 226 U. S. 205, 33 Sup. Ct. Rep. 41 (1912); Sioux Remedy Co. v. Cope, 235 U. S. 197, 35 Sup. Ct. Rep. 57 (1914). necessary to the existence of the States, namely, taxation upon all property within them, must be permitted, and the property employed in interstate commerce is not to be exempted. .. Were it not subject to taxation in this form the effect would be to confer upon it an affirmative advantage equivalent to a pecuniary bounty equal to the amount of the tax from which it is " 14 exempted." With the advent of general state-wide income taxes, the "ordinary system of taxation which is necessary to the existence of the states" is no longer confined to property taxation. The income tax has come to constitute one of the "ordinary and general" burdens of government. Reason and psychology combine to warrant the expectation that the Supreme Court will not exclude foreign corporations engaged exclusively in interstate commerce from the corporations otherwise subject to the jurisdiction of the states" with respect to taxes on net incomes.15 It seems safe, therefore, to state the principle of the Oak Creek case by saying that a general state-wide tax on net income is not "an unconstitutional interference with or regulation of commerce among the states" by reason of the inclusion of net income from 14 This passage is quoted more at length in 32 HARV. L. REV. 261. 15 This position is taken by the supreme court of Wisconsin in Superior v. Allouez Bay Dock Co., 166 Wis. 76, 80, 164 N. W. 362 (1917), in which Chief Justice Winslow says: "It must be admitted that the defendant's income arose entirely from interstate commerce business. . . . Is the levying of an income tax measured by the income so derived a burden upon interstate commerce? "The question is not free from difficulty, but we think it must be answered in the negative. Income taxation is not taxation of property, but is more nearly akin to taxes levied upon privileges or occupations. Its amount may be measured by the receipts of the business, but it is not in any true sense a tax upon the business itself. The subject is covered, as it seems to us, by the decisions of this court in United States Glue Co. v. Oak Creek, 161 Wis. 211, 153 N. W. 241, and Northwestern Mut. L. Ins. Co. v. State, 163 Wis. 484, 155 N. W. 609, 158 N. W. 328, and the cases therein cited." The cases relied on do not involve concerns whose business was exclusively interstate, so the declaration in the Superior case is no more than the assertion that this does not seem material to the court. Moreover, the decision in the Superior case that those engaged exclusively in interstate commerce may be constitutionally subjected to a tax on their net income was a declaration on a moot point, because the case held that the defendant was exempted from income taxation, for the reason that the property from which the income was derived was railroad property, and the complainant was therefore entitled to the benefit of the provision in the Income Tax Law which exempts "incomes derived from property and privileges by persons now required by law to pay taxes or license fees directly into the treasury of the state in lieu of taxes" (166 Wis. 76, 81). |