The question before us is whether the so-called "occupation tax" act, adopted by the 1933 legislature, is constitutional or unconstitutional.
The title of the act, chapter 191, Laws of 1933, p. 869 [Rem. 1933 Sup., § 8326-1 et seq.], reads as follows:
"AN ACT relating to taxation; imposing taxes upon the privilege of engaging in business activities and providing for the ascertainment, assessment, collection and distribution thereof; providing for the administration and enforcement of this act; providing penalties; making appropriations; and declaring that this act shall take effect immediately."
It is conceded by all that the purpose of the act is to raise additional revenue to meet the deficit occasioned by the general economic depression. It is in no sense a regulatory statute.
Inasmuch as any discussion of the matter must make frequent reference to the terms "gross income," *Page 414 "business" and "gross proceeds of sales," we may as well have before us the legislative definitions of those terms.
Section 1 (6) of the act reads:
"The term `gross income' means the value proceeding or accruing from the sale of tangible property, real or personal,or service or both, and all receipts, actually received by reason of the investment of the capital of the business engaged in, including interest, discount, rentals, royalties, fees or other emoluments however designated and without any deduction on account of the cost of property sold, the cost of materials used, labor costs, interest or discount paid or any other expenses whatsoever and without any deduction on account of losses: Provided, The term `gross income' shall not include any payments received on accounts or notes outstanding at the time this act goes into effect." (Italics mine.)
Section 1 (7) of the act reads:
"The word `business' shall include all activities engaged inwith the object of gain, benefit or advantage either direct orindirect, and not excepting sub-activities producing marketable commodities used or consumed in the main business activity, each of which sub-activities shall be considered business engaged in taxable in the class in which it falls." (Italics mine.)
Section 1 (8) of the act reads:
"The term `gross proceeds of sales' means the value proceeding or accruing from the sale of property without any deduction on account of the cost of property sold, expenses of any kind, or losses."
Closely associated with the term "business" is the correlative term "business activities."
Section 2 (1) of the act reads:
"Business activities, for the purpose of this act, are hereby declared to consist of the five separate and distinct functions, to wit:
*Page 415(a) The extractive function; (b) The manufacturing and/or producing function;
(c) The wholesaling and/or jobbing function; (d) The function of retail distribution; (e) The function of performing and rendering services.
"The taxes hereinafter imposed shall apply to all businessactivities within the state and to each function thereof, whether carried on separately or in combinations of two or more functions." (Italics mine.)
Section 2 (2) of the act reads:
"From and after the first day of August, 1933, and until the thirty-first day of July, 1935, there is hereby levied and there shall be collected from every person an annual tax or excise forthe privilege of engaging in business activities. Such tax or excise shall be measured by the application of rates against values, gross proceeds of sales, or gross income, as the case may be, as follows: . . ." (Italics mine.)
Then follow various sub-classifications of the five main functions of business activities and the designation of specific rates to be paid by each, measured by their gross proceeds of sales or their gross income. Included within the extractive function are the pursuits devoted to agriculture and horticulture.
Section 2 (2) (a) VII (ba) reads as follows:
"Upon every person engaging or continuing within this state in the business of growing or raising for sale, profit or use, any article, substance, commodity, product, or crop; as to such person, the amount of the tax or excise shall be equal to the value of the articles, substances, commodities, products or crops produced, grown, or raised for sale, as shown by the proceeds derived from the sale thereof by the grower, raiser or producer (except as hereinafter provided) multiplied by the rate of one-tenth of one per cent."
This section was vetoed by the governor of the state.
Section 2 (2) (b) of the act, which is the omnibus provision, reads as follows:
"Upon every person engaging in or continuing within this state in any business not included in the *Page 416 preceding subdivisions of this section and upon every personengaging or continuing within this state in the business ofrendering, performing or selling services, professional orotherwise; as to such persons the amount of the tax or excise shall be equal to the gross income of the business multiplied by the rate of six-tenths of one per cent." (Italics mine.)
This section was also vetoed by the governor.
From a reading of the foregoing sections it is apparent that it was the intent that every person engaged in any activity with the object of gain should be taxed according to his gross income.
Inasmuch as the constitutionality of a particular statute must depend upon the particular constitution which it either observes or offends, we must needs have before us the provisions of our own constitution which affect the question.
The fourteenth amendment of our constitution, adopted in November, 1930, so far as it is pertinent here, reads as follows:
"All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax and shall be levied and collected for public purposes only. The word `property' as used herein shall mean and includeeverything, whether tangible or intangible, subject toownership." (Italics mine.)
There are, of course, many decisions by the courts of other states touching the validity of income tax acts passed by their respective legislatures. Those decisions range themselves into two classes, one holding that income is property within the meaning of the statute, the other holding that it is not, but is rather a tax on the privilege of earning an income. But in order properly to evaluate any particular decision, it is always necessary to have in mind the constitutional provision behind it. The rock upon which the courts *Page 417 split, and upon which the members of a particular court often divide, is, as already indicated, the question whether income is, or is not, property. There is no state, with the possible exception of Montana, that has a constitution containing language comparable in character to our constitution upon that specific phase of the question. Art. XII, § 17, of the Montana constitution provides:
"The word property as used in this article is hereby declared to include moneys, credits, bonds, stocks, franchises and all matters and things (real, personal and mixed) capable of private ownership, but this shall not be construed so as to authorize the taxation of the stocks of any company or corporation when the property of such company or corporation represented by such stocks is within the state and has been taxed."
Speaking of that provision, the Montana court said in Crusev. Fischl, 55 Mont. 258, 175 P. 878, at 880:
"We imagine that it would defy the ingenuity of the most profound lexicographer to formulate a more comprehensive definition . . ."
If this were a challenge to other states to formulate a more comprehensive definition, it seems to me that the state of Washington has met it when it declared that "property" shall include everything, tangible or intangible, subject to ownership. The constitution of this state, so far as it bears upon the characterization of property, is sui generis.
I am aware that, in a recent decision by the supreme court of Montana, an income tax law passed by the legislature of that state was held valid. O'Connell v. State Board of Equalization, 25 P.2d (Mont.) 114. This court, however, has recently criticized the holding in that case, and has expressly refused to follow it. Culliton v. Chase, ante p. 363, 25 P.2d 81.
If the question before us were simply whether income *Page 418 is, or is not, property, the answer has already been definitely supplied by this court. In Aberdeen Savings Loan Assn. v.Chase, 157 Wash. 351, 289 P. 536, 290 P. 697, 71 A.L.R. 232, an En Banc decision, we held that net income is property. In that case, the respondents contended that the tax provided for in the statute was an excise for the privilege of doing business. Addressing itself to the recital of the statute, the court in its opinion said:
"Such a legislative declaration is to be carefully considered by the courts and due weight given thereto. Courts should, however, in construing an act containing such a declaration, consider the true operation and effect of the law which must be dealt with on the basis of the practical results which follow its operation, and not alone by legislative declarations contained therein."
The particular case arose upon a net income tax act, but the opinion stated that there was no distinction in principle between a tax on gross receipts and a tax on net income.
Upon a rehearing of the case, this court declared itself as follows (p. 392):
"In order to clarify the situation, the court now states that the opinions above cited were rendered with a view to determining the questions presented by the cases at bar, and those questions only; that the majority of the court was of the opinion that the legislation therein attacked must be held, under the decisions of the supreme court of the United States, to attempt to establish a property and not an excise or corporation franchise tax; . . ."
In Burr, Conrad Broom, Inc. v. Chase, 157 Wash. 393,289 P. 551, which was a companion to the Aberdeen Savings Loan case, we said:
"We are convinced that, notwithstanding the legislative declaration, the tax is not, in truth and in fact, *Page 419 an excise or corporate privilege tax, and, this being the case, we find no justification for any such discrimination between corporations and individuals or copartnerships, which, under the circumstances presented by the record in this case, must be held to be merely an arbitrary classification."
In Spokane Eastern Trust Co. v. Spokane County, 70 Wash. 48,126 P. 54, Ann. Cas. 1914B 641, we said:
"An excise tax is a tax upon a pursuit, trade or occupation .. . 3 Words and Phrases, 2548. Where the charge is imposed solely or primarily as a means of raising revenue, it is a property tax."
Those cases are conclusive, so far as our decisions are concerned, in establishing the nature of the tax and also the nature of the subject of the tax. A tax based upon gross income or gross proceeds of sales is a property tax.
Subsequent to the decision of the Aberdeen Savings LoanAssn. case, our constitution was amended. The amendment, however, fortifies the conclusion reached in that case. Our present constitution, in providing for a uniformity of tax upon the same class of property, defines property as everything, tangible or intangible, subject to ownership. So that the immediate question now before us is whether "gross income" or "gross proceeds of sales" is subject to ownership.
The relator contends that "income is capable of acquisition, but except in a very limited number of cases, is not capable of ownership." According to this statement, income seems to partake of the nature of a globule of mercury, which one can hold in his hand, but on which he can never fasten his thumb. By this formula, the grocer owns his stock of goods while it is on the shelf, but when he converts it into cash he does not own the proceeds; if he banks the money, it *Page 420 is not his money that he banks; if some one steals, it, he is not guilty of larceny.
I presume that the proponents of that theory would draw a distinction between "gross income" or "gross proceeds of sales" and the money equivalent thereof. The distinction, however, seems to me to be too tenuous and too barren of reason to be of any value in solving so material and practical a matter as the ever-present subject of taxation. In fact, it seems to me that any such tenuous distinction, if it exists at all, is fully met by the choice of language contained in our constitution. Its framers avoided the possibility of income being declared not to be property in its common acceptation, by defining the word "property" as meaning and including everything subject to ownership. If there are any words more comprehensive than these, they do not occur to me.
If I am correct thus far, then it must follow, and I do not believe that the contrary is seriously contended, that the act fails because it lacks the element of uniformity prescribed by the constitution. Paraphrasing the fourteenth amendment, its mandate is that when anything subject to ownership is taxed, it must be taxed at the same rate at which everything else of the same class is taxed. "Gross income" or "gross proceeds of sales" is a class of itself. Its sources may vary, the net profits resulting therefrom may be large in one instance and small in another, but, of itself, it is a single classified concept. The "gross proceeds of sales" of the manufacturer may exceed those of the merchant; the "gross income" of either may result from mathematical computations different from those employed by the professional man; but the terms themselves have one and an identical meaning when applied to each. By the act itself, they mean the value proceeding or accruing from the sale of property or *Page 421 services or both, without deduction of cost, expense or loss.
I now approach the matter from another angle. Art. I, § 12, of our constitution provides:
"No law shall be passed granting to any citizen, class of citizens, or corporation, other than municipal, privileges or immunities which, upon the same terms, shall not equally belong to all citizens or corporations."
By the governor's veto, there was written into the act an exemption in favor of farmers, professional men, salaried persons, wage-earners, landlords, mortgage loan houses, and all others who would otherwise have been classed under the omnibus clause. The act, as it passed the legislature, expressly declared its intent to tax all persons engaged in any activity with the object of gain, benefit or advantage, direct or indirect. The language used was broad and sweeping, and its extent was all-inclusive. When the act finally emerged with the gubernatorial veto attached to certain portions of it, there had been deleted from it a portion of its very vitals. The act as originally adopted by the legislature indicates, on its face at least, a conscientious effort to relieve the dire necessities of the situation, by calling to the colors the assistance of all persons in the raising of certain revenues. As the act now stands, under the partial veto, we have a draft upon a selective class, or classes, while others are permitted not only to exempt themselves from its burdens, but even to enjoy the sacrifice made by those on whom the burden falls.
The purpose of the act is to enable government to function. Government functions for all. Why should some bear the burdens entailed by the limitation of the forty-mill limit act, which the present act is designed to supplement, and others merely enjoy that limitation? *Page 422 Why should one class, or a series of classes, be called upon to support our system of education, even in part, while all others, who enjoy the full benefits of the system, are relieved of the burden to a proportionate extent? In my opinion, there is no valid reason.
Undoubtedly, the state has a wide latitude in selecting the subjects of taxation and in making classifications. Brown-FormanCo. v. Kentucky, 217 U.S. 563; Tax Commissioners v. Jackson,283 U.S. 527, 73 A.L.R. 1464; Miethke v. Pierce County,173 Wash. 381, 23 P.2d 405. This rule is subject, however, to the qualification that there must be a reasonable basis for the classification, and all persons within the same class must be taxed or exempted alike. State v. Hart, 125 Wash. 520,217 P. 45, and cases therein cited. Stated in another way, the classification must be reasonable and germane to the objects and purposes of the legislation. McKnight v. Hodge, 55 Wash. 289,104 P. 504, 40 L.R.A. (N.S.) 1207; Maercker v. Milwaukee,151 Wis. 324, 139 N.W. 199, L.R.A. 1915F 1196, Ann. Cas. 1914B 199; Cooley on Taxation, p. 719.
The present tax is an "occupation tax." It assumes, by its title and by its provisions, to enforce upon every person an annual tax for the privilege of engaging in business activities. Viewed from its profile, the act has the appearance of being a complete entity; viewed from its front, we see that half of it is gone. The veto effected a mutilation of the act and robbed it of sufficient of its vitality to prevent it from accomplishing the purpose for which it was conceived. As it now stands, the act presents a classification that is unreasonable and arbitrary, discriminatory in its nature, and taking no thought of relative ability to pay, or the relative enjoyment of governmental privileges conferred. *Page 423
Coming now to the leading opinion, I have but one or two things to say. I do not believe that either the farmer or the professional man should be exempt from the occupation tax, and certainly not the landlord, the mortgage-loan company, or even the salaried person.
With respect to the farmer, it is undoubtedly true that in recent years he has earned hardly more than laborer's wages for the hours employed. But it seems to me that the remedy for this is by other means, some of which have already been employed, and others of which our national government is even now endeavoring to effect. The farmer is not a pensioner, and I do not think that he desires to be considered as such. He does not desire a mere sop to be thrown to him in alleviation of a condition that he must otherwise continue to bear. What he needs, and what he desires, is that conditions be so radically changed that he may justly receive that which he is entitled to for his labor and his products. Until that is done, he will receive but little aid, and small comfort, from a mere exemption from some particular tax.
As to the professional man, there is even less reason for exemption as to him. Granted that he sometimes receives small fees, and at other times none, for the service that he nevertheless cheerfully performs, that is no answer to the question before us. Many a grocer, butcher or baker has sold supplies from his shelf for which he has never been paid, and is extending credit to those who may never pay the bill. The fact that he may at times contribute the necessities of life to the hungry would offer no logical reason for exempting him from the tax. When it comes to the question of who is really affluent, or successful, in these times, I doubt whether the merchant can show any better returns than the professional man or the salaried class. The purpose of the occupation tax act certainly is not *Page 424 to stigmatize those who are engaged in strictly commercial pursuits, nor to exalt and exempt a profession merely because it maintains a code of ethics.
What I have said with reference to the professional man applies equally to the landlord, the mortgage-loan company and even the salaried man. Taken as a whole, those included in the exempted classes are numbered by the thousands. They are all engaged in business activities. They each have an occupation from which a gross income may be realized. If, in fact, the gross income of any be small, then the amount of tax to be paid by them will likewise be small and its payment will entail but a slight burden as to them. If, on the other hand, the gross income of any be large, then it furnishes not only a basis, but also a reason, for a proportionate contribution by them to the revenue sought to be raised.
We have here only a practical, every-day question, one that, because of its necessity, we must recognize. It is the question of taxation, the means provided for the maintenance of government. It may be a rendering "unto Caesar the things that are Caesar's," but since, and so long as, the state is dependent thereon, it must be rendered. The only amelioration that it can have is that it be fairly and equally distributed and borne.
I think that the act in question is clearly unconstitutional, and therefore dissent.
MITCHELL, J., concurs with STEINERT, J.