ACCEPTED 03-14-00197-CV 4959656 THIRD COURT OF APPEALS AUSTIN, TEXAS 4/20/2015 4:35:11 PM JEFFREY D. KYLE CLERK NO. 03-14-00197-CV _____________________________________________ IN THE COURT OF APPEALS THIRD JUDICIAL DISTRICT OF TEXAS AT AUSTIN ________________________________________________ GRAPHIC PACKAGING, INC., Appellant RECEIVED IN v. 3rd COURT OF APPEALS AUSTIN, TEXAS 4/20/2015 4:35:11 PM GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF JEFFREY D. KYLE THE STATE OF TEXAS; AND KEN PAXTON, ATTORNEYClerk GENERAL OF THE STATE OF TEXAS, Appellees. FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT, CAUSE NO. D-1-GN-12-003038, THE HONORABLE DARLENE BYRNE PRESIDING REPLY BRIEF FOR APPELLANT James F. Martens Amy L. Silverstein jmartens@textaxlaw.com asilverstein@sptaxlaw.com Texas Bar No. 13050720 California Bar No. 154221 Amanda G. Taylor SILVERSTEIN & POMERANTZ LLP ataylor@textaxlaw.com 12 Gough Street, Second Floor Texas Bar No. 24045921 San Francisco, California 94103 Lacy L. Leonard Tele: (415) 593-3502 lleonard@textaxlaw.com Fax: (415) 593-3501 Texas Bar No. 24040561 Danielle Ahlrich ATTORNEYS FOR APPELLANT dahlrich@textaxlaw.com GRAPHIC PACKAGING, INC. Texas Bar No. 24059215 MARTENS, TODD, LEONARD, TAYLOR & AHLRICH 301 Congress Avenue, Suite 1950 Austin, Texas 78701 Tele: (512) 542-9898 Fax: (512) 542-9899 ORAL ARGUMENT REQUESTED IDENTITY OF PARTIES AND COUNSEL APPELLANT APPELLEES Graphic Packaging, Inc. Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas Appellate Counsel: Appellate Counsel: Amy L. Silverstein Rance Craft, asilverstein@sptaxlaw.com Assistant Solicitor General SILVERSTEIN & POMERANTZ LLP rance.craft@texasattorneygeneral.gov 12 Gough Street, Second Floor Cynthia A. Morales, San Francisco, California 94103 Assistant Attorney General Tele: (415) 593-3502 cynthia.morales@texasattorneygeneral.gov Fax: (415) 593-3501 OFFICE OF THE ATTORNEY GENERAL P.O. Box 12548 (MC 059) Austin, Texas 78711-2548 Trial and Appellate Counsel: Tele: (512) 936-2872 James F. Martens Fax: (512) 474-2697 jmartens@textaxlaw.com Amanda G. Taylor ataylor@textaxlaw.com Trial Counsel: Lacy L. Leonard Kevin D. Van Oort lleonard@textaxlaw.com Formerly with the Office of the Attorney Danielle Ahlrich General dahlrich@textaxlaw.com MARTENS, TODD, LEONARD, TAYLOR & AHLRICH 301 Congress Avenue, Suite 1950 Austin, Texas 78701 Tele: (512) 542-9898 Fax: (512) 542-9899 i TABLE OF CONTENTS IDENTITY OF PARTIES AND COUNSEL .............................................................i TABLE OF CONTENTS .......................................................................................... ii INDEX OF AUTHORITIES.....................................................................................iv ABBREVIATIONS ...................................................................................................x REPLY ARGUMENT ...............................................................................................1 I. Section 171.106(a) Did Not Impliedly Repeal the Compact Formula. ................................................................................................3 II. The Compact Is Valid And Binding...................................................... 5 A. The Compact Bears Clear Indicia of a Binding Compact. ......... 5 1. The Commission’s Establishment. ................................... 8 2. No Unilateral Modification or Repeal. ............................. 9 3. Requires Reciprocal Action. ...........................................11 B. The Compact is Not an Advisory Compact or a Uniform Law. ...........................................................................................12 III. THE COMPACT’S ELECTION PROVISION IS UNAMBIGUOUSLY MANDATORY. .............................................14 A. The Express Terms are Mandatory. ..........................................14 B. The Most Relevant Extrinsic Evidence Supports the Mandatory Election. ..................................................................16 C. The Conduct of Other Party States Cannot Override the Compact’s Express Terms. .......................................................17 D. The Compact Does Not Surrender Texas’s Power to Tax........ 19 1. The Compact Election Does Not Involve the “Power to Tax.” ..............................................................19 2. No Surrender or Suspension. ..........................................21 ii IV. COMPACT LAW AND THE CONTRACT CLAUSE PRECLUDE TEXAS FROM UNILATERALLY ELIMINATING THE ELECTION. ....................................................22 A. Settled Principles for Construing Compacts Are Applicable. ................................................................................22 B. The Contract Clause Would Be Violated By Elimination of The Compact Election. .........................................................25 V. The Franchise Tax Is an Income Tax under the Compact Definition.............................................................................................29 CERTIFICATE OF SERVICE ................................................................................34 CERTIFICATE OF COMPLIANCE .......................................................................34 iii INDEX OF AUTHORITIES CASES Alabama v. North Carolina, 560 U.S. 330 (2010)............................................................................ 9, 16, 19 Alcorn v. Wolfe, 827 F. Supp. 47 (D. D.C. 1993).....................................................................23 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978).......................................................................................28 Arizona v. California, 292 U.S. 341 (1934).......................................................................................16 Blair v. State Tax Assessor, 485 A.2d 957 (Me. 1984) ....................................................................... 21, 22 Bolton v. Terra Bella Irrigation Dist., 106 Cal. App. 313 (1930) ..............................................................................22 City of Charleston v. Pub. Serv. Comm’n, 57 F.3d 385 (4th Cir. 1995) ...........................................................................26 CT Hellmuth & Association, Inc. v. Washington Metro Area Transit Authority, 414 F. Supp. 408 (D. Md. 1976)....................................................................24 Cuyler v. Adams, 449 U.S. 433 (1911).......................................................................................23 Dartmouth College v. Woodward, 17 U.S. 518 (1819).........................................................................................20 Doe v. Ward, 124 F. Supp. 2d 900 (W.D. Pa. 2000) ...........................................................25 Energy Reserves Group v. Kan. Power & Light Co., 459 U.S. 400 (1983)................................................................................ 27, 28 Gaar, Scott & Co. v. Shannon, 115 S.W. 361, 362 (Tex. Civ. App.—Austin 1908) aff’d, 233 U.S. 468 (1912).......................................................................................20 iv General Expressways, Inc. v. Iowa Reciprocity Board, 163 N.W.2d 413 (Iowa 1968) ........................................................................25 Gillette Co. v. Franchise Tax Board, 207 Cal. App. 4th 1369 (2012) ............................................................... 18, 26 Green v. Biddle, 21 U.S. 1 (1823)...................................................................................... 25, 28 Harsha v. Detroit, 246 N.W. 849 (Mich. Sup. Ct. 1939) ............................................................19 In re C.B., 188 Cal. App. 4th 1024 (2010) ........................................................................9 Int’l Serv. Ins. Co. v. Jackson, 335 S.W.2d 420 (Tex. App.—Austin 1960, writ ref’d n.r.e.) .........................3 Int’l Union of Operating Eng'rs, Local 542 v. Del. River Joint Toll Bridge Comm’n, 311 F.3d 273 (3rd Cir. 2002) ...........................................................................9 Int'l Business Machines Corp. v. Dept. of Treasury, 852 N.W.2d 865 (Mich. 2014) .............................................................. passim Kansas v. Colorado, 514 U.S. 673 (1995)................................................................................ 18, 19 McComb v. Wambaugh, 934 F.2d 474 (3rd Cir. 1991) ................................ 9, 16, 24 Memphis & Little Rock Railroad v. Railroad Comm., 112 U.S. 609 (1884).......................................................................................19 National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Railway Co., 470 U.S. 451 (1985).......................................................................................10 Northeast Bancorp, Inc. v. Bd. of Governors of the Federal Reserve, 472 U.S. 159 (1985)............................................................................... passim Oklahoma v. New Mexico, 501 U.S. 221 (1991).......................................................................................16 People v. Board of Supervisors of Calaveras County, 126 Cal. App. 670 (1932) ..............................................................................20 v Railroad Tax Cases, 13 F. 722 (D. Cal. 1882) ................................................................................20 Rhoades v. State, 934 S.W.2d 113 (Tex. 1996) ...........................................................................4 Seattle Masters Builders Ass'n v. Pacific Northwest Electric Power and Conservation Planning Council, 786 F.2d 1359 (9th Cir. 1986) ............................................................... passim Sheehy v. Public Empl. Retirement Div., 864 P.2d 762 (Mont. Sup. Ct. 1993)..............................................................21 Standard Oil Co. v. Johnson, 10 Cal. 2d. 758 (1938) ...................................................................................21 State Bank of Ohio v. Knoop, 57 U.S. 369 (1854).........................................................................................20 State Highway Dep’t v. Gorham, 162 S.W.2d 934 (Tex. 1942) .......................................................................4, 5 Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility, 71 S.W.3d 846 (Tex. App.–Austin 2002, no pet.) .........................................28 Switzer v. Phoenix, 341 P.2d 427 (Ariz. Sup. Ct. 1959) ........................................................ 21, 22 Tarrant Reg’l Water Dist. v. Hermann, 186 L. Ed. 2d 153 (2013) .................................................................. 10, 16, 19 Texas v. New Mexico, 462 U.S. 554 (1983).......................................................................................16 Texas v. New Mexico, 482 U.S. 124 (1987).......................................................................................29 Trinova Corp. v. Dep’t of Treasury, 498 U.S. 358 (1991).......................................................................................29 U.S. Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978)............................................................................... passim vi U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1 (1976)........................................................................ 25, 26, 27, 28 Valencia Energy Co. v. Dep’t of Rev., 959 P.2d 1256 (Ariz. Sup. Ct. 1998) .............................................................19 Virginia v. Tennessee, 148 U.S. 503 (1893).......................................................................................23 West Virginia ex rel. Dyer v. Sims, 341 U.S. 22 (1951).....................................................................................9, 23 STATUTES & RULES 1971 Fla. Laws ch. 71-980 § 2.................................................................................17 1981 Nev. Stat. ch. 181, at 350 ................................................................................18 1985 Neb. Laws L.B. 344 ........................................................................................18 1985 W. Va. Acts ch. 160 ........................................................................................18 2005 Me. Laws ch. 332, § 29 ...................................................................................18 2006 Tex. Gen. Laws 1, 38 ......................................................................................29 2012 Cal. Stat. ch. 37, § 3 ........................................................................................18 2013 Minn. Ch. Law 143 (H.F. 677) .......................................................................18 2014 Mich. Pub. Acts 282, § 1.................................................................................18 Cal. Fish & Game Code § 14001 ...............................................................................8 Cal. Gov’t Code § 66800 .........................................................................................10 Cal. Veh. Code § 15207 ...........................................................................................10 Fla. Stat. § 214.71 ....................................................................................................17 I.R.C. § 55 ................................................................................................................31 I.R.C. § 63 ................................................................................................................31 I.R.C. § 151 ..............................................................................................................31 vii I.R.C. §§ 101-140.....................................................................................................30 Mich. Comp. Laws § 205.581....................................................................................3 Mo. Rev. Stat. § 32.200 ...........................................................................................17 Mont. Code Ann. § 15-1-601 ...................................................................................17 N.D. Cent. Code § 57-59-01 ....................................................................................17 N.M. Stat. Ann. § 7-5-1 ...........................................................................................17 Tex. Code Crim. Proc. art. 42.19 ...............................................................................8 Tex. Const. art. III, § 36 .........................................................................................4, 5 Tex. Const. art. VIII, § 4 ............................................................................. 19, 21, 22 Tex. Fam. Code § 60.010 .........................................................................................10 Tex. Gov’t Code § 510.017......................................................................................10 Tex. R. App. P. 38.3.................................................................................................28 Tex. Tax Code § 141.001 ................................................................................. passim Tex. Tax Code § 171.106 ................................................................................. passim Tex. Tax Code § 171.1011 .......................................................................................30 Tex. Tax Code § 171.1012 .......................................................................................30 Tex. Tax Code § 171.1013 .......................................................................................31 viii OTHER AUTHORITIES California Chamber of Commerce, Special Exhibits Re: A.B. 1304: Ratifying Multistate Tax Compact (Jul. 13, 1973) ..............................................................................................................18 Caroline Broun, Richard Masters and others, The Evolving Use and Changing Role of Interstate Compacts (ABA 2006)............................................. 9, 12, 13, 24 Fletcher Cyclopedia of the Law of Corporations ....................................................30 Interstate Compacts vs. Uniform Laws, at cglg.org/media/1302/ compacts_vs_uniform_laws-csgncic.pdf (last visited Apr. 9, 2015) ..................................................................................................14 Kearns B. Taylor, Texas’ Exciting Answer in the Battle with Proponents of Federal Control Over State Taxation of Interstate Commerce, 30 Tex. B.J. 773 .............................................................................................15 Lilian V. Faulhaber, The Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, 92 B.U. L. Rev. 1307 (2012) .........................................................................31 Public Law 86-272 ...................................................................................................29 Texas House of Representatives Ways & Means Committee HB 3........................29 Texas House Research Organization HB 3..............................................................29 Walter Hellerstein, State Taxation ¶ 9.01[1] n.12.19, ¶ 7.12[7] ...........................................................................30 ix ABBREVIATIONS For ease of reference, Graphic Packaging, Inc. uses the following abbreviated references to the record and the parties herein: Abbreviation Reference Graphic Graphic Packaging, Inc. The Comptroller Appellees Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, collectively The Compact Multistate Tax Compact The Compact Election The election contained in Texas Tax Code Section 141.001, art. III(1) The Compact Formula The apportionment formula contained in Texas Tax Code Section 141.001, art. IV, i.e., an equally-weighted, three-factor formula consisting of a property factor, a payroll factor, and a sales factor The Texas Formula The apportionment formula contained in Texas Tax Code Section 171.106(a), i.e., a single factor formula consisting of only a sales factor UDITPA The Uniform Division of Income for Tax Purposes Act x REPLY ARGUMENT Graphic properly used the Compact Formula to determine its franchise tax base. Texas became a party to the Compact in 1967 and thereby agreed to all of its terms, including the core provision allowing all taxpayers to elect to apportion income by either the Compact Formula or an alternative state formula, the Texas Formula. Tex. Tax Code § 141.001, art. III(1). Texas has never repealed the Compact Election or Formula. The Comptroller contends that Texas Tax Code § 171.106(a) eliminated the Compact Formula. Yet, neither the plain language of Section 171.106(a) nor its legislative history indicate an amendment of the Compact to mandate the Texas Formula. In International Business Machines Corp. v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014) (“IBM”), the Michigan Supreme Court rejected a nearly identical argument involving the same Compact. The Court agreed that Michigan’s apportionment statute was mandatory, but “the Legislature gave no clear indication that it intended to repeal the [Compact Election],” so it assumed “the Legislature intended for both to remain in effect.” Id. at 875. When enacted, the Compact “contemplat[ed] the future enactment of a state income tax with a mandatory apportionment formula different from the Compact's apportionment formula.” Id. at 874. The statutes were compatible: if a taxpayer elects the Compact, the Compact Formula applied; otherwise, the taxpayer was “required to apportion its tax 1 base consistently with the mandatory language of” the Michigan’s statute. Id. at 875. The Michigan Supreme Court’s reasoning is on point here and provides the proper analytical path for reconciling the terms of the Compact and the franchise tax law. If this Court agrees, then it need not reach any other issues. Furthermore, the Compact is valid and binding on Texas until it withdraws. The states and the drafters understood compacts were an established mechanism for resolving cross-border issues and intended the Compact to be binding. The plain terms of the Compact demonstrate a clear intent to create a binding interstate compact. The legislative history confirms that intent. There is no evidence of intent to enact a mere model law. Enactment and withdrawal provisions and a commission are never features of garden-variety statutes. And, there is no evidence of intent to allow piecemeal amendment of the Compact’s terms. Subsequent actions of party states are inconsistent; some states never deviated from the Compact Election, some states withdrew, and most notably, some states deviated from the Compact Election and later withdrew. Finally, the Compact Election applies because the franchise tax is an “income tax” under the Compact’s broad definition. All of Texas’s alternative tax bases, especially the cost of goods sold computation, begin with gross income and allow deductions not directly related to specific transactions. Thus, they are income taxes under the Compact. 2 I. SECTION 171.106(A) DID NOT IMPLIEDLY REPEAL THE COMPACT FORMULA. Tex. Tax Code § 171.106(a) did not impliedly repeal the Compact Formula. An implied repeal would require that the statutes were irreconcilable or that repeal was “plainly intended by the Legislature... The implication must be clear, necessary, irresistible, and free from reasonable doubt.” Int’l Serv. Ins. Co. v. Jackson, 335 S.W.2d 420, 424 (Tex. Civ. App. 1960). Sections 171.106(a) and 141.001 are harmonized to preserve both: if a taxpayer makes the Compact Election, the Compact Formula applies; otherwise, the Texas Formula applies. See Appellant’s Brief 23-24. The Michigan Supreme Court in IBM, 852 N.W.2d 865, adopted this analysis, holding the Compact Election reconciled the Compact Formula with the Michigan Formula, which is materially similar to Section 171.106(a). 1 [The state’s apportionment formula] is not the only provision of Michigan’s tax laws pertaining to the apportionment of business income--the Compact's election provision shares the same purpose. Therefore, we cannot interpret [the state’s apportionment formula] in a vacuum… The Department's argument overlooks that the Compact's election provision, by using the terms “may elect,” contemplates a divergence between a party state's mandated apportionment formula and the Compact's own formula--either at the time of the Compact's adoption by a 1. Compare Mich. Comp. Laws § 205.581, art. IV(9) (2011), with Section 171.106(a). The Michigan statute also contained a clause stating “except as otherwise provided in this act.” IBM, 852 N.W.2d at 873. 3 party state or at some point in the future. Otherwise, there would be no point in giving taxpayers an election between the two. In fact, reading the Compact's election provision as forward-looking--i.e., contemplating the future enactment of a state income tax with a mandatory apportionment formula different from the Compact's apportionment formula--is the only way to give meaning to the provision when it was enacted in Michigan. Viewed in this light, the [state’s] mandatory apportionment language may plausibly be read as compatible with the Compact's election provision. Id. at 873-74. To say that prior to enacting the franchise tax in 2006, the “Legislature never has intended to apply” the Compact Formula does not establish a policy or say anything about legislative intent in 2006. Appellees’ Brief 36. Silence does not evidence intent to eliminate the Compact Formula. Rather this Court must assume “the Legislature intended for both to remain in effect.” IBM, 852 N.W.2d at 875. Finally, the Comptroller’s interpretation would violate Tex. Const. art. III, § 36, which is aimed at eliminating confusion and uncertainty; requiring amended statutes to be re-enacted and published allows “their meaning [to be] known without the necessity of examining the statute amended.” Rhoades v. State, 934 S.W.2d 113, 121 (Tex. 1996) (quoting Tex. Const. art. III, § 36 commentary). However, Section 171.106(a) as interpreted by the Comptroller gives no notice it affects Section 141.001, creating just the confusion and uncertainty the Constitution intends to prevent. See Appellees’ Brief 39; State Highway Dep’t v. Gorham, 162 S.W.2d 4 934, 937 (Tex. 1942) (a law restricting application of a statute and not expressly referencing the title of the provisions it restricted, violated Tex. Const. art. III, § 36). Id. at 937. Section 171.106(a) did not impliedly repeal the Compact Election or Formula. II. THE COMPACT IS VALID AND BINDING. The Compact bears clear indicia of a binding compact. Appellant’s Brief 38-41 (discussing enactment provisions, imposition of mutual obligations on party states, withdrawal provision, creation of Commission). History confirms the states and the drafters understood compacts to be an established mechanism for resolving cross-border issues, and they intended the Compact to be a binding compact. Id. Claiming that the Compact is a uniform law disregards its plain terms and its legislative history. Appellees’ Brief 54-55. Arguing that without an express prohibition, party states are free to ignore the Compact (Id. at 55-60), turns the concept of compacts on its head.2 A. The Compact Bears Clear Indicia of a Binding Compact. Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve, 472 U.S. 159 (1985), and Seattle Masters Builders Association v. Pacific Northwest 2. The Comptroller misreads Tex. Tax Code § 141.001, art. XI(a) (“Nothing in this compact shall be construed to … [a]ffect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement Article III.2 of this compact.”). See Appellees’ Brief 53 n.8. This language anticipates and preempts an argument that Article III.2 might interfere with the power to set tax rates. 5 Electric Power and Conservation Planning Council, 786 F.2d 1359 (9th Cir. 1986), did not establish absolute requirements for the existence of a compact but rather discussed certain indicia common in compacts in a manner pertinent to the facts in those cases. Seattle Master Builders also recognized that “[a]n unusual feature of a compact does not make it invalid.” 786 F.2d at 1364. One issue in Northeast Bancorp was whether statutes in Massachusetts and Connecticut permitting the acquisitions of banks by out-of-state entities were an invalid compact under the Compact Clause due to lack of Congressional approval. Northeast Bancorp, 472 U.S. at 162. The statutes were not titled compacts, were not “entered into” with other states, and lacked withdrawal provisions. The Supreme Court rejected the Compact Clause challenge, expressing doubt as to “whether there is an agreement amounting to a compact.” Id. at 175-76. The Court noted: The two statutes are similar in that they both require reciprocity and impose a regional limitation... But several of the classic indicia of a compact are missing. No joint organization or body has been established to regulate regional banking or for any other purpose. Neither statute is conditioned on action by the other State, and each State is free to modify or repeal its law unilaterally. Most importantly, neither statute requires a reciprocation of the regional limitation. Id. at 175. 6 Seattle Master Builders paraphrased Northeast Bancorp in determining the Pacific Northwest Electric Power and Conservation Planning Council was a compact organization, not a federal agency (subject to the Constitutional appointments clause): The Supreme Court recently outlined some of the indicia of compacts. These are establishment of a joint organization for regulatory purposes; conditional consent by member states in which each state is not free to modify or repeal its participation unilaterally; and state enactments which require reciprocal action for their effectiveness. Seattle Master Builders, 786 F.2d at 1363 (citing Northeast Bancorp). U.S. Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978), supports Appellant. The Court reviewed the Compact’s terms before determining it was legal without Congressional consent. See id. at 471 (detailing the Compact’s obligations and the “multilateral nature of the agreement”); Appellant’s Brief 14. If the Court doubted whether the Compact was a binding compact, it would have said so, like in Northeast Bancorp, and the lengthy Compact Clause analysis would have been irrelevant. The Court held the Compact was valid and the audits authorized by the Compact could proceed. U.S. Steel, 434 U.S. at 472-78. In any event, the Compact indeed contains the “classic indicia of a compact” discussed in Northeast Bancorp. 7 1. The Commission’s Establishment. The Compact established the Commission, a classic characteristic of a binding compact. See Northeast Bancorp, 472 U.S. at 175 (indicia includes “a joint organization or body has been established to regulate regional banking or for any other purpose”). The Commission has been in existence for more than 45 years, employs a large number of people, has a sizeable budget, assembles leaders to advance important proposals, and undertakes numerous audits. See Tex. Tax Code § 141.001, arts. VI-VIII; see also, www.mtc.gov (Commission website detailing its activities) and www.mtc.gov/Audit.aspx?id=578 (reporting over 1600 audits in the last five years). Although the term “regulatory” power is not defined, the Commission is a robust organization with significant influence and powers. See Northeast Bancorp, 472 U.S. at 175 (failing to define “regulatory” power). Seattle Master Builders imprecisely paraphrased Northeast Bancorp, and no case holds a compact must create a compact agency with regulatory power to be binding. A compact agency is highly suggestive of a compact’s existence, but it does not need to be a regulatory agency, because even the absence of a regulatory agency does not necessarily mean no compact exists. Many compacts have advisory commissions (see Pacific Marine Fisheries Compact (Cal. Fish & Game Code § 14001)), and others have no commission at all (see, e.g., Interstate Corrections Compact (Tex. Code Crim. Proc. art. 42.19) (imposing obligations on 8 states without creating a commission)). See also Caroline Broun, Richard Masters and others, The Evolving Use and Changing Role of Interstate Compacts (ABA 2006) (“Broun”), at 133-47 (discussing various structures for administering compacts). 2. No Unilateral Modification or Repeal. Silence in the Compact does not mean states may modify Compact provisions. In effect, the Comptroller argues the Compact had to expressly prohibit eliminating the Election provision. Appellees’ Brief 55-60. The rule is the opposite – the terms of a compact are mandatory, and a party cannot alter or ignore them unless expressly authorized. See, e.g., West Virginia ex rel. Dyer v. Sims, 341 U.S. 22, 28 (1951); McComb v. Wambaugh, 934 F.2d 474, 479 (3rd Cir. 1991); In re C.B., 188 Cal. App. 4th 1024, 1031 (2010); Int’l Union of Operating Eng'rs, Local 542 v. Del. River Joint Toll Bridge Comm’n, 311 F.3d 273, 281 (3rd Cir. 2002) (“This is because the ‘concurred in’ provision introduces the issue of, and mechanism for, modification, without which there is absolutely no authority for, let alone specific means of accomplishing, a modification of the Compact…”); Broun at 23. Likewise, a withdrawal provision does not render a Compact non-binding. Many binding compacts have withdrawal provisions. See Alabama v. North Carolina, 560 U.S. 330, 352-53 (2010) (discussing analogous withdrawal provision 9 in Southeast Interstate Low-Level Radioactive Waste Management Compact); Cal. Gov’t Code § 66800, art. X (c) (Tahoe Regional Planning Compact: “A State party to this compact may withdraw therefrom by enacting a statute repealing the compact…”); Cal. Veh. Code § 15027 (Driver’s License Compact: “any party state may withdraw from this compact by enacting a statute repealing the same…”); Tex. Fam. Code § 60.010, art. XI (Interstate Compact on Juveniles); Tex. Gov’t Code § 510.017, art. XI (Interstate Compact for Adult Offender Supervision). The Comptroller cites National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Railway Co., 470 U.S. 451, 465-66 (1985), stating that “‘absent some clear indication that the legislature intends to bind itself contractually,’ an enacted law does not create contractual or vested rights.” However, that case is inapplicable because it did not involve a compact. Moreover, the very choice of a compact communicates the legislature’s intent to enter into a binding agreement. Appellant’s Brief 38-39. Similarly, the concept that “[s]tates rarely relinquish their sovereign powers” and “when they do we would expect a clear indication of such devolution, not inscrutable silence” is not applicable because the Compact’s election provision is unambiguously mandatory. See Appellees’ Brief 51 (quoting Tarrant Reg’l Water Dist. v. Hermann, 186 L. Ed. 2d 153, 169 (2013)); see § III.A infra. Similarly, the 10 course of conduct by member states does not establish a right to unilaterally amend the Compact. See § III.C infra. 3. Requires Reciprocal Action. The Compact requires reciprocal action by the party states for effectiveness, because it did not “enter[] into force” until enacted by seven states. Tex. Tax Code § 141.001, art. X(1); Seattle Master Builders Ass’n, 786 F.2d at 1363 (provisions requiring reciprocal action constitute indicia of a compact). The Comptroller claims, “the Supreme Court could not have meant that the joint action necessary to establish an advisory body with no regulatory power is evidence of a binding regulatory compact.” Appellees’ Brief 48. This statement, without any authority, misconstrues the authorities (particularly Northeast Bancorp, which did not refer to regulatory power) and the facts (the Commission has broad powers beyond simply providing advice). Appellant’s Brief 37-38; see § II.A.1 supra. Requiring enactment by multiple states is never a characteristic of regular statutes and satisfies the requirement of reciprocal action that characterizes a binding compact. The Comptroller is correct that the Compact would have been effective as a regular statute even if seven other states did not enact it. Appellees’ Brief 48. But this misses the point. Enactment by seven states elevated it to a binding compact. The Compact Election also is reciprocal because it ensures states that their taxpayers will be afforded the Compact Election when they do business in other 11 party states. This reciprocity was central to staving off Congressional pre-emption, one of the Compact’s main purposes. See Appellant’s Brief 44-45. The sales/use tax credit provision is also reciprocal because party states agree provide credits for taxes paid in other states. B. The Compact is Not an Advisory Compact or a Uniform Law. The Commissioner cites Broun for its claim that the Compact is “an advisory compact containing model laws.” Appellees’ Brief 42-43. According to Broun, “[b]y their very terms, advisory compacts cede no state sovereignty nor delegate any governing power to a compact-created agency.” Broun at 14. Because the Compact does cede some state sovereignty, including particularly the authority to impose an exclusive apportionment formula, Broun confirms that it is not an advisory compact. Appellant’s Brief 36-45. Advisory compacts also “lack formal enforcement mechanisms and are designed not to actually resolve an interstate matter, but simply to study such matters.” Broun at 13. However, the Compact was designed to resolve an interstate matter, i.e., to secure base-line uniformity through binding obligations upon the party states. And the terms go beyond simply study, e.g., they require party states to provide the Election to apportion under the Compact, to honor sales/use tax exemptions and credits, and to pay dues and provide members to the Commission. Tex. Tax Code § 141.001, arts. III(1), V, VI(1), VI(4)(b). The 12 Commission also does more than study; it has a robust audit function. Id. at art. VIII. 3 Regardless, no authority (including Broun) says advisory compacts are not binding. See Appellees’ Brief 42 (as an advisory compact, the Compact does not “carr[y] the preemptive force that Graphic assigns to it”). A state entering into an advisory compact must conduct the compact’s study. Advisory compacts are one of three general types of compacts: boundary compacts, advisory compacts, and regulatory compacts. Broun distinguishes all compacts from administrative agreements, which are between state agencies. Broun at 16-17. The Compact is between states, not state agencies. Thus, Broun supports the conclusion that because an advisory compact is one of three established types of compacts, states are bound to the obligations they undertake by entering into an advisory compact. UDITPA does not operate as a uniform law when enacted as part of the Compact. 4 It was drafted in the late 1950s to address the lack of uniformity in state taxation, but it was insufficient to establish uniformity. See Appellant’s Brief 2-6. 3. Not requiring Congressional consent is not a feature of an advisory compact but rather a consequence of a compact not tending to “encroach upon or interfere with the just supremacy of the United States.” U.S. Steel, 434 U.S. at 471. 4. The Comptroller’s statement that the “Compact simply sets those articles into its text without any prefatory language requiring members to maintain those provisions unchanged in their laws or any means of compelling them to do so” is incorrect. Appellees’ Brief 54. The terms of the Compact require it to be enacted “in the form substantially” as written by the drafters. Appellant’s Brief, Att. G at 4 (Council of State Governments memorandum accompanying the Compact’s final text). 13 To stave off Congressional preemption, the states and drafters chose a different vehicle, a binding agreement containing the Compact Election. Id. at 6-7. According to the Council on State Government’s National Center for Interstate Compacts: “If uniform provisions are embodied in a compact, no state could subsequently destroy this uniformity by unilateral amendment of its own statute except to the extent that such variation might be permitted by specific provision of the compact.” 5 Interstate Compacts vs. Uniform Laws, at cglg.org/media/1302/ compacts_vs_uniform_laws-csgncic.pdf (last visited Apr. 9, 2015). III. THE COMPACT’S ELECTION PROVISION IS UNAMBIGUOUSLY MANDATORY. A. The Express Terms are Mandatory. The Comptroller incorrectly argues, “applying Article III.1 to the franchise tax creates a latent ambiguity.” Appellees’ Brief 55. The Compact Election states: A taxpayer subject to an income tax … may elect to apportion and allocate his income in the manner provided by the laws of such States … without reference to this compact, or may elect to apportion and allocate in accordance with Article IV. 5. The Comptroller also quotes the Commission’s first annual report as saying the Compact had “been enacted as a uniform law” by 15 states. Appellees’ Brief 55. The Commission knew then the Compact was not a uniform law. Supp.CR.29. Thus, the more reasonable interpretation of this statement is that it refers simply to the uniform template used by states to enact the Compact. 14 Tex. Tax Code § 141.001, art. III(1). Because a taxpayer “may elect,” the party states must make the Election available. In 1970, the Commission agreed: The Multistate Tax Compact thus preserves the right of the states to make such alternative formulas available to taxpayers even though it makes uniformity available to taxpayers where and when desired. Supp.CR.47; see Kearns B. Taylor, Texas’ Exciting Answer in the Battle with Proponents of Federal Control Over State Taxation of Interstate Commerce, 30 Tex. B.J. 773, 821 (the Compact “provides for giving a taxpayer the option to achieve uniformity if he so desires, by utilizing the Uniform Division of Income for Tax Purposes Act”). The Compact Election was the central provision of the Compact. See § II.B supra. If the Election were optional, the Compact would have failed its purpose of establishing the uniformity Congress demanded. Appellant’s Brief 44-45. In fact, the Compact Election advances each of its express purposes. The Election facilitates proper determination of taxpayers’ state and local tax liabilities, equitably apportions their tax bases among states, prevents duplicative taxation, and secures base-line uniformity and compatibility. In addition, using the same formula in multiple states simplifies compliance. Id. at Att. G at 1 (Council of State Governments memorandum accompanying the Compact’s final text), Att. H at 1 (Council of State Governments Compact Summary and Analysis). Tex. Tax Code 15 § 141.001, art. XII directs, the “[C]ompact shall be liberally construed so as to effectuate the purposes thereof.” By contrast, the Comptroller’s interpretation eviscerates the Compact’s purposes. Different formulas ensure complexity, raise compliance costs, reduce uniformity, and risk double-taxation. Oklahoma v. New Mexico, 501 U.S. 221, 230-31 (1991) (compact must be interpreted consistent with its stated purposes). B. The Most Relevant Extrinsic Evidence Supports the Mandatory Election. The construction aids the Comptroller mentions (Appellees’ Brief 57) are irrelevant because there is no ambiguity in the Compact’s terms. Tarrant, 186 L. Ed. 2d 153. Nonetheless, if this Court considers extrinsic evidence, the contemporaneous drafting and negotiation evidence and the Compact’s express purposes are most probative of the parties’ intent, not evidence of conduct years or decades later as cited by the Comptroller. See Alabama v. North Carolina, 560 U.S. at 345-48; Oklahoma v. New Mexico, 501 U.S. at 231-37 (relying on “purpose and negotiating history” to interpret ambiguous phrases in Canadian River Compact); Texas v. New Mexico, 462 U.S. 554, 568 n.14 (1983) (using context at time of compact’s enactment to aid interpreting ambiguous provision); Arizona v. California, 292 U.S. 341, 359-60 (1934); McComb, 934 F.2d at 481. That evidence indicates the states and the drafters knew what compacts were and how they operated, and intended to enter into such a binding agreement. See Appellant’s 16 Brief 44. The Election was a core element of the Compact to secure a base-line level of uniformity and thus avoid federal imposition of a single apportionment formula. See id. at 43. A model law (UDITPA) had already proven insufficient to stave off federal action. C. The Conduct of Other Party States Cannot Override the Compact’s Express Terms. The claim “the Compact states consistently have construed that silence to mean that members may unilaterally change or restrict the Compact’s terms in their own laws” is incorrect. See Appellees’ Brief 51. First, the Commission’s 1972 resolution is inapposite because Fla. Stat. § 214.71 set forth the same formula as Compact Article IV. 1971 Fla. Laws ch. 71-980 § 2 (amending Fla. Stat. § 214.71 and describing an equally-weighted three-factor formula). Accordingly, Florida did not meaningfully change the Compact Formula after it repealed Articles III and IV. The Commission’s resolution supports this: “Whereas, the State of Florida has repealed Articles III and IV of the Multistate Tax Compact, while still legislatively adhering to the spirit of the Compact…” CR.487. Moreover, many states have not altered the Election. See, e.g., Missouri (Mo. Rev. Stat. § 32.200); North Dakota (N.D. Cent. Code § 57-59-01); Montana (Mont. Code Ann. § 15-1-601); New Mexico (N.M. Stat. Ann. § 7-5-1). Other states have withdrawn from the Compact. See U.S. Steel, 434 U.S. at 454 n.1 17 (citing statutes repealing the Compact in Florida, Illinois, Indiana, and Wyoming); Nevada (1981 Nev. Stat. ch. 181, at 350); Maine (2005 Me. Laws ch. 332, § 29); Nebraska (1985 Neb. Laws L.B. 344, § 9); West Virginia (1985 W. Va. Acts ch. 160); California Chamber of Commerce, Special Exhibits Re: A.B. 1304: Ratifying Multistate Tax Compact (Jul. 13, 1973) (explaining that New York withdrew because of its opposition to “mandat[ing] uniformity”). The most that can be gleaned from states’ deviations from the Compact Formula after the complaint in Gillette Co. v. Franchise Tax Board, 207 Cal. App. 4th 1369 (2012), was filed is those states recognized a controversy existed about their ability to modify the Compact. Most importantly, some states that previously deviated from the Compact Formula have since withdrawn from the Compact. California (2012 Cal. Stat. ch. 37, § 3); Michigan (2014 Mich. Pub. Acts 282, § 1 (S.B. 156)); Minnesota (2013 Minn. Law ch. Law 143, art. 13, § 24 (H.F. 677)). Other states repealed and re-enacted the Compact. See Appellees’ Brief 12-13 (Oregon, Utah, and the District of Columbia). From this patchwork of states’ conduct, it is impossible to draw a conclusion that party states “consistently have construed that silence” to allow unilateral amendment. Finally, no court has used course of performance evidence to override the express terms of a compact, as opposed to aiding in the interpretation of an ambiguous compact provision. In Kansas v. Colorado, 514 U.S. 673 (1995), the 18 Supreme Court explicitly refused to allow “the subsequent practice of the parties” to alter the Court’s interpretation of the Arkansas River Compact when that practice was inconsistent with the compact’s “clear language.” Id. at 690; cf. Tarrant, 186 L. Ed. 2d at 172 (looking to party states’ practical conduct to interpret ambiguous compact provisions); Alabama v. North Carolina, 560 U.S. at 345-46 (considering party states’ practical conduct in interpreting ambiguous compact provision). D. The Compact Does Not Surrender Texas’s Power to Tax. A mandatory Compact Election does not violate Texas Constitution, Article VIII, Section 4: “The power to tax corporations and corporate property shall not be surrendered or suspended by act of the Legislature, by any contract or grant to which the State shall be a party.” A choice of apportionment formula is not the “power to tax.” Nor is it a permanent or irrevocable surrender or suspension because Texas may withdraw under the Compact’s terms. 1. The Compact Election Does Not Involve the “Power to Tax.” The purpose of states’ anti-surrender provisions was to prohibit legislatures from granting corporate charters with tax immunities they could not later alter. See, e.g., Valencia Energy Co. v. Dep’t of Rev., 959 P.2d 1256, 1263-65 (Ariz. Sup. Ct. 1998); Memphis & Little Rock Railroad v. Railroad Comm., 112 U.S. 609 (1884); Harsha v. Detroit, 246 N.W. 849, 852 (Mich. Sup. Ct. 1939). 19 Article 13, §§ 1, 6, says that ‘the power of taxation shall never be surrendered or suspended by any grant or contract to which the state shall be a party.’ … By a contract authorizing certain persons to form a corporation and exercise its franchises, however valuable the consideration received, the state cannot, as we have seen, surrender or suspend its rights to tax its property besides, as all other property is taxed. Railroad Tax Cases, 13 F. 722, 776 (D. Cal. 1882). States conceived of such provisions after Supreme Court cases enforced perpetual tax exemptions in corporate charters. See, e.g., Dartmouth College v. Woodward, 17 U.S. 518 (1819); State Bank of Ohio v. Knoop, 57 U.S. 369 (1854). Anti-surrender provisions prohibit relinquishing the power to impose or collect a tax, in particular through an irrevocable contractual tax exemption. For example, in People v. Board of Supervisors of Calaveras County, 126 Cal. App. 670 (1932), the court rejected the argument that cancelling taxes due on land acquired by the state would violate the anti-surrender provision: “[T]he power of taxation has [not] been surrendered by the state either by grant or contract. The facts before us show that the power of taxation was exercised, and that by operation of law, it has ceased to be a charge upon the land for the reason that the land is now the property of the state.” Id. at 674. Similarly, in Gaar, Scott & Co. v. Shannon, 115 S.W. 361, 362 (Tex. Civ. App.—Austin 1908) aff’d, 233 U.S. 468 (1912), the sole case cited by the Comptroller, a taxpayer’s 10-year business permit did not preclude the state from 20 imposing additional franchise taxes because of Texas’s anti-surrender provision. See also Switzer v. Phoenix, 341 P.2d 427, 430-31 (Ariz. Sup. Ct. 1959) (parallel provision is a “prohibition against the surrender or relinquishment of the right to impose a tax” and “against the irrepealable grant of immunity from taxation”); Sheehy v. Public Empl. Retirement Div., 864 P.2d 762, 766 (Mont. Sup. Ct. 1993) (Under Montana’s anti-surrender provision, “the state cannot promise any group of taxpayers that it will never tax them.”); Blair v. State Tax Assessor, 485 A.2d 957, 960 (Me. 1984) (Maine Constitution prevents legislature from granting permanent tax exemptions); Standard Oil Co. v. Johnson, 10 Cal. 2d. 758, 763-64 (1938) (because state reserved power to tax in ceding federal jurisdiction over national parks, the provision was not implicated). Providing taxpayers a choice between formulas to apportion income does not implicate the power to impose or collect a tax. See U.S. Steel, 434 U.S. at 457 (explaining a party state retains complete control over the tax base, the tax rate, its tax revenues, and the means and methods of tax collection). Rather, the apportionment formula plays a role in the computation of the amount of tax a multistate corporation ultimately owes. 2. No Surrender or Suspension. In addition, the Compact Election is not a surrender or suspension by grant or contract. Tex. Const. art. VIII, § 4. Anti-surrender provisions bar irrevocable 21 exemptions from taxation. The legislature cannot act on a permanent basis or even for a specific amount of time (for example, a 10-year charter exempting taxation), without the ability to revoke the tax exemption. See, e.g., Switzer, 341 P.2d at 431; Blair, 485 A.2d at 960. Here, Texas can reclaim full control over the apportionment formula by withdrawing from the Compact. Tex. Tax Code § 141.001, art. X(2); U.S. Steel, 434 U.S. at 473; see also Bolton v. Terra Bella Irrigation Dist., 106 Cal. App. 313, 328 (1930) (anti-surrender provision not implicated when legislative grant can be withdrawn). In sum, the Compact Election does not violate Texas Constitution, Article VIII, Section 4. IV. COMPACT LAW AND THE CONTRACT CLAUSE PRECLUDE TEXAS FROM UNILATERALLY ELIMINATING THE ELECTION. A. Settled Principles for Construing Compacts Are Applicable. The argument that “a non-approved compact’s preeminence over other state law arises from its status as a contract” is incomplete and misleading, and Appellant does not concede it. See Appellees’ Brief 63. Compacts “are a unique type of arrangement, conceptualized by the courts as simultaneously both contracts and binding reciprocal statutes among sovereign states.” Appellant’s Brief 32. This accounts for the fundamental interpretive principle of compacts, that they supersede inconsistent state law. Id. 22 Lack of Congressional consent does not change compacts’ interpretive principles. See id. at 34-36. Both Congressionally-approved and unapproved compacts solve cross-border problems. States and other stakeholders rely on the binding nature of compacts. If a state could override a compact term at will, the compact would not serve its vital purposes. Both types of Compacts are simultaneously statutes and binding agreements among sovereign states, and this results in a compact superseding other state laws. By contrast, Congressional consent is unrelated to states’ and other stakeholders’ need to rely on the binding nature of compacts. Congressional consent serves an entirely different purpose. A compact requires consent only if it “tend[s] to the increase of political power in the States, [and thus] may encroach upon or interfere with the just supremacy of the United States.” U.S. Steel, 434 U.S. at 471 (citing Virginia v. Tennessee, 148 U.S. 503, 518-19 (1893)). In that case, consent ensures Congress affirmatively agrees to the agreement. Prior to Cuyler v. Adams, 449 U.S. 433 (1911), it was not clear that Congressionally approved compacts were federal law; yet, pre-Cuyler cases consistently held compacts supersede other state laws. Dyer, 341 U.S. at 28. Thus, Congressional approval is merely an additional reason subsequent state law cannot override a compact. See Alcorn v. Wolfe, 827 F. Supp. 47, 52 (D. D.C. 1993) (“In light of the Supremacy Clause … and because compacts are analogous 23 to contracts between states, the terms of the [] compact cannot be modified unilaterally by state legislation and take precedence over conflicting state law.”) (emphasis added); Broun at 65 (“Congressional consent may change the venue in which compact disputes are ultimately litigated; it does not change the controlling nature of the agreement on the member states.”); Appellant’s Brief 35-36. The IBM dissent is wrong. It began by stating that IBM cited only two cases to support the proposition that non-Congressionally approved compacts supersede conflicting state law, McComb, 934 F.2d at 479, and CT Hellmuth & Association, Inc. v. Washington Metro Area Transit Authority, 414 F. Supp. 408, 409 (D. Md. 1976). While those cases do support the principle that the Compact supersedes conflicting state law, IBM did not rely on them exclusively. Rather, IBM and its amici thoroughly discussed the purposes of compacts, and analyzed the caselaw involving compacts, both Congressionally-approved and unapproved. The dissent’s failure both to acknowledge and to consider those facts and legal authorities caused it to reach the wrong conclusion. This Court should not make the same mistake. To do so would have negative reverberations throughout the law of compact interpretation and operation. 24 B. The Contract Clause Would Be Violated By Elimination of The Compact Election. Green v. Biddle, 21 U.S. 1, 84 (1823), held that “any deviation” from the terms of a compact violates the Contract Clause. Green has not been questioned or overruled and is still frequently cited in modern compact cases. See Gen. Expressways, Inc. v. Iowa Reciprocity Board, 163 N.W.2d 413, 420-21 (Iowa 1968); Doe v. Ward, 124 F. Supp. 2d 900, 914-15 (W.D. Pa. 2000). The multi-step analysis invoked by the Comptroller (Appellees’ Brief 65) was developed to strike a balance between the nature of a contract’s impairment and the state’s justification for that impairment. However, this approach has never been applied to a compact among states (rather than a contract with at least one private party). This is sensible because compacts are agreements among sovereign states related to collective governance that cannot be unilaterally altered. Even applying the multi-step analysis, the conclusion is the same. Contract Clause analysis raises two questions: (1) was there substantial impairment, and (2) if so, was it “reasonable and necessary to serve an important public purpose.” U.S. Trust Co. of N.Y. v. New Jersey, 431 U.S. 1, 22, 25 (1976). Elimination of the Compact Election, which was essential to the Compact’s purposes, is a substantial impairment. See § III.B supra. To avoid this result, the Comptroller focuses on the language of a non-compact case which states, “of greatest concern appears to be the contracting 25 parties’ actual reliance on the abridged contractual term.” Appellees’ Brief 66. The Comptroller contends Graphic could not have relied on the Compact Election because it did not use it until March 2011 and because states can withdraw at will. Id. However, the Comptroller’s subjective reliance analysis is wrong.6 “When assessing whether there has been the requisite reliance, the Court has looked to objective evidence of reliance.” City of Charleston v. Pub. Serv. Comm’n, 57 F.3d 385, 392 (4th Cir. 1995) (emphasis added). Objective factors confirm that eliminating the Compact Election would substantially impair the Compact. U.S. Trust, 431 U.S. 1, 19-21; Tex. Tax Code § 141.001, art. X(2); see § III.B supra. First, the Compact does not indicate the Compact Election is subject to impairment by unilateral amendment by the states. Instead, by entering into a compact, the states bound themselves to the Compact’s terms until they withdrew. Tex. Tax Code § 141.001, art. X(2). Second, prior regulation of state taxation does not diminish the reliance interests of party states and taxpayers. By acting collectively through a compact, 6. The Comptroller argues that Graphic was not an intended third-party beneficiary of the Compact. Appellees’ Brief 65. The Comptroller is mistaken. See Gillette. 209 Cal. App. 4th at 952 (“This is a right specifically extended not to the party states but to taxpayers as third parties regulated under the Compact, and as such Taxpayers may seek to enforce this right as part of its tax refund suit.”). 26 the states agreed the Compact's terms bound them, thus eliminating any expectation the states would enact subsequent statutes in conflict with the Compact. Third, the fact that Texas did not modify the Compact Election but purported to eliminate it is strong evidence of substantial impairment. U.S. Trust, 431 U.S. at 19 (state law which “totally eliminated” the state’s promise that Port Authority revenues pay bondholders was a substantial impairment). Fourth, the Compact Election was the central undertaking (core provision) of the party states when they entered into the Compact. See § III.B supra. In sum, objective criteria establish reliance and substantial impairment of the Compact if the Election was eliminated. The Comptroller also claims “Section 171.106 serves a significant and legitimate purpose” because doing so “treats both local and foreign concerns with an even hand.” Appellees’ Brief 66-67. In actuality, an apportionment formula based only upon gross receipts is universally understood to benefit in-state interests over out-of-state interests. It does not treat them with an even hand. Moreover, the legitimate public purposes that can save an otherwise unconstitutional impairment are typically economic emergencies, such as the Great Depression, or the necessity to regulate a broad-based social ill under a state’s police powers. Energy Reserves Group v. Kan. Power & Light Co., 459 U.S. 400, 411-12 (1983); 27 Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 242-44 (1978). No such exigencies exist. Finally, the Comptroller argues Section 171.106 is reasonable and appropriate because “[t]he Supreme Court has repeatedly held that the single-factor apportionment methods are ‘presumptively valid.’” Appellees’ Brief 67. This does not explain why eliminating the Compact Election is reasonable. Nor does it explain why eliminating the Compact Election was necessary, another requirement of the multi-step analysis. U.S. Trust, 431 U.S. at 22, 25. If the Legislature determined a mandatory apportionment formula should be imposed on all taxpayers, it had the authority to withdraw from the Compact. See id. at 30 (state may not impose a drastic impairment when an alternative course is available). In sum, eliminating the Compact Election would violate the Compact and Contract Clauses.7 7. Graphic did not waive its Contract Clause argument. Appellees’ Brief 67-68. Pursuant to Tex. R. App. P. Rule 38.3, Graphic is free to dispute the applicability of Energy Reserves because both Appellant’s and Appellees’ Briefs discussed the Contract Clause. See Appellant’s Brief 46-48; Appellees’ Brief 62-67. Further, Energy Reserves is not authoritative here because it did not concern a compact, whereas Green did. Compare Energy Reserves, 459 U.S. 400, with Green, 21 U.S. 1. See Sunbeam Envtl. Servs. v. Tex. Workers’ Comp. Ins. Facility, 71 S.W.3d 846, 851 (Tex. App.–Austin 2002, no pet.) (the argument alleged to have been waived not raised in appellee’s reply brief). 28 V. THE FRANCHISE TAX IS AN INCOME TAX UNDER THE COMPACT DEFINITION. The Comptroller’s arguments that Texas’s franchise tax is not an income tax under this Court’s definition, or as the phrase “is commonly understood,” and the Legislature stated the tax was not an income tax, miss the point. Appellees’ Brief 22, 26. The Compact’s definition of an “income tax” controls here, and the franchise tax satisfies that definition. Texas v. New Mexico, 482 U.S. 124, 128 (1987) (a compact is “a legal document that must be construed and applied in accordance with its terms”). Appellant’s Brief 48-57. The Legislature’s characterization of Texas’s franchise tax does not control because the Legislature only considered the definition under Public Law 86-272, which is materially different. 8 2006 Tex. Gen. Laws 1, 38 (“[T]he franchise tax imposed by Chapter 171, Tax Code, as amended by this Act, is not an income tax and Pub. L. No. 86-272 does not apply to the tax.”); Texas House of Representatives Ways & Means Committee HB 3 Analysis at 4; Texas House Research Organization HB 3 Bill Analysis at 9. Each time the foregoing documents describe how the Texas franchise tax “is not an income tax,” they refer only to Public Law 86-272, not the Compact. See Trinova Corp. v. Dep’t of Treasury, 498 U.S. 358, 374 (1991) 8. Public Law 86-272’s definition does not include the broadening phrase, “an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4). 29 (“labeling the SBT a tax on ‘business activity’ does not permit [the court] to forgo [sic] examination of the actual tax base”). 9 The franchise tax is an income tax under the Compact. “Total revenue” is federal gross income less federal exclusions (I.R.C. §§ 101-140) and Texas deductions. Tex. Tax Code § 171.1011(c)(1)(B). The Comptroller disregards exclusions because they are not available to all taxpayers. Appellees’ Brief 28. The Compact does not require this. Even under the federal income tax and all other state income taxes, not every taxpayer deducts every expense or includes all income. See I.R.C. §§ 101-140, 261-280H. Additionally, the tax base at issue is an income tax base. The only calculation that is relevant here is cost of goods sold (“COGS”), which Appellant used. The Compact definition does not require more than “one type of expense,” (Appellees’ Brief 27) but at least one type of expense that is “not specifically and directly related to particular transactions.” Tex. Tax Code § 141.001, art. II(4). COGS deductions satisfy this definition because they do not directly relate to any particular transaction, but instead represent the total costs for products sold in the reporting period. Tex. Tax Code § 171.1012 (c), (d) (COGS deductions include 9. Fletcher Cyclopedia of the Law of Corporations is not persuasive because it is not a tax treatise and it omits Wyoming as a non-income tax state although it does not impose anything resembling a corporate income tax. State Taxation does not take a position regarding Texas but merely observes there is conflict regarding whether the tax is an income tax under the Compact. Walter Hellerstein, State Taxation ¶ 9.01[1] n.12.19, ¶ 7.12[7]. 30 both the direct costs of acquiring and producing goods and indirect costs, such as insurance, utilities, rent, administrative salaries, and payroll and property taxes). An alternative computation, compensation, allows the following deductions not specifically and directly related to particular transactions: total wages, salaries and benefits paid to officers, directors, owners, partners, and employees, including administrative staff. Tex. Tax Code § 171.1013(a), (b). The Comptroller is also incorrect that taxpayers that deduct the greater of $1 million or 30% of their gross income do not deduct any expenses. Appellees’ Brief 26-27. Those deductions are proxies for the taxpayer’s actual expenses, just as the federal standard deduction and exemptions (under both the federal alternative minimum tax and the federal personal income tax) are proxies for a taxpayer’s expenses. I.R.C. §§ 55(b)(1), (d), 63, 151; see also Lilian V. Faulhaber, The Hidden Limits of the Charitable Deduction: An Introduction to Hypersalience, 92 B.U. L. Rev. 1307, 1321-22 (2012). The IBM Court properly applied the Compact’s “broad definition” of an income tax. 852 N.W.2d at 878. It concluded “the MGRT [Michigan Gross Receipts Tax] fits within the broad definition of ‘income tax’ under the Compact by taxing a variation of net income--the entire amount received by the taxpayer as determined from any gainful activity minus inventory and certain other deductions that are expenses not specifically and directly related to a particular transaction.” 31 Id. at 880. “[A] tax is an income tax if the tax measures net income by subtracting expenses from gross income, with at least one of the expense deductions not being specifically and directly related to a particular transaction.” Id. at 878. Like Texas’s tax, the computation of Michigan’s tax began with gross receipts and was reduced “for the purchase of inventory during the tax year, including freight, shipping, delivery, or engineering charges included in the original contract price.” Id. at 880. The Court noted, “several of these exclusions or deductions are not specifically and directly related to particular transactions,” e.g., [d]epreciable assets can be assets used over a certain number of years and, thus, not related to a single transaction,” “[m]aterials and supplies purchased during a tax year can be used at any time for the operation of a business and for any amount of transactions,” and “the purchase of inventory, which includes such things as goods held for resale or raw materials, some of which can stay in a taxpayer's warehouse for an indeterminate amount of time, can be an expense not specifically or directly related to a particular transaction.” Id. The tax base used by Graphic and the other tax bases readily satisfy the Compact’s income tax definition. 32 Respectfully submitted, SILVERSTEIN & POMERANTZ, LLP 12 Gough Street, 2nd Floor San Francisco, California 94103 (415) 593-3502 (415) 593-3501 (Facsimile) By: /s/ Amy Silverstein Amy L. Silverstein California State Bar No. 154221 asilverstein@sptaxlaw.com Admitted Pro Hac Vice MARTENS, TODD, LEONARD, TAYLOR & AHLRICH James F. Martens jmartens@textaxlaw.com State Bar No. 13050720 Lacy L. Leonard lleonard@textaxlaw.com State Bar No. 24040561 Danielle Ahlrich dahlrich@textaxlaw.com State Bar No. 24059215 Amanda Taylor ataylor@textaxlaw.com State Bar No. 24045921 301 Congress Avenue, Suite 1950 Austin, Texas 78701 Tele: (512) 542-9898 Fax: (512) 542-9899 ATTORNEYS FOR APPELLANT GRAPHIC PACKAGING, INC. 33 CERTIFICATE OF SERVICE Pursuant to the Texas Rules of Appellate Procedure and Local Rules for the Third Court of Appeals, a true and correct copy of the foregoing was served on counsel, via e-service and e-mail, as listed below, on the 17th day of April, 2015. Tex. R. App. P. 9.5; Local Rule 4(d). Rance Craft, Assistant Solicitor General Texas Bar No. 24035655 rance.craft@texasattorneygeneral.gov Cynthia A. Morales, Assistant Attorney General Texas Bar No. 14417420 cynthia.morales@texasattorneygeneral.gov OFFICE OF THE ATTORNEY GENERAL P.O. Box 12548 (MC 059) Austin, Texas 78711-2548 Tele: (512) 936-2872 Fax: (512) 474-2697 /s/ Amy Silverstein Amy Silverstein CERTIFICATE OF COMPLIANCE I hereby certify that this Appellant’s Reply Brief complies with the typeface requirements of Tex. R. App. P. 9.4(e) because it has been prepared in a conventional typeface no smaller than 14-point for text and 12-point for footnotes. This document also complies with the word-count limitations of Tex. R. App. P. 9.4(i) because, according to the word count tool of the computer program used to prepare this document, it contains 7,494 words, excluding any parts exempted by Tex. R. App. P. 9.4(i)(1). /s/ Amy Silverstein Amy Silverstein 34 Page 1 ALLIED STRUCTURAL STEEL CO. v. SPANNAUS, ATTORNEY GENERAL OF MINNESOTA, ET AL. No. 77-747 SUPREME COURT OF THE UNITED STATES 438 U.S. 234; 98 S. Ct. 2716; 57 L. Ed. 2d 727; 1978 U.S. LEXIS 130; 1 Employee Benefits Cas. (BNA) 1477 April 25, 1978, Argued June 28, 1978, Decided SUBSEQUENT HISTORY: Petition For Rehearing contractual relationship. The Court noted that the State's Denied October 2, 1978. police power was limited when its exercise effected substantial modifications of private contracts. The Act PRIOR HISTORY: APPEAL FROM THE UNITED did not possess the attributes of the state laws that in the STATES DISTRICT COURT FOR THE DISTRICT OF past had survived challenge under the Contract Clause. It MINNESOTA. was not enacted to deal with a broad, generalized economic or social problem. It invaded an area never DISPOSITION: 449 F.Supp. 644, reversed. before subject to regulation by the State. It did not effect simply a temporary alteration of the contractual CASE SUMMARY: relationships of those within its coverage, but worked a severe, permanent, and immediate change in the relationships, irrevocably and retroactively. Its narrow PROCEDURAL POSTURE: Appellant employer filed aim was leveled only at employers who voluntarily an action for injunctive and declaratory relief and claimed agreed to establish pension plans for their employees. that the Private Pension Benefits Protection Act (Act), Minn. Stat. 181B.01 et seq., unconstitutionally impaired OUTCOME: The Court reversed the district court's the employer's contractual obligations to its employees judgment that upheld the constitutional validity of the under its pension agreement. The United States District Act as applied to the employer. Court for the District of Minnesota upheld the constitutional validity of the Act as applied to the CORE TERMS: pension plan, pension, plant, state laws, employer. The employer appealed. pension benefits, funding, vesting, Minnesota Act, contractual obligations, terminated, impairment, vested, OVERVIEW: Pursuant to the Act, the State assessed a pension right, social problem, contractual relationships, pension funding charge against the employer because it termination, terminate, severe, private contracts, closed one of its offices and several of the discharged retroactive, discharged, impairing, emergency, pension employees did not have vested pension rights under the funds, state legislation, police power, contingency, employer's pension plan. The Court reversed the mortgage, monthly, Protection Act judgment that upheld the validity of the Act. As applied to the employer, the Act violated the Contract Clause LexisNexis(R) Headnotes because it operated as a substantial impairment of a Page 2 438 U.S. 234, *; 98 S. Ct. 2716, **; 57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130 tailored to the emergency that it was designed to meet; (4) that the imposed conditions were reasonable; (5) that the legislation was limited to the duration of the Pensions & Benefits Law > Employee Benefit Plans > emergency. Another consideration in upholding a state Single-Employer Plans law against a Contract Clause attack: is whether the [HN1] Minn. Stat. § 181B.04. petitioner had purchased into an enterprise already regulated in the particular to which he now objects. Constitutional Law > Congressional Duties & Powers > Contracts Clause > General Overview Constitutional Law > Congressional Duties & Powers > [HN2] See U.S. Const. art. I, § 10. Contracts Clause > General Overview Contracts Law > Contract Modifications > General Constitutional Law > Congressional Duties & Powers > Overview Contracts Clause > General Overview Governments > State & Territorial Governments > Governments > State & Territorial Governments > Police Power Police Power [HN7] Although the absolute language of the Contract [HN3] Literalism in the construction of the Contract Clause leaves room for the "essential attributes of Clause would make it destructive of the public interest by sovereign power," necessarily reserved by the states to depriving the State of its prerogative of self-protection. safeguard the welfare of their citizens, that power has limits when its exercise effects substantial modifications of private contracts. Despite the customary deference Constitutional Law > Congressional Duties & Powers > courts give to state laws directed to social and economic Contracts Clause > General Overview problems, legislation adjusting the rights and Governments > State & Territorial Governments > responsibilities of contracting parties must be upon Police Power reasonable conditions and of a character appropriate to [HN4] The Contract Clause does not operate to obliterate the public purpose justifying its adoption. the police power of the states. Constitutional Law > Congressional Duties & Powers > Constitutional Law > Congressional Duties & Powers > Contracts Clause > General Overview Contracts Clause > General Overview Governments > State & Territorial Governments > [HN5] One whose rights are subject to state restriction Legislatures cannot remove them from the power of the State by [HN8] The first inquiry in determining whether a state making a contract about them. The contract will carry law violates the Contract Clause, must be whether the with it the infirmity of the subject matter. state law has, in fact, operated as a substantial impairment of a contractual relationship. The severity of the impairment measures the height of the hurdle the state Contracts Law > Contract Conditions & Provisions > legislation must clear. Minimal alteration of contractual General Overview obligations may end the inquiry at its first stage. Severe Governments > State & Territorial Governments > impairment, on the other hand, will push the inquiry to a Legislatures careful examination of the nature and purpose of the state Governments > State & Territorial Governments > legislation. Police Power [HN6] Despite the Contract Clause, the states retain residual authority to enact laws to safeguard the vital Constitutional Law > Congressional Duties & Powers > interests of their people. In upholding a state law, the Contracts Clause > General Overview following factors are significant; (1) that the state [HN9] The severity of an impairment of contractual legislature has declared in the Act itself that an obligations can be measured by the factors that reflect the emergency need for the protection existed; (2) that the high value the Framers placed on the protection of private state law was enacted to protect a basic societal interest, contracts. Contracts enable individuals to order their not a favored group; (3) that the relief was appropriately personal and business affairs according to their particular Page 3 438 U.S. 234, *; 98 S. Ct. 2716, **; 57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130 needs and interests. Once arranged, those rights and subject to state regulation at the time the company's obligations are binding under the law, and the parties are contractual obligations were originally undertaken, but entitled to rely on them. invaded an area never before subject to regulation by the state, (3) it did not effect simply a temporary alteration of SUMMARY: the contractual relationships of those within its coverage, but worked a severe, permanent, and immediate change A company with an office in Minnesota had a in those relationships, irrevocably and retroactively, and pension plan, under which employees could receive a (4) its narrow aim was leveled not at every Minnesota pension upon retirement at age 65 regardless of length of employer, and not even at every Minnesota employer service. Furthermore, an employee's right to a pension who left the state, but only at those who had in the past vested prior to age 65 if certain requirements as to length been sufficiently enlightened to voluntarily agree to of service and age were met. The company was the sole establish pension plans for their employees. contributor to the pension fund, but the plan neither required the company to make specific contributions nor Brennan, J., joined by White and Marshall, JJ., imposed any sanction for failing to contribute adequately. dissented, expressing the view that (1) the statute, which The company retained a virtually unrestricted right to simply created an additional duty for the company but amend the plan, and was free to terminate it and which did not abrogate or dilute any obligation due a distribute the assets at any time according to a party to a private contract, did not implicate the contract predetermined method. Minnesota enacted a statute, clause in any way, the clause not protecting all under which private employers of 100 or more employees contract-based expectations including that of an employer providing pension benefits under qualified plans were that his obligations to his employees not be legislatively subject to a "pension funding charge" upon termination of enlarged beyond those explicitly provided in its pension the plan or closing of an office within the state. The plan, and (2) the statute did not violate the due process charge was assessed if pension funds were not sufficient clause of the Fourteenth Amendment. to cover full pensions for all employees working at least 10 years. After enactment of the statute, in a move Blackmun, J., did not participate. planned before its passage, the company closed its Minnesota office. Several discharged employees, who LAWYERS' EDITION HEADNOTES: had no vested pension rights under the plan, were nonetheless pension obligees under the statute. The state LAW §271 ; notified the company that it owed a significant pension funding charge, and the company brought suit in the contract clause -- state statute -- pensions -- ; United States District Court for the District of Minnesota for injunctive and declaratory relief, claiming that the act Headnote:[1A][1B] unconstitutionally impaired its contractual obligation to its employees under its pension agreement. A three-judge A state statute which subjects certain private District Court upheld the statute as applied to the employers who provide pension benefits under a covered company (449 F Supp 644). plan to a "pension funding charge" if the employer terminates the plan or closes an office within the state, On direct appeal, the United States Supreme Court such charge being assessed if the pension fund is reversed. In an opinion by Stewart, J., joined by Burger, insufficient to cover full pensions for all employees Ch. J., and Powell, Rehnquist, and Stevens, JJ., it was working at least 10 years, violates the contract clause of held that the Minnesota statute, as applied to the the Federal Constitution (Art I, 10, cl 1) insofar as it company, violated the contract clause of the Federal applies to an employer, some of whose employees, Constitution (Art I, 10, cl 1), it not being necessary to having been discharged upon the closing of its office, had hold that the state law impaired the obligation of the no vested rights under its pension plan (which predated company's employment contracts without moderation or the statute) but nonetheless qualified as pension obligees reason or in a spirit of oppression, since (1) the law was under the statute, it not being necessary to hold that the not enacted to deal with a broad, generalized, economic state statute impairs the obligation of the company's or social problem, (2) it did not operate in an area already employment contracts without moderation or reason or in Page 4 438 U.S. 234, *; 98 S. Ct. 2716, **; 57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130 a spirit of oppression, where (1) the statute was not LAW §124 ; enacted to deal with a broad, generalized economic or social problem, (2) the statute does not operate in an area contract clause -- limitations on state power -- police already subject to state regulation at the time the power -- ; company's contractual obligations under the pension plan Headnote:[4] were originally undertaken, but instead invades an area never before subject to regulation by the state, (3) the The contract clause of the Federal Constitution (Art statute does not effect simply a temporary alteration of I, 10, cl 1) imposes limits upon the power of the state to the contractual relationships of those within its coverage, abridge existing contractual relationships, even in the but works a severe, permanent, and immediate change in exercise of its otherwise legitimate police power. those relationships, irrevocably and retroactively, and (4) the statute's narrow aim is leveled not at every employer within the state, or not even at every employer leaving LAW §128 ; the state, but only at those employers who in the past were sufficiently enlightened to voluntarily agree to contract clause -- state legislation -- ; establish pension plans for their employees. (Brennan, Headnote:[5] White, and Marshall, JJ., dissented from this holding.) For purposes of the contract clause of the Federal LAW §214(1) ; Constitution (Art I, 10, cl 1), despite the customary deference courts give to state laws directed to social and contract clause -- state police power -- ; economic problems, legislation adjusting the rights and responsibilities of contracting parties must be upon Headnote:[2] reasonable conditions and of a character appropriate to the public purpose justifying its adoption. The contract clause of the Federal Constitution (Art I, 10, cl 1) does not operate to obliterate the police power of the state; the interdiction of statutes impairing the CONTRACTS §145 ; obligation of contracts does not prevent the state from exercising such powers as are vested in it for the bilateral contract -- diminution of duties -- ; promotion of the common weal, or are necessary for the Headnote:[6A][6B] general good of the public, though contracts previously entered into between individuals may thereby be affected, In any bilateral contract the diminution of duties on and this police power, which is an exercise of the one side effectively increases the duties on the other. sovereign right of the government to protect the lives, health, morals, comfort and general welfare of the people, SYLLABUS is paramount to any rights under contracts between individuals. Appellant, an Illinois corporation, maintained an office in Minnesota with 30 employees. Under appellant's pension plan, adopted in 1963 and qualified LAW §142 ; under § 401 of the Internal Revenue Code, employees contract -- subject matter infirmity -- ; were entitled to retire and receive a pension at age 65 regardless of length of service, and an employee's Headnote:[3] pension right became vested if he satisfied certain conditions as to length of service and age. Appellant was One whose rights, such as they are, are subject to the sole contributor to the pension trust fund, and each state restriction, cannot remove them from the power of year made contributions to the fund based on actuarial the state by making a contract about them, since the predictions of eventual payout needs. But the plan contract will carry with it the infirmity of the subject neither required appellant to make specific contributions matter. nor imposed any sanction on it for failing to make adequate contributions, and appellant retained a right not Page 5 438 U.S. 234, *; 98 S. Ct. 2716, **; 57 L. Ed. 2d 727, ***; 1978 U.S. LEXIS 130 only to amend the plan but also to terminate it at any time requirement was applied only to those employers who and for any reason. In 1974, Minnesota enacted the terminated their pension plans or who, like appellant, Private Pension Benefits Protection Act (Act), under closed their Minnesota offices, thus forcing the employer which a private employer of 100 employees or more (at to make all the retroactive changes in its contractual least one of whom was a Minnesota resident) who obligations at one time. Pp. 244-247. provided pension benefits under a plan meeting the qualifications of § 401 of the Internal Revenue Code, was (c) The Act does not possess the attributes of those subject to a "pension funding charge" if he terminated the state laws that have survived challenge under the plan or closed a Minnesota office. The charge was Contract Clause. It was not even purportedly enacted to assessed if the pension funds were insufficient to cover deal with a broad, generalized economic or social full pensions for all employees who had worked at least problem, cf. Home Building & Loan Assn. v. Blaisdell, 10 years, and periods of employment prior to the 290 U.S. 398, 445, but has an extremely narrow focus effective date of the Act were to be included in the and enters an area never before subject to regulation by 10-year employment criterion. Shortly thereafter, in a the State. Pp. 247-250. move planned before passage of the Act, appellant closed its Minnesota office, and several of its employees, who COUNSEL: George B. Christensen argued the cause for were then discharged, had no vested pension rights under appellant. With him on the briefs were Chester W. Nosal appellant's plan but had worked for appellant for 10 years and John R. Kenefick. or more, thus qualifying as pension obligees under the Byron E. Starns, Chief Deputy Attorney General of Act. Subsequently, the State notified appellant that it Minnesota, argued the cause for appellees. With him on owed a pension funding charge of $ 185,000 under the the brief were Warren Spannaus, Attorney General, pro Act. Appellant then brought suit in Federal District se, Richard B. Allyn, Solicitor General, and Kent G. Court for injunctive and declaratory relief, claiming that Harbison, Richard A. Lockridge, and Jon K. Murphy, the Act unconstitutionally impaired its contractual Special Assistant Attorneys General. * obligations to its employees under its pension plan, but the court upheld the Act as applied to appellant. Held: * Peter G. Nash, Eugene B. Granof, and Stanley The application of the Act to appellant violates the T. Kaleczyc filed a brief for the Chamber of Contract Clause of the Constitution, which provides that Commerce of the United States as amicus curiae "[no] State shall . . . pass any . . . Law impairing the urging reversal. Obligation of Contracts." Pp. 240-251. JUDGES: STEWART, J., delivered the opinion of the (a) While the Contract Clause does not operate to Court, in which BURGER, C. J., and POWELL, obliterate the police power of the States, it does impose REHNQUIST, and STEVENS, JJ., joined. BRENNAN, some limits upon the power of a State to abridge existing J., filed a dissenting opinion, in which WHITE and contractual relationships, even in the exercise of its MARSHALL, JJ., joined, post, p. 251. BLACKMUN, J., otherwise legitimate police power. "Legislation adjusting took no part in the consideration or decision of the case. the rights and responsibilities of contracting parties must be upon reasonable conditions and of a character OPINION BY: STEWART appropriate to the public purpose justifying its adoption." United States Trust Co. v. New Jersey, 431 U.S. 1, 22. OPINION Pp. 242-244. [*236] [***731] [**2718] MR. JUSTICE (b) The impact of the Act upon appellant's STEWART delivered the opinion of the Court. contractual obligations was both substantial and severe. Not only did the Act retroactively modify the [***LEdHR1A] [1A]The issue in this case is compensation that appellant had agreed to pay its whether the application of Minnesota's Private Pension employees from 1963 to 1974, but it did so by changing Benefits Protection Act 1 to the appellant violates the appellant's obligations in an area where the element of Contract Clause of the United States Constitution. reliance was vital -- the funding of a pension plan. Moreover, the retroactive state-imposed vesting 1 Minn. Stat. § 181B.01 et seq. (1974). This is Page 6 438 U.S. 234, *236; 98 S. Ct. 2716, **2718; 57 L. Ed. 2d 727, ***LEdHR1A; 1978 U.S. LEXIS 130 the same Act that was considered in Malone v. Although those contributions once made were White Motor Corp., 435 U.S. 497, a case irrevocable, in the sense that they remained part of the presenting a quite different legal issue. pension trust fund, the plan neither required the company to make specific [***732] contributions nor imposed I any sanction on it for failing to contribute adequately to the fund. In 1974 appellant Allied Structural Steel Co. (company), a corporation with its principal place of The company not only retained a virtually business in Illinois, maintained an office in Minnesota unrestricted right to amend the plan in whole or in part, with 30 employees. Under the company's general but was also free to terminate the plan and distribute the pension plan, adopted in 1963 and qualified as a trust assets at any time and for any reason. In the event single-employer plan under § 401 of the Internal Revenue of a termination, the assets of the fund were to go, first, to Code, 26 U. S. C. § 401 (1976 ed.), 2 salaried employees meet the plan's obligation to those employees already were covered as follows: At age 65 an employee was retired and receiving pensions; second, to those eligible entitled to retire and receive a monthly pension generally for retirement; and finally, if any balance remained, to the computed by multiplying 1% of his average monthly other employees covered under the plan whose pension earnings by the total number of his years of employment rights had not yet vested. 5 Employees within each of with the company. 3 Thus, an employee aged 65 or more these categories were assured payment only to the extent could retire without satisfying any particular of the pension assets. length-of-service requirement, but the size of his pension would reflect the length of his service with the company. 5 Apart from termination of the fund and 4 An employee could also [*237] become entitled to distribution of the trust assets, there was no other receive a pension, payable in full at age 65, if he met any situation in which employees in this third one of the following requirements: (1) he had worked 15 category would receive anything from the pension years for the company and reached the age of 60; or (2) fund. he was at least 55 years old and the sum of his age and his years of service with the company was at least 75; or [*238] The plan expressly stated: (3) he was less than 55 years old but the sum of his age "No employee shall have any right to, or interest in, and his years of service with the company was at least 80. any part of the Trust's assets upon termination of his Once an employee satisfied any one of these conditions, employment or otherwise, except as provided from time his pension right became vested in the sense that any to time under this Plan, and then only to the extent of the subsequent termination of employment would not affect benefits payable to such employee out of the assets of the his right to receive a monthly pension when he reached Trust. All payments of benefits as provided for in this 65. [**2719] Those employees who quit or were Plan shall be made solely out of the assets of the Trust discharged before age 65 without fulfilling one of the and neither the employer, the trustee, nor any member of other three conditions did not acquire any pension rights. the Committee shall be liable therefor in any manner." 2 The plan was not the result of a The plan also specifically advised employees that collective-bargaining agreement, and no such neither its existence nor any of its terms were to be agreement is at issue in this case. understood as implying any assurance that employees 3 The employee could elect to receive instead a could not be dismissed from their employment with the lump-sum payment. company at any time. 4 Thus, an employee whose average monthly earnings were $ 800 and who retired at 65 would In sum, an employee who did not die, did not quit, receive eight dollars monthly if he had worked and was not discharged before meeting one of the one year for the company and $ 320 monthly if he requirements of the plan would receive a fixed pension at had worked for the company for 40 years. age 65 if the company remained in business and elected to continue the pension plan in essentially its existing The company was the sole contributor to the pension form. trust fund, and each year it made contributions to the fund based on actuarial predictions of eventual payout needs. Page 7 438 U.S. 234, *238; 98 S. Ct. 2716, **2719; 57 L. Ed. 2d 727, ***732; 1978 U.S. LEXIS 130 On April 9, 1974, Minnesota enacted the law here in vested pension rights under the company's plan, but had question, the Private Pension Benefits Protection Act, worked for the company for 10 years or more and thus Minn. Stat. §§ 181B.01-181B.17. Under the Act, a qualified as pension obligees of the company under the private employer of 100 employees or more -- at least one law that Minnesota had enacted a few months earlier. On of whom was a Minnesota resident -- who provided August 18, the State notified the company that it owed a pension benefits under a plan meeting the qualifications pension funding charge of approximately $ 185,000 of § 401 of the Internal Revenue Code, was subject to a under the provisions of the Private Pension Benefits "pension funding charge" if he either terminated the plan Protection Act. or closed a Minnesota office. 6 The charge was assessed if the pension funds were not sufficient to cover full 8 According to the stipulated facts, the closing of pensions for all employees who had worked at least 10 the company's Minnesota office resulted from a years. The Act required the employer to satisfy the shift of that office's duties to the main company deficiency by purchasing deferred annuities, payable to office in Illinois the previous December. The the employees at their normal retirement age. A separate closing was not completed until February 1975, provision [*239] specified that periods of employment by which time the Minnesota Act had been prior to the effective date of the Act were to be included pre-empted by federal law. See Malone v. White in the 10-year employment criterion. 7 Motor Corp., 435 U.S., at 499. We deal here solely with the application of the Minnesota Act 6 Although the company had only 30 employees to the 11 employees discharged in July 1974. in Minnesota, it was subject to the Act because it had over 100 employees altogether. The company brought suit in a Federal District 7 Entitled "Nonvested Benefits Prior to Act," Court asking [*240] for injunctive and declaratory [HN1] Minn. Stat. § 181B.04 provided: relief. It claimed that the Act unconstitutionally impaired its contractual obligations to its employees under its "Every employer who hereafter ceases to pension agreement. The three-judge court upheld the operate a place of employment or a pension plan constitutional validity of the Act as applied to the within this state shall owe to his employees company, Fleck v. Spannaus, 449 F.Supp. 644, and an covered by sections 181B.01 to 181B.17 a appeal was brought to this Court under 28 U. S. C. § pension funding charge which shall be equal to 1253 (1976 ed.). 9 We noted probable jurisdiction. 434 the present value of the total amount of nonvested U.S. 1045. pension benefits based upon service occurring before April 10, 1974 of such employees of the 9 The claims of Walter Fleck and the other two employer who have completed ten or more years individual plaintiffs were dismissed by the of any covered service under the pension plan of District Court for lack of standing, Fleck v. the employer and whose nonvested pension Spannaus, 421 F.Supp. 20, leaving only the benefits have been or will be forfeited because of company as an appellant. Warren Spannaus, the the employer's ceasing to operate a place of Attorney General of Minnesota, is an appellee. employment or a pension plan, less the amount of II such nonvested pension benefits which are compromised or settled to the satisfaction of the A commissioner as provided in sections 181B.01 to 181B.17." There can be no question of the impact of the Minnesota Private Pension Benefits Protection Act upon [***733] [**2720] During the summer of 1974 the company's contractual relationships with its the company began closing its Minnesota office. On July employees. The Act substantially altered those 31, it discharged 11 of its 30 Minnesota employees, and relationships by superimposing pension obligations upon the following month it notified the Minnesota the company conspicuously beyond those that it had Commissioner of Labor and Industry, as required by the voluntarily agreed to undertake. But it does not Act, that it was terminating an office in the State. 8 At inexorably follow that the Act, as applied to the least nine of the discharged employees did not have any company, violates the Contract Clause of the Page 8 438 U.S. 234, *240; 98 S. Ct. 2716, **2720; 57 L. Ed. 2d 727, ***733; 1978 U.S. LEXIS 130 Constitution. powers as are vested in it for the promotion of the common weal, or are necessary for the general good of The language of the Contract Clause appears the public, though contracts previously entered into unambiguously absolute: [HN2] "No State shall . . . pass between individuals may thereby be affected. This any . . . Law impairing the Obligation of Contracts." U.S. power, which in its various ramifications is known as the Const., Art. I, § 10. The Clause is not, however, the police power, is an exercise of the sovereign right of the Draconian provision that its words might seem to imply. Government to protect the lives, health, morals, comfort As the Court [***734] has recognized, [HN3] and general welfare of the people, and is paramount to "literalism in the construction of the contract clause . . . any rights under contracts between individuals." would make it destructive of the public interest by Manigault v. Springs, 199 U.S. 473, 480. As Mr. Justice depriving the State of its prerogative of self-protection." Holmes succinctly put the matter in his opinion for the W. B. Worthen Co. v. Thomas, 292 U.S. 426, 433. 10 Court in Hudson Water Co. v. McCarter, 209 U.S. 349, 357: [HN5] "One whose rights, such as they are, are 10 See generally B. Schwartz, A Commentary subject to state restriction, cannot remove them from the on the Constitution of the United States, Pt. 2, power of the State by making a contract [*242] about The Rights of Property 266-306 (1965); B. them. The contract will carry with it the infirmity of the Wright, The Contract Clause of the Constitution subject matter." (1938). B [*241] Although it was perhaps the strongest single constitutional check on state legislation during our early [***LEdHR4] [4]If the Contract Clause is to retain years as a Nation, 11 the Contract Clause receded into any meaning at all, however, it must be understood to comparative desuetude with the adoption of the impose some limits upon the power of a State to abridge Fourteenth Amendment, and particularly with the existing contractual relationships, even in the exercise of development of the large body of jurisprudence under the its otherwise legitimate police power. The existence and Due Process Clause of that Amendment in modern nature of those limits were clearly indicated in a series of constitutional history. 12 Nonetheless, the Contract cases in this Court arising from the efforts of the States to [**2721] Clause remains part of the Constitution. It is deal with the unprecedented emergencies brought on by not a dead letter. And its basic contours are brought into the severe economic depression of the early 1930's. focus by several of this Court's 20th-century decisions. In Home Building & Loan Assn. v. Blaisdell, 290 11 Perhaps the best known of all Contract Clause U.S. 398, the Court [***735] upheld against a Contract cases of that era was Dartmouth College v. Clause attack a mortgage moratorium law that Minnesota Woodward, 4 Wheat. 518. had enacted to provide relief for homeowners threatened 12 Indeed, at least one commentator has with foreclosure. Although the legislation conflicted suggested that "the results might be the same if directly with lenders' contractual foreclosure rights, the the contract clause were dropped out of the Court there acknowledged that, [HN6] despite the Constitution, and the challenged statutes all Contract Clause, the States retain residual authority to judged as reasonable or unreasonable deprivations enact laws "to safeguard the vital interests of [their] of property." Hale, The Supreme Court and the people." Id., at 434. In upholding the state mortgage Contract Clause: III, 57 Harv. L. Rev. 852, moratorium law, the Court found five factors significant. 890-891 (1944). First, the state legislature had declared in the Act itself that an emergency need for the protection of homeowners existed. Id., at 444. Second, the state law was enacted to protect a basic societal interest, not a favored group. Id., [***LEdHR2] [2] [***LEdHR3] [3]First of all, it is to at 445. Third, the relief was appropriately tailored to the be accepted as a commonplace that [HN4] the Contract emergency that it was designed to meet. Ibid. Fourth, the Clause does not operate to obliterate the police power of imposed conditions were reasonable. Id., at 445-447. the States. "It is the settled law of this court that the And, finally, the legislation was limited to the duration of interdiction of statutes impairing the obligation of the emergency. Id., at 447. contracts does not prevent the State from exercising such Page 9 438 U.S. 234, *242; 98 S. Ct. 2716, **2721; 57 L. Ed. 2d 727, ***735; 1978 U.S. LEXIS 130 The Blaisdell opinion thus clearly implied that if the 21, that power has limits when its exercise effects Minnesota moratorium legislation had not possessed the substantial modifications of private contracts. Despite characteristics attributed to it by the Court, it would have the customary deference courts give to state laws directed been invalid under the Contract Clause of the to social and economic problems, "[legislation] adjusting Constitution. 13 [*243] These implications were given the rights and responsibilities of contracting parties must concrete force in three cases that followed closely in be upon reasonable conditions and of a character Blaisdell's wake. appropriate to the public purpose justifying its adoption." Id., at 22. Evaluating with particular scrutiny a 13 In Veix v. Sixth Ward Building & Loan Assn., modification of a contract to which the State itself was a 310 U.S. 32, 38, the Court took into account still party, the Court in that case held that legislative alteration another consideration in upholding a state law of the rights and remedies of Port Authority bondholders against a Contract Clause attack: the petitioner violated the Contract Clause because the legislation was had "purchased into an enterprise already neither necessary nor reasonable. 15 regulated in the particular to which he now objects." 14 See also El Paso v. Simmons, 379 U.S. 497. There the Court held that a Texas law shortening In W. B. Worthen Co. v. Thomas, 292 U.S. 426, the the time within which a defaulted land claim Court dealt with an Arkansas law that exempted the could be reinstated did not violate the Contract proceeds of a life insurance policy from collection by the Clause. "We do not believe that it can seriously be beneficiary's judgment creditors. Stressing the contended that the buyer was substantially retroactive effect of the state law, the Court held that it induced to enter into these contracts on the basis was invalid under the Contract Clause, since it [**2722] of a defeasible right to reinstatement . . . or that he was not precisely and reasonably designed to meet a interpreted that right to be of everlasting effect. grave temporary emergency in the interest of the general At the time the contract was entered into the welfare. In W. B. Worthen Co. v. Kavanaugh, 295 U.S. State's policy was to sell the land as quickly as 56, the Court was confronted with another Arkansas law possible . . . ." Id., at 514. In sum, "[the] measure that diluted the rights and remedies of mortgage taken . . . was a mild one indeed, hardly bondholders. The Court held the law invalid under the burdensome to the purchaser . . . but nonetheless Contract Clause. "Even when the public welfare is an important one to the State's interest." Id., at invoked as an excuse," Mr. Justice Cardozo wrote for the 516-517. Court, the security of a mortgage cannot be cut down 15 The Court indicated that impairments of a "without moderation or reason or in a spirit of State's own contracts would face more stringent oppression." Id., at 60. And finally, in Treigle v. Acme examination under the Contract Clause than Homestead Assn., 297 U.S. 189, the Court held invalid would laws regulating contractual relationships under the Contract Clause a Louisiana law that modified between private parties, 431 U.S., at 22-23, the existing withdrawal rights of the members of a although it was careful to add that "private building and loan association. "Such an interference with contracts are not subject to unlimited modification the right of contract," said the Court, "cannot be justified under the police power." Id., at 22. by saying that in the public interest the operations of building associations may be controlled [***736] and III regulated, or that in the same interest their charters may be amended." Id., at 196. [***LEdHR6A] [6A]In applying these principles to the present case, [HN8] the first inquiry must be whether [***LEdHR5] [5]The most recent Contract Clause case the state law has, in fact, operated as a substantial in this Court was United States Trust Co. v. New Jersey, impairment of a contractual relationship. 16 [*245] The 431 U.S. 1.14 In [*244] that case the Court again severity of the impairment [***737] [**2723] recognized that [HN7] although the absolute language of measures the height of the hurdle the state legislation the Clause must leave room for "the 'essential attributes must clear. Minimal alteration of contractual obligations of sovereign power,' . . . necessarily reserved by the may end the inquiry at its first stage. 17 Severe States to safeguard the welfare of their citizens," id., at impairment, on the other hand, will push the inquiry to a Page 10 438 U.S. 234, *245; 98 S. Ct. 2716, **2723; 57 L. Ed. 2d 727, ***737; 1978 U.S. LEXIS 130 careful examination of the nature and purpose of the state amount based on the plan's requirements for vesting. The legislation. plan satisfied the current federal income tax code and was subject to no other legislative requirements. And, of 16 course, the company was free to amend or terminate the pension plan at any time. The company thus had no [***LEdHR6A] [6B]The novel construction reason to anticipate that its employees' [*246] pension of the Contract Clause expressed in the dissenting rights could become vested except in accordance with the opinion is wholly contrary to the decisions of this terms of the plan. It relied heavily, and reasonably, on Court. The narrow view that the Clause forbids this legitimate contractual expectation in calculating its only state laws that diminish the duties of a annual contributions to the pension fund. contractual obligor and not laws that increase them, a view arguably suggested by Satterlee v. The effect of Minnesota's Private Pension Benefits Matthewson, 2 Pet. 380, has since been expressly Protection Act on this contractual obligation was severe. repudiated. Detroit United R. Co. v. Michigan, The company was required in 1974 to have made its 242 U.S. 238; Georgia R. & Power Co. v. contributions throughout the pre-1974 life of its plan as if Decatur, 262 U.S. 432. See also, e. g., Sherman v. employees' pension rights had vested after 10 years, Smith, 1 Black 587; Bernheimer v. Converse, 206 instead of vesting in accord with the terms of the plan. U.S. 516, 530; Henley v. Myers, 215 U.S. 373; Thus a basic term of the pension contract -- one on which National Surety Co. v. Architectural Decorating the company had relied for 10 years -- was substantially Co., 226 U.S. 276; Columbia R., Gas & Electric modified. The result was that, although the company's Co. v. South Carolina, 261 U.S. 236; past contributions were adequate when made, they were Stockholders of Peoples Banking Co. v. Sterling, not adequate when computed under the 10-year statutory 300 U.S. 175. Moreover, in any bilateral contract vesting requirement. The Act thus forced a current the diminution of duties on one side effectively recalculation of the past 10 years' contributions based on increases the duties on the other. the new, unanticipated 10-year vesting requirement. The even narrower view that the Clause is Not only did the state law thus retroactively modify limited in its application to state laws relieving the compensation that the company had agreed to pay its debtors of obligations to their creditors is, as the employees from 1963 to 1974, but also it did so by dissent recognizes, post, at 257 n. 5, completely at changing the company's obligations in an area where the odds with this Court's decisions. See Dartmouth element of reliance was vital -- the funding of a pension College v. Woodward, 4 Wheat. 518; Wood v. plan. 18 As the Court has recently recognized: Lovett, 313 U.S. 362; El Paso v. Simmons, supra. See generally Hale, The Supreme Court and the [***738] "These [pension] plans, like other forms Contract Clause, 57 Harv. L. Rev. 512, 514-516 of insurance, depend on the accumulation of large sums (1944). to cover contingencies. The amounts set aside are 17 See n. 14, supra. determined by a painstaking assessment of the insurer's likely liability. Risks that the insurer foresees will be [HN9] The severity of an impairment of contractual included in the [*247] calculation of liability, and the obligations can be measured by the factors that reflect the rates or contributions charged will reflect that calculation. high value the Framers placed on the protection of private The occurrence of major unforeseen contingencies, contracts. Contracts enable individuals to order their however, jeopardizes the insurer's solvency and, personal and business affairs according to their particular ultimately, the insureds' benefits. Drastic changes in the needs and interests. Once arranged, those rights and legal rules governing pension and insurance funds, like obligations are binding under the law, and the parties are other unforeseen events, [**2724] can have this effect." entitled to rely on them. Los Angeles Dept. of Water & Power v. Manhart, 435 U.S. 702, 721. Here, the company's contracts of employment with its employees included as a fringe benefit or additional 18 In some situations the element of reliance form of compensation, the pension plan. The company's may cut both ways. Here, the company had relied maximum obligation was to set aside each year an upon the funding obligation of the pension plan Page 11 438 U.S. 234, *247; 98 S. Ct. 2716, **2724; 57 L. Ed. 2d 727, ***738; 1978 U.S. LEXIS 130 for more than a decade. There was no showing of legislature's purpose. reliance to the contrary by its employees. Indeed, Minnesota did not act to protect any employee But whether or not the legislation was aimed largely reliance interest demonstrated on the record. at a single employer, 20 it clearly has an extremely Instead, it compelled the employer to exceed [***739] narrow focus. It applies only to private bargained-for expectations and nullified an employers who have at least 100 employees, at least one express term of the pension plan. of whom works in Minnesota, and who have established voluntary private pension plans, qualified under § 401 of Moreover, the retroactive state-imposed vesting the Internal Revenue Code. And it applies only when requirement was applied only to those employers who such an employer closes his Minnesota office or terminated their pension plans or who, like the company, terminates his pension plan. 21 Thus, this law can [*249] closed their Minnesota offices. The company was thus hardly be characterized, like the law at issue in the forced to make all the retroactive changes in its Blaisdell case, as one enacted to protect a broad societal contractual obligations at one time. By simply interest rather than a narrow class. 22 proceeding to close its office in Minnesota, a move that had been planned before the passage of the Act, the 20 In Malone v. White Motor Corp., 435 U.S., at company was assessed an immediate pension funding 501 n. 5, the Court noted that the White Motor charge of approximately $ 185,000. Corp., an employer of more than 1,000 Minnesota employees, had been prohibited from terminating Thus, the statute in question here nullifies express its pension plan until the expiration date of its terms of the company's contractual obligations and collective-bargaining agreement, May 1, 1974. imposes a completely unexpected liability in potentially International Union, UAW v. White Motor Corp., disabling amounts. There is not even any provision for 505 F.2d 1193 (CA8). On April 9, 1974, the gradual applicability or grace periods. Cf. the Employee Minnesota Act was passed, to become effective Retirement Income Security Act of 1974 (ERISA), 29 U. the following day. When White Motor proceeded S. C. §§ 1061 (b)(2), 1086 (b), and 1144 (1976 ed.). See to terminate its collectively bargained pension n. 23, infra. Yet there is no showing in the record before plan at the earliest possible date, May 1, 1974, the us that this severe disruption of contractual expectations State assessed a deficiency of more than $ 19 was necessary to meet an important general social million, based upon the Act's 10-year vesting problem. The presumption favoring "legislative judgment requirement. as to the necessity and reasonableness of a particular 21 Not only did the Act have an extremely measure," United States Trust Co., 431 U.S., at 23, narrow aim, but also its effective life was simply cannot stand in this case. extremely short. The United States House of Representatives had passed a version of the The only indication of legislative intent in the record Employee Retirement Income Security Act of before us is to be found in a statement in the District 1974, 29 U. S. C. § 1001 et seq. (1976 ed.), on Court's opinion: February 28, 1974, 120 Cong. Rec. 4781-4782 (1974), and the Senate on March 4, 1974, id., at 5011. Both versions expressly pre-empted state laws. That the Minnesota Legislature was aware "It seems clear that the problem of plant closure and of the impending federal legislation is reflected in pension plan termination was brought to the attention the explicit provision of the Act that it will [*248] of the Minnesota legislature when the "become null and void upon the institution of a Minneapolis-Moline Division of White Motor mandatory plan of termination insurance Corporation closed one of its Minnesota plants and guaranteeing the payment of a substantial portion attempted to terminate its pension plan." 449 F.Supp., at of an employee's vested pension benefits pursuant 651. 19 to any law of the United States." Minn. Stat. § 181B.17. ERISA itself, effective January 1, 1975, 19 The Minnesota Supreme Court, Fleck v. expressly pre-empts all state laws regulating Spannaus, 312 Minn. 223, 251 N. W. 2d 334, covered plans. 29 U. S. C. § 1144 (a) (1976 ed.). engaged in mere speculation as to the state Page 12 438 U.S. 234, *249; 98 S. Ct. 2716, **2724; 57 L. Ed. 2d 727, ***739; 1978 U.S. LEXIS 130 Thus, the Minnesota Act was in force less than State. nine months, from April 10, 1974, until January 1, 1975. The company argues that the enactment of the law while ERISA was on the horizon totally belies the State's need for this pension legislation. [***740] [***LEdHR1A] [1B]This Minnesota law 22 In upholding the constitutionality of the Act, simply does not possess the attributes of those state laws the District Court referred to Minnesota's interest that in the past have survived challenge under the in protecting the economic welfare of its older Contract Clause of the Constitution. The law was not citizens, as well as their surrounding economic even purportedly enacted to deal with a broad, communities. 449 F.Supp. 644. generalized economic or social problem. Cf. Home Building & Loan Assn. v. Blaisdell, 290 U.S., at 445. It [**2725] Moreover, in at least one other important did not operate in an area already subject to state respect the Act does not resemble the mortgage regulation at the time the company's contractual moratorium legislation whose constitutionality was obligations were originally undertaken, but invaded an upheld in the Blaisdell case. This legislation, imposing a area never before subject to regulation by the State. Cf. sudden, totally unanticipated, and substantial retroactive Veix v. Sixth Ward Building & Loan Assn., 310 U.S. 32, obligation upon the company to its employees, 23 was not 38. 25 It did not effect simply a temporary alteration of enacted to deal with a situation remotely approaching the the contractual relationships of those within its coverage, broad and desperate emergency economic conditions of but worked a severe, permanent, and immediate change the early 1930's -- conditions of which the Court in in those relationships -- irrevocably and retroactively. Cf. Blaisdell took judicial notice. 24 United States Trust Co. v. New Jersey, 431 U.S., at 22. And its narrow aim was leveled, not at every Minnesota 23 Compare the gradual applicability of ERISA, employer, not even at every Minnesota employer who left which itself is not even mandatory. At the outset the State, but only at those who had in the past been ERISA did not go into effect at all until four sufficiently enlightened as voluntarily to agree to months after it was enacted. 29 U. S. C. § 1144 establish pension plans for their employees. (1976 ed.). Funding and vesting requirements were delayed for an additional year. §§ 1086 (b), 25 See n. 13, supra. 1061 (b)(2) (1976 ed.). By contrast, the Minnesota Act became fully effective the day "Not Blaisdell's case, but Worthen's (W. B. Worthen after its passage. The District Court rejected out Co. v. Thomas, [292 U.S. 426]) supplies the applicable of hand the argument that employers were rule" here. W. B. Worthen Co. v. Kavanaugh, 295 U.S., constitutionally entitled to some grace period to at 63. It is not necessary to hold that the Minnesota law adjust their pension planning. 449 F.Supp., at impaired the obligation of the company's employment 651. contracts "without moderation or reason or in a spirit of 24 This is not to suggest that only an emergency oppression." Id., at 60. 26 But we do hold that if the of great magnitude can constitutionally justify a Contract Clause means anything at [*251] all, it means state law impairing the obligations of contracts. that Minnesota could not constitutionally do what it tried See, e. g., Veix v. Sixth Ward Building & Loan to do to the company in this case. Assn., 310 U.S., at 39-40; East New York Savings 26 As Mr. Justice Cardozo's opinion for the Bank v. Hahn, 326 U.S. 230; El Paso v. Simmons, Court in the Kavanaugh case made clear, these 379 U.S. 497. criteria are "the outermost limits only." The Entering a field it had never before sought to opinion went on to stress the state law's "studied regulate, the Minnesota Legislature grossly distorted the indifference to the interests" of creditors. 295 company's existing contractual relationships with its U.S., at 60. employees by superimposing retroactive obligations upon The judgment of the District Court is reversed. the company substantially [*250] beyond the terms of its employment contracts. And that burden was imposed It is so ordered. upon the company only because it closed its office in the Page 13 438 U.S. 234, *251; 98 S. Ct. 2716, **2725; 57 L. Ed. 2d 727, ***LEdHR1A; 1978 U.S. LEXIS 130 [**2726] MR. JUSTICE BLACKMUN took no part pension plans. As the Minnesota Supreme Court in the consideration or decision of this case. indicated, see Fleck v. Spannaus, 312 Minn. 223, 231, 251 N. W. 2d 334, 338 (1977), the impetus for the law DISSENT BY: BRENNAN must have been a legislative belief -- shared by Congress, see generally Employee Retirement Income Security Act DISSENT of 1974 (ERISA), 29 U. S. C. § 1001 et seq. (1976 ed.) -- that private pension plans often were grossly unfair to MR. JUSTICE BRENNAN, with whom MR. covered employees. Not only would employers often JUSTICE WHITE and MR. JUSTICE MARSHALL join, neglect to furnish their employees with adequate dissenting. information concerning their rights under the plans, leading to erroneous expectations, but also because In cases involving state legislation affecting private employers often failed to make contributions to the contracts, this Court's decisions over the past half pension funds large enough adequately to fund their century, consistently with both the constitutional text and plans, employees often ultimately received only a small its original understanding, have interpreted the Contract amount of those benefits they reasonably anticipated. Clause as prohibiting state legislative Acts which, "[with] See Fleck v. Spannaus, supra, at 231, 251 N. W. 2d, at studied indifference to the interests of the [contracting 338. Acting against this background, Minnesota, prior to party] or to his appropriate protection," effectively the enactment of ERISA, adopted the Act to remedy, diminished or nullified the obligation due him under the inter alia, what was viewed as a related serious social terms of a contract. W. B. Worthen Co. v. Kavanaugh, problem: the frustration of expectation interests that can 295 U.S. 56, 60 [***741] (1935). But the Contract occur when an employer closes a single plant and Clause has not, during this period, been applied to state terminates the employees who work there. 1 legislation that, while creating new duties, in nowise diminished the efficacy of any contractual obligation 1 Since appellant's plan remains in force at its owed the constitutional claimant. Cf. Goldblatt v. other plants, this case does not involve a Hempstead, 369 U.S. 590 (1962). The constitutionality of termination of a pension plan, and I will therefore such legislation has, rather, been determined solely by not discuss the aspect of the statute that involves reference to other provisions of the Constitution, e. g., the such contingencies except to observe that it, too, Due Process Clause, insofar as they operate to protect is a sensitive attempt to protect employees' existing economic values. expectation interests. Today's decision greatly expands the reach of the Pension plans normally do not make provision to Clause. The Minnesota Private Pension Benefits protect [*253] the interests of employees -- even those Protection Act (Act) does not abrogate or dilute any within only a few months of the "vesting" of their rights obligation due a party to a private contract; rather, like all under the plan -- who are terminated because an positive social legislation, the Act imposes new, employer closes one of his plants. See generally additional obligations on a particular class of persons. In Bernstein, Employee Pension Rights When Plants Shut my view, any constitutional infirmity in the law must Down: Problems and Some Proposals, 76 [***742] therefore derive, not from the Contract Clause, but from Harv. L. Rev. 952 (1963). Even assuming -- contrary to the Due Process Clause of the Fourteenth Amendment. common experience -- [**2727] that an employer [*252] I perceive nothing in the Act that works a denial adequately informs his employees that a termination for of due process and therefore I dissent. any reason prior to vesting will result in forfeiture of accrued pension credits, denial of all pension benefits not I because of job-related failings, but only because the I begin with an assessment of the operation and employees are unfortunate enough to be employed at a effect of the Minnesota statute. Although the Court plant that closes for purely economic reasons, is harsh disclaims knowledge of the purposes of the law, both the indeed. For unlike discharges for inadequate job terms of the Act and the opinion of the State Supreme performance, which may reasonably be foreseen, the Court disclose that it was designed to remedy a serious closing of a plant is a contingency outside the range of social problem arising from the operation of private normal expectations of both the employer and the Page 14 438 U.S. 234, *253; 98 S. Ct. 2716, **2727; 57 L. Ed. 2d 727, ***742; 1978 U.S. LEXIS 130 employee -- as is made clear by the fact that Allied did undertaking to set up a pension plan for the not rely upon the possibility of a plant's closing in benefit of its employees. calculating the amount of its contributions to its pension plan fund. 2 Although the Court refers to the fact that, under the terms of the plan, no sanctions could be 2 All parties to this case agree that Allied's imposed on appellant for not adequately funding actuarial assumptions in calculating its annual it, no substantial objection can be levied against contributions to the pension plan did not include the Act to the extent that it mandates funding the possibility of a plant's closing. sufficient to meet the employer's original undertaking. The plan in the present case can be The Minnesota Act addresses this problem by interpreted as imposing a duty on the employer to selecting a period -- 10 years of employment -- after fund it adequately, see App. to Brief for Appellant which this generally unforeseen contingency may not be 10a (§ 10 of the plan), and the employees here the basis for depriving employees of their accumulated surely would have understood it as imposing that pension fund credits, and by establishing a mechanism to requirement. There can be no serious objection to provide the employees with the equivalent of the earned a measure that makes such a promise enforceable. pension plan credits. Although the Court glides over this fact, it should be apparent that the Act will impose only I emphasize, contrary to the repeated [***743] minor economic burdens on employers whose pension protestations of the Court, that the Act does not impose plans have been adequately funded. For, where, as was "sudden and unanticipated" burdens. The features of the true here and as will generally be true, the possibility of a Act involved in this case come into play only when an plant's closing was not relied upon by actuaries in employer, after the effective date of the Act, closes a calculating the amount of the employer's contributions to plant. The existence of the Act's duties -- which are the plan, an [*254] adequate pension plan fund would similar to a legislatively imposed requirement of [*255] include contributions on behalf of terminated employees severance pay measured by the length of the discharged of 10 or more years' service whose rights had not vested. employees' service -- is simply one of a number of factors Indeed, without the Act, the closing of the plant would that the employer considers in making the business create a windfall for the employer, because, due to the decision whether to close a plant and terminate the resulting surplus in the fund, his future contributions employees who work there. In no sense, therefore, are would be reduced. In denying the windfall, the Act the Act's requirements unanticipated. While the extent of requires that the employer use the money he will save in the employer's obligation depends on pre-enactment the future to purchase annuities for the terminated [**2728] conduct, the requirements are triggered solely employees. 3 Of course, the consequence for the by the closing of a plant subsequent to enactment. 4 employer may be a slightly higher pension expense; the greater outlay might arise, in part, because the past 4 Although appellant here apparently decided to contributions to the plan would have reflected the close its Minnesota plant prior to the Act's actuarial possibility that some of the employees who had effective date, appellant had every opportunity to served 10 years might not ultimately satisfy the plan's reconsider that decision after the Act was adopted vesting requirement. and presumably reached its final decision after weighing the possible liabilities under the Act. 3 Because appellant's pension plan was, at the time of the plant closing, underfunded by in II excess of $ 295,000, appellant's pension-funding The primary question in this case is whether the charge -- which the parties stipulate will be Contract Clause is violated by state legislation enacted to between $ 114,000 and $ 195,000 -- will not in protect employees covered by a pension plan by requiring fact be offset by future out-of-pocket savings. an employer to make outlays -- which, although not in But this is incidental. What is critical is that this case, will largely be offset against future savings -- to appellant, like all covered employers, will be provide terminated employees with the equivalent of forced to assume an economic burden only a little benefits reasonably to be expected under the plan. The greater than that inherent in its original Act does not relieve either the employer or his employees Page 15 438 U.S. 234, *255; 98 S. Ct. 2716, **2728; 57 L. Ed. 2d 727, ***743; 1978 U.S. LEXIS 130 of any existing contract obligation. Rather, the Act courts; and "commodity payment laws," permitting simply creates an additional, supplemental duty of the payments in certain enumerated commodities at a employer, no different in kind from myriad duties created proportion, often three-fourths or four-fifths, of actual by a wide variety of legislative measures which defeat value. See id., at 454-459 (Sutherland, J., dissenting); settled expectations but which have nonetheless been Sturges v. Crowninshield, 4 Wheat. 122, 204 (1819); see sustained by this Court. See, e. g., Usery v. Turner also B. Wright, The Contract Clause of the [*257] Elkhorn Mining Co., 428 U.S. 1 (1976); Hadacheck v. Constitution 4 (1938); Hale, The Supreme Court and the Sebastian, 239 U.S. 394 (1915). For this reason, the Contract Clause, 57 Harv. L. Rev. 512-513 (1944). Minnesota Act, in my view, does not implicate the Contract Clause in any way. The basic fallacy of today's Thus, the several provisions of Art. I, § 10, of the decision is its mistaken view that the Contract Clause Constitution -- "No State shall . . . coin Money; emit Bills protects all contract-based expectations, including that of of Credit; [**2729] make any Thing but gold and silver an employer that his obligations to his employees will not Coin a Tender in Payment of Debts; [or] pass any . . . be legislatively enlarged beyond those explicitly provided Law impairing the Obligation of Contracts . . . ." -- were in his pension plan. targeted directly at this wide variety of debtor relief measures. Although the debates in the Constitutional [*256] A Convention and the subsequent public discussion of the Constitution are not particularly enlightening in Historically, it is crystal clear that the Contract determining the scope of the Clause, they support the Clause was not intended to embody a broad constitutional view that the sole evil at which the Contract Clause was policy of protecting all reliance interests grounded in directed was the theretofore rampant state legislative private contracts. It was made part of the Constitution to interference with the ability of creditors to obtain the remedy a particular social evil -- the state legislative payment or security provided for by contract. The practice of enacting laws to relieve individuals of their Framers regarded the Contract Clause as simply an obligations under certain contracts -- and thus was adjunct to the currency provisions of Art. I, § 10, which intended to prohibit States from adopting "as [their] operated primarily to bar legislation depriving creditors policy the repudiation of debts or the destruction of of the payment of the full value of their loans. See contracts or the denial of means to enforce them," Home Wright, supra, at 5-16. The Clause was thus intended by Building & Loan Assn. v. Blaisdell, 290 U.S. 398, 439 the Framers to be applicable only to laws which altered (1934). But the Framers never contemplated that the the obligations of contracts by effectively relieving one Clause would limit the legislative power of States to party of the obligation to perform a contract duty. 5 enact laws creating duties [***744] that might burden some individuals in order to benefit others. 5 Of course, as our recent decisions make plain, the applicability of the Clause has not been The widespread dissatisfaction with the Articles of confined to classic "debtor relief" laws, but has Confederation and, thus, the adoption of our Constitution, been regarded as implicated by any measure was largely a result of the mass of legislation enacted by which dilutes or nullifies a duty created by a various States during our earlier national period to relieve contract. See, e. g., El Paso v. Simmons, 379 U.S. debtors from the obligation to perform contracts with 497 (1965). their creditors. The economic depression that followed the Revolutionary War witnessed "an ignoble array of B [such state] legislative schemes." Id., at 427. Perhaps the most common of these were laws providing for the The terms of the Contract Clause negate any basis emission of paper currency, making it legal tender for the for its interpretation as protecting all contract-based payment of debts. In addition, there were "installment expectations from unjustifiable interference. [***745] laws," authorizing the payment of overdue obligations in It applies, as confirmed by consistent judicial several installments over a period of months or even interpretations, only to state legislative Acts. See years, rather than in a single lump sum as provided for in generally Tidal Oil Co. v. Flanagan, 263 U.S. 444 a contract; "stay laws," statutes staying or postponing the (1924). Its inapplicability to impairments by state judicial payment of private debts or temporarily closing the acts or by national legislation belies interpretation of the Clause as [*258] intended broadly to make all contract Page 16 438 U.S. 234, *258; 98 S. Ct. 2716, **2729; 57 L. Ed. 2d 727, ***745; 1978 U.S. LEXIS 130 expectations inviolable. Rather, the only possible that the impairment of a contract may consist in interpretation of its terms, especially in view of its "adding to its burdens" as well as in diminishing history, is as a limited prohibition directed at a particular, its efficacy. Georgia R. & Power Co. v. Decatur, narrow social evil, likely to occur only through state supra, at 439. These opinions reflect the legislative action. This evil is identified with admirable then-prevailing philosophy of economic due precision: "[Laws] impairing the Obligation of process which has since been repudiated. See Contracts." (Emphasis supplied.) It is nothing less than an Ferguson v. Skrupa, 372 U.S. 726 (1936). In my abuse of the English language to interpret, as does the view, the reasoning of Georgia R. & Power Co. Court, the term "impairing" as including laws which and Detroit United R. Co. is simply wrong. create new duties. While such laws may be conceptualized as "enlarging" the obligation of a contract [**2730] C when they add to the burdens that had previously been The Court seems to attempt to justify its distortion of imposed by a private agreement, such laws cannot be the meaning of the Contract Clause on the ground that prohibited by the Clause because they do not dilute or imposing new duties on one party to a contract can upset nullify a duty a person had previously obligated himself his contract-based expectations as much as can laws that to perform. effectively relieve [***746] the other party of any duty Early judicial interpretations of the Clause explicitly to perform. But it is no more anomalous to give effect to rejected the argument that the Clause applies to state the term "impairment" and deny a claimant protection legislative enactments that enlarge the obligations of under the Contract Clause when new duties are created contracts. Satterlee v. Matthewson, 2 Pet. 380 (1829), is than it is to give effect to the Clause's inapplicability to the leading case. There, this Court rejected a claim that a acts of the National Government and deny a Contract state legislative Act which gave validity to a contract Clause remedy when an Act of Congress denies a creditor which the state court had held, before the enactment of the ability to enforce a contract right to payment. Both the statute, to be invalid at common law could be said to results are simply consequences of the fact that the have "impaired the obligation of a contract." It reasoned Clause does not protect all contract-based expectations. that "all would admit the retrospective character of [the More fundamentally, the Court's distortion of the particular state] enactment, and that the effect of it was to meaning of the Contract Clause creates anomalies of its create a contract between parties where none had own and threatens to undermine the jurisprudence of previously existed. But it surely cannot be contended, property rights developed over the last 40 years. The that to create a contract, and to destroy or impair one, Contract Clause, of course, is but one of several clauses mean the same thing." Id., at 412-413. 6 Since creating an in the Constitution that protect existing economic values obligation where none had existed previously is not an from governmental interference. The Fifth Amendment's impairment of contract, it of course should follow command that "private property [shall not] be taken for necessarily that [*259] legislation increasing the public use, without just [*260] compensation" is such a obligation of an existing contract is not an impairment. 7 clause. A second is the Due Process Clause, which See Hale, supra, at 514-516. during the heyday of substantive due process, see 6 Satterlee, which was written by Mr. Justice Lochner v. New York, 198 U.S. 45 (1905), largely Washington, necessarily rejected the contrary supplanted the Contract Clause in importance and dictum of Green v. Biddle, 8 Wheat. 1, 84 (1823), operated as a potent limitation on government's ability to another of Mr. Justice Washington's Court interfere with economic expectations. See G. Gunther, opinions. Cases and Materials on Constitutional Law 603-604 (9th 7 In Georgia R. & Power Co. v. Decatur, 262 ed. 1975); Hale, The Supreme Court and the Contract U.S. 432 (1923), Detroit United R. Co. v. Clause: III, 57 Harv. L. Rev. 852, 890-891 (1944). Michigan, 242 U.S. 238 (1916), and in dictum in Decisions over the past 50 years have developed a other cases, see ante, at 244-245, n. 16, this Court coherent, unified interpretation of all the constitutional embraced, without any careful analysis and provisions that may protect economic expectations and without giving any consideration to Satterlee v. these decisions have recognized a broad latitude in States Matthewson, 2 Pet. 380 (1829), the contrary view to effect even severe interference with existing economic Page 17 438 U.S. 234, *260; 98 S. Ct. 2716, **2730; 57 L. Ed. 2d 727, ***746; 1978 U.S. LEXIS 130 values when reasonably necessary to promote the general legislation. Second, the assertion that Minnesota welfare. See Penn Central Transp. Co. v. New York City, here "invaded an area never before subject to ante, p. 104; Pittsburgh v. Alco Parking Corp., 417 U.S. regulation" takes an exceedingly restrictive view 369 (1974); Goldblatt v. Hempstead, 369 U.S. 590 of the subject matter of the Act. If it is regarded (1962); Sproles v. Binford, 286 U.S. 374 (1932); Euclid not as a private pension plan, but rather as the v. Ambler Realty Co., 272 U.S. 365 (1926). At the same compensation afforded employees by large time the prohibition of the Contract Clause, consistently employers, then the statute operates in an area that with its wording and historic purposes, has been limited has been extensively regulated. The only in application to state laws that diluted, with utter explanation for the Court's decision is that it indifference to the legitimate interests of the beneficiary subjectively values the interests of employers in of a contract duty, the existing contract obligation, W. B. pension plans more highly than it does the Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935); see legitimate expectation interests of employees. United States Trust Co. v. New Jersey, 431 U.S. 1 (1977); cf. El Paso v. Simmons, 379 U.S. 497 (1965); Home To permit this level of scrutiny of laws that interfere Building & Loan Assn. v. Blaisdell, 290 U.S. 398 (1934). with contract-based expectations is an anomaly. There is nothing sacrosanct about expectations rooted in contract Today's conversion of the Contract Clause into a that justify according them a constitutional immunity limitation on the power of States to enact laws that denied other property rights. Laws that interfere with impose duties additional to obligations assumed under settled expectations created by state property law (and private contracts must inevitably produce results difficult which impose severe economic burdens) are uniformly to square with any rational conception of a constitutional held constitutional where reasonably related to the order. Under the Court's opinion, any law that may be promotion of the general welfare. Hadacheck v. characterized as "superimposing" new obligations on Sebastian, 239 U.S. 394 (1915) is illustrative. There a those provided for by contract is to be [*261] regarded property owner had established on a particular parcel as creating "sudden, substantial, and unanticipated [*262] of land a perfectly lawful business of a brickyard, [***747] burdens" and then to be subjected to the most and, in reliance on the existing law, continued to operate exacting scrutiny. [**2731] The validity of such a law that business for a number of years. However, a local will turn upon whether judges see it as a law that deals ordinance was passed prohibiting the operation of with a generalized social problem, whether it is brickyards in the particular locale and diminishing the temporary (as few will be) or permanent, whether it value of the claimant's parcel and thus of his investment operates in an area previously subject to regulation, and, by nearly 90%. Notwithstanding the effect of the finally, whether its duties apply to a broad class of ordinance on the value of the investment, the ordinance persons. See ante, at 249-250. The necessary was sustained against a taking claim. See also Miller v. consequence of the extreme malleability of these rather Schoene, 276 U.S. 272 (1928) (statute required cutting vague criteria is to vest judges with broad subjective down ornamental red cedar trees because they had cedar discretion to protect property interests that happen to rust which would be harmful to apple trees in the appeal to them. 8 vicinity). 8 With respect, the Court's application of these There is no logical or rational basis for sustaining the criteria illustrates this point. First, I find it duties created by the laws in Miller and Hadacheck, but difficult to understand how the Court can assert invalidating the duty created by the Minnesota Act. that the Act's attempt to protect the expectation Surely, the Act effects no greater interference with interests of employees to pension plans does not reasonable reliance interests than did these other laws. deal with a "broad, generalized . . . social Moreover, the laws operate identically: They all create problem" but that the mortgage moratorium in duties that burden one class of persons and benefit Home Building & Loan Assn. v. Blaisdell, 290 another. The only difference between the present case U.S. 398 (1934), did. The Court's suggestion that and Hadacheck or Miller is that here there was a prior the Act has a "narrow aim" because it applies only contractual relationship between the members of the to pension plans overlooks that it is the existence benefited and burdened classes. I simply cannot accept of the pension plan that creates the need for this [***748] that this difference should possess Page 18 438 U.S. 234, *262; 98 S. Ct. 2716, **2731; 57 L. Ed. 2d 727, ***748; 1978 U.S. LEXIS 130 constitutional significance. The only means of avoiding the fruits of their labor -- the operators and the coal this anomaly is to construe the Contract Clause consumers." Id., at 18. consistently with its terms and the original understanding and hold it is inapplicable to laws which create new A similar analysis is appropriate here. The Act is an duties. attempt to remedy a serious social problem: the utter frustration of an employee's expectations that can occur III when he is terminated because his employer closes down his place of work. The burden on his employer is surely But my view that the Contract Clause has no far less harsh than that saddled upon coal operators by the applicability whatsoever to the Minnesota Act does not federal statute. Too, a large part of the employer's outlay end the inquiry in this case. The Due Process Clause of that the Act requires will be offset against future savings. the Fourteenth Amendment limits a State's power to enact To this extent, the Act merely [*264] prevents the such laws and I therefore address that related challenge to employer from obtaining a windfall, an effect which the Act's validity. 9 [**2732] I think that any claim would immunize this aspect of the statutory requirement based on due process has no merit. from attack even under the more stringent standards the Court reads into the Contract Clause. See El Paso v. 9 I recognize that the only question presented by Simmons, 379 U.S., at 515 and cases [***749] cited. To appellant is whether the Minnesota Act violates the extent the Act does more than prevent a windfall, it is the Contract Clause. See Jurisdictional Statement simply implementing a reasonable legislative judgment 2. However, I think that a due process claim is that the expectation interests of employees of more than fairly subsumed by the question presented and, 10 years' service in the receipt of a pension but who, as under the circumstances, elementary fairness an actuarial matter, would not satisfy the vesting requires that I address the due process claim. This requirements of the pension plan, should not be frustrated reasoning does not apply to the other possible by the generally unforeseen contingency of a plant's challenges to the Act -- e. g., ones based on the closing. "Taking" Clause or on the Commerce Clause -- for these others involve rather different Significantly, also, the Minnesota Act, unlike the considerations from those involved in the federal statute upheld in Turner Elkhorn Mining, is not Contract and Due Process Clause analyses. wholly retrospective in its operation. The Act requires an outlay from an employer like appellant only if after the [*263] My conclusion rests to a considerable extent enactment date of the Act (thus when it may give full upon Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 consideration to the economic consequences of its (1976). That case involved a federal statute that required decision) the employer decides to close its plant. the operators of coal mines to compensate employees who had contracted pneumoconiosis even though the Nor, finally, do I believe it relevant that the Act is employees had terminated their work in the coal-mining limited in coverage to large employers. "In establishing a industry before the Act was passed. This federal statute system of unemployment benefits the legislature is not imposed a new duty on operators based on past acts and bound to occupy the whole field. It may strike at the evil applied even though the coal mine operators might not where it is most felt." Carmichael v. Southern Coal & have known of the danger that their employees would Coke Co., 301 U.S. 495, 519-520 (1937). contract pneumoconiosis at the time of the particular employees' service. Id., at 17; see also id., at 40 n. 4 In sum, in my view, the Contract Clause has no (POWELL, J., concurring in part). While indicating that applicability whatsoever to the Act, and because I the Due Process Clause may place greater limitations on conclude the Act is consistent with the only relevant the Government's power to legislate retrospectively than constitutional restriction -- the Due Process Clause -- I it does on the Government's ability to act prospectively, would affirm the judgment of the District Court. the statute was upheld on the ground that Congress had broad discretion to deal with the serious social problem REFERENCES of pneumoconiosis affecting former miners and that it State's exercise of police power as constituting was "a rational measure to spread the costs of the impairment of obligation of private contract in violation employees' disabilities to those who have profited from of contract clause (Art I, 10, cl 1) of Federal Constitution Page 19 438 U.S. 234, *264; 98 S. Ct. 2716, **2732; 57 L. Ed. 2d 727, ***749; 1978 U.S. LEXIS 130 16 Am Jur 2d, Constitutional Law 438, 450 ALR Quick Index, Impairment of Contract Obligations USCS, Constitution, Article I, Section 10, Clause 1 Federal Quick Index, Impairment of Contract Obligations US L Ed Digest, Constitutional Law 271 Annotation References: ALR Digests, Constitutional Law 203 State's exercise of a police power as constituting impairment of obligation of private contract in violation L Ed Index to Annos, Impairment of Contract of contract clause (Art I, 10, cl 1) of Federal Constitution. Obligations 57 L Ed 2d 1279. Page 1 ARIZONA v. CALIFORNIA ET AL. [NO NUMBER IN ORIGINAL] SUPREME COURT OF THE UNITED STATES 292 U.S. 341; 54 S. Ct. 735; 78 L. Ed. 1298; 1934 U.S. LEXIS 714 April 2, 1934, Return to Rule to Show Cause Presented May 21, 1934, Decided PRIOR HISTORY: MOTION FOR LEAVE TO but attempts would be made thereafter to interfere with FILE BILL TO PERPETUATE TESTIMONY. its rights, and that it was not possible to bring the issues that would arise to an immediate judicial investigation or ORIGINAL application upon the part of the State of determination. The issue before the Court was whether Arizona for leave to file a bill to perpetuate testimony for the testimony that the State proposed to take would be use in future litigation against the State of California and material and competent evidence in the contemplated other parties named. litigation. Denying leave to file, the Court held in part that the evidence sought to be perpetuated was not DISPOSITION: Leave to file denied. competent to prove that Congress intended, by the Act, to exclude another state from the waters allotted by the CASE SUMMARY: Compact and to reserve all of those waters to the State. OUTCOME: The court denied leave to file the bill to PROCEDURAL POSTURE: Plaintiff State filed an perpetuate testimony. original application for leave to file a bill to perpetuate testimony for use in future litigation against defendants, CORE TERMS: compact, basin, river, acre-feet, another State and related others. Plaintiff had filed an Boulder Canyon Project Act, upper, apportioned, action against defendants, seeking a declaration that the apportion, tributaries, surplus waters, apportionment, Colorado River Compact and the Boulder Canyon Project beneficial, perpetuated, ratification, per annum, Act of 1928 be declared to be unconstitutional and void. perpetuate, treaty, consumptive, stream, leave to file, The bill had been dismissed without prejudice. negotiator, perpetuate testimony, depositions, aggregate, ratify, use of water, negotiation, negotiating, ambiguous, OVERVIEW: The State sought a declaration that the ambiguity Secretary of the Interior and other states be permanently enjoined from carrying out the Compact or the Act; and LexisNexis(R) Headnotes that they be enjoined from performing contracts which had been executed by the Secretary on behalf of the United States for the use of stored water and developed power after the project shall have been completed, and from doing any other thing under color of the Act. In the Civil Procedure > Discovery > Methods > Perpetuation State's original bill of complaint to perpetuate testimony, of Testimony it alleged that none of its rights had been interfered with, [HN1] A bill to perpetuate testimony may be entertained Page 2 292 U.S. 341, *; 54 S. Ct. 735, **; 78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714 in aid of litigation pending in the United States Supreme and also all parts of said States located without the Court, or to be begun there. drainage area of the Colorado River system which are now or shall hereafter be beneficially served by waters diverted from the system below Lee Ferry. Civil Procedure > Discovery > Methods > Oral Depositions Civil Procedure > Discovery > Methods > Perpetuation Governments > State & Territorial Governments > of Testimony Water Rights Civil Procedure > Discovery > Methods > Written [HN5] By Article III of the Colorado River Compact, the Depositions apportionment is made: (a) There is hereby apportioned [HN2] To sustain a bill to perpetuate testimony, it must from the Colorado River system in perpetuity to the appear that the facts which a plaintiff expects to prove by upper basin and to the lower basin, respectively, the the testimony of the witnesses sought to be examined will exclusive beneficial consumptive use of 7,500,000 be material in the determination of the matter in acre-feet of water per annum, which shall include all controversy; that the testimony will be competent water necessary for the supply of any rights which may evidence; that depositions of the witnesses cannot be now exist; (b) In addition to the apportionment in taken and perpetuated in the ordinary methods prescribed Paragraph (a), the lower basin is hereby given the right to by law, because the then condition of the suit (if one is increase its beneficial consumptive use of such waters by pending) renders it impossible, or (if no suit is then 1,000,000 acre-feet per annum; (d) The States of the pending) because the plaintiff is not in a position to start upper division (Colorado, New Mexico, Utah and one in which the issue may be determined; and that Wyoming) will not cause the flow of the river at Lee taking of the testimony on bill in equity is made Ferry to be depleted below an aggregate of 75,000,000 necessary by the danger that it may be lost by delay. acre-feet for any period of 10 consecutive years reckoned in continuing progressive series beginning with the first day of October next succeeding the ratification of this Governments > State & Territorial Governments > compact. Legislatures Governments > State & Territorial Governments > Water Rights Governments > State & Territorial Governments > [HN3] The Boulder Canyon Project Act of 1928 approves Water Rights the Colorado River Compact subject to certain limitations International Law > Dispute Resolution > Comity and conditions, the approval to become effective upon the Doctrine > General Overview ratification of the Compact, as so modified, by the [HN6] Article III of the Colorado River Compact does legislatures of California and at least five of the six other not in terms apportion as between the upper and the lower states. basin the surplus waters in excess of the amounts specifically allocated. But it recognizes in Paragraph (c) that there may be "surplus" waters in the River, Governments > State & Territorial Governments > applicable to the lower basin. Water Rights [HN4] By Article II the Colorado River Compact defines the terms used: (a) The term "Colorado River system" Contracts Law > Types of Contracts > Covenants means that portion of the Colorado River and its Governments > State & Territorial Governments > tributaries within the United States of America; (b) The Water Rights term "Colorado River Basin" means all of the drainage [HN7] The Colorado River Compact does not purport to area of the Colorado River system and all other territory apportion between the States of the lower basin the share within the United States of America to which the waters of each in the waters of the Colorado River System; but of the Colorado River system shall be beneficially the Boulder Canyon Project Act of 1928 makes some applied; and (g) The term "Lower Basin" means those provision for such apportionment. By § 4(a) it provides parts of the States of Arizona, California, Nevada, New that California, by act of its legislature, shall agree Mexico and Utah within and from which waters naturally irrevocably and unconditionally with the United States drain into the Colorado River system below Lee Ferry and for the benefit of the States of Arizona, Colorado, Page 3 292 U.S. 341, *; 54 S. Ct. 735, **; 78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714 Nevada, New Mexico, Utah and Wyoming, as an express Water Rights covenant and in consideration of the passage of the Act, Real Property Law > Water Rights > Beneficial Use that the aggregate annual consumptive use (diversions [HN10] The provision of Article III(b) of the Colorado less returns to the river) of water of and from the River Compact, like that of Article III(a) is entirely Colorado River for use in the State of California, referable to the main intent of the Compact which is to including all uses under contracts made under the apportion the waters as between the upper and lower provisions of this Act and all water necessary for the basins. The effect of Article III (b) (at least in the event supply of any rights which may now exist, shall not that the lower basin puts the 8,500,000 acre-feet of water exceed 4,400,000 acre-feet of the waters apportioned to to beneficial uses) is to preclude any claim by the upper the lower basin States by paragraph (a) of Article III of basin that any part of the 7,500,000 acre-feet released at the Colorado River Compact, plus not more than one-half Lee Ferry to the lower basin may be considered as of any excess or surplus waters unapportioned by said "surplus" because of Arizona waters which are available Compact, such uses always to be subject to the terms of to the lower basin alone. Congress apparently expected said Compact. that a complete apportionment of the waters among the States of the lower basin would be made by the sub-compact which it authorized Arizona, California and Contracts Law > Remedies > Ratification Nevada to make. If Arizona's rights are in doubt it is, in Governments > State & Territorial Governments > large part, because she has not entered into the Colorado Water Rights River Compact or into the suggested sub-compact. Real Property Law > Water Rights > Beneficial Use [HN8] Section 4 of the Boulder Canyon Project Act of 1928 authorizes Arizona, California and Nevada to enter International Law > Treaty Formation > General into an agreement which, among other things, shall Overview provide: (1) That of the 7,500,000 acre-feet annually International Law > Treaty Interpretation > General apportioned to the lower basin States by paragraph (a) of Overview Article III of the Colorado River compact, there shall be [HN11] When the meaning of a treaty is not clear, apportioned to the State of Nevada 300,000 acre-feet and recourse may be had to the negotiations, preparatory to the State of Arizona 2,800,000 acre-feet for exclusive works, and diplomatic correspondence of the contracting beneficial consumptive use in perpetuity, and (2) that the parties to establish its meaning. But that rule has no State of Arizona may annually use one-half of the excess application to oral statements made by those engaged in or surplus water unapportioned by the Colorado River negotiating the treaty which were not embodied in any compact, and (3) that the State of Arizona shall have the writing and were not communicated to the government of exclusive beneficial use of the Gila River and its the negotiator or to its ratifying body. tributaries within the boundaries of said State, and (7) said agreement to take effect upon the ratification of the LAWYERS' EDITION HEADNOTES: Colorado River compact by Arizona, California and Nevada. DEPOSITIONS, §3 ; Governments > State & Territorial Governments > prerequisites of bill to perpetuate testimony for Water Rights future action. -- ; [HN9] The Boulder Canyon Project Act of 1928 does not Headnote:[1] purport to apportion among the states of the lower basin the waters to which the lower basin is entitled under the To sustain a bill to perpetuate testimony in an action Colorado River Compact. The Act merely places limits to be brought in the future, it must appear that the facts on California's use of waters under Article III(a) of the expected to be proved will be material and the testimony Compact and of surplus waters; and it is such uses which competent, that depositions of the witnesses cannot be are subject to the terms of said Compact. taken and perpetuated in the ordinary methods prescribed by law, because the plaintiff is not in a position to start a Governments > State & Territorial Governments > suit in which the issue may be determined, and that Page 4 292 U.S. 341, *; 54 S. Ct. 735, **; 78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714 taking of the testimony on bill in equity is made Nondocumentary evidence, consisting of testimony necessary by the danger that it may be lost by delay. of what persons said some years before while negotiating the Colorado River Compact between several states, not embodied in any writing and not communicated to EVIDENCE, §834 Congress or the legislatures of the ratifying states, is not competent to prove that Congress, by the Boulder STATES, §52 ; Canyon Project Act, intended to exclude a certain state materiality -- compact between other states. -- ; from the waters allotted by the Compact. Headnote:[2] SYLLABUS The meaning of a compact between several states, 1. This Court may entertain a bill to perpetuate considered as a contract, cannot be material in litigation testimony in aid of future litigation within its original against signatory states by a state which refused to ratify jurisdiction. P. 347. it and is not a party thereto, nor can the construction of the compact by a signatory state or by Congress be 2. The sole purpose of such a suit is to perpetuate the material in any suit by the nonsignatory state based upon testimony; and in order to sustain the bill it must appear the contract. that the facts which the plaintiff expects to prove by the testimony of the witnesses sought to be examined will be material to the determination of the matter in controversy; EVIDENCE, §551 that the testimony will be competent evidence; that depositions of the witnesses can not be taken and STATES, §52 ; perpetuated in the ordinary methods prescribed by law, because the then condition of the suit (if one is pending) Colorado River Compact -- ambiguity -- extrinsic renders it impossible, or (if no suit is then pending) evidence of meaning. -- ; because the plaintiff is not in a position to start one in Headnote:[3] which the issue may be determined; and that taking of the testimony on bill in equity is made necessary by the The provision of the Colorado River Compact danger that it may be lost by delay. P. 347. between several states that, in addition to the apportionment made elsewhere therein, the "lower basin" 3. Arizona asked leave to file a bill to perpetuate the is given the right to increase its beneficial consumptive testimony of persons who took part in the formulation of use of water by 1,000,000 acre-feet per annum, is not the "Colorado River Compact," apportioning the waters ambiguous, so as to admit extrinsic evidence to show its of the Colorado River, which was adopted by all the meaning, although the additional waters thereby States embracing the water-shed of that river, except appropriated are claimed thereunder exclusively by the Arizona, and was approved, subject to certain limitations state seeking to introduce such evidence, on the ground of and conditions, by the Act of Congress of December 21, the geographical situation of the states, where other states 1928, known as the Boulder Canyon Project Act (see 283 were included in the lower basin, and the Compact left to U.S. 423). By the bill she claimed that § 4 (a) of the Act, later agreement the apportionment of the water among the imposing limitations on the use of water by California, states in each basin. was intended for the benefit of Arizona; that § 4 (a) embodies by reference Article III (b) of the Compact for the purpose of defining those limitations, and that the EVIDENCE, §593 proper interpretation of Art III (b) will be, therefore, essential in future litigation to the determination of STATUTES, §145 ; Arizona's rights under the statute; that, read in the light of other parts of the Compact, Art. III (b) is ambiguous; and extrinsic evidence to show intent of Congress -- that the testimony sought to be perpetuated will be Boulder Canyon Project Act. -- ; material and admissible in removing the ambiguity, and Headnote:[4] will show that the water apportioned by Art. III (b) to the Page 5 292 U.S. 341, *; 54 S. Ct. 735, **; 78 L. Ed. 1298, ***; 1934 U.S. LEXIS 714 lower basin of the water-shed -- 1,000,000 acre feet per Mr. U. S. Webb, Attorney General of California, and annum -- is for the sole and exclusive use and benefit of Messrs. I. W. Stewart, Arvin B. Shaw, Charles L. Arizona. Held: Childers, E. C. Finney, Ray L. Chesebro, James M. Stevens, and Fred M. Bottorf were on the brief for (1) That the meaning of the Compact, considered California et al., defendants. merely as a contract, can never be material to the contemplated litigation, since Arizona refused to ratify Messrs. James H. Howard, Northcutt Ely, Ray W. Bruce, the Compact. P. 356. C. L. Byers, Phil D. Swing, and Thos. Whelan, were on the brief for the Metropolitan Water District of Southern (2) The bill does not show that Art. III (b) of the California et al., defendants. Compact is relevant to the interpretation of § 4 (a) of the Act. The Act does not purport to apportion among the Mr. Paul P. Prosser, Attorney General of Colorado, Mr. States of the lower basin (to which Arizona and Gray Mashburn, Attorney General of Nevada, Mr. E. K. California belong) the waters to which the lower basin is Neumann, Attorney General of New Mexico, Mr. Joseph entitled under the Compact; it merely limits California's Chez, Attorney General of Utah, and Mr. Ray E. Lee, use of waters under Art. III (a) and of surplus waters; and Attorney General of Wyoming, were on the brief for there can be no claim that Art. III (b) is relevant in Colorado et al., defendants. defining surplus waters under § 4 (a) of the Act. P. 357. Solicitor General Biggs, Assistant Attorney General (3) Proof that Congress understood that Article III Blair, and Messrs. Charles Bunn, Aubrey Lawrence, and (b) had allotted all the waters therein to Arizona would Nathan R. Margold were on the brief for Ickes, Secretary not make Art. III (b) relevant to the interpretation of § 4 of the Interior, defendant. (a) of the Act. P. 358. By leave of Court, Messrs. James D. Parriott, R. C. (4) Ambiguity in Art. III (b) is not shown. The Hecox, Malcolm Lindsey, and Stanley P. Smith filed a Compact makes an apportionment only between the brief on behalf of the City and County of Denver, as upper and lower basins. The fact that any of the waters amici curiae. apportioned to the lower basin are useful to Arizona only or have been appropriated by her does not contradict the JUDGES: Hughes, Van Devanter, McReynolds, clear intent of Paragraph (b) to apportion the 1,000,000 Brandeis, Sutherland, Butler, Stone, Roberts, Cardozo acre-feet therein to the States of the lower basin and not specifically to Arizona alone. P. 358. OPINION BY: BRANDEIS (5) The proposed testimony, even if it were relevant, OPINION would not be competent, since the Act rests not upon what was thought or said by negotiators of the Compact, [*344] [**736] [***1299] MR. JUSTICE but upon its ratification by the six States other than BRANDEIS delivered the opinion of the Court. Arizona. P. 359. On October 13, 1930, Arizona sought, by an original 4. The rule permitting recourse to the negotiations, bill, a declaration that the Colorado River Compact and preparatory works, and diplomatic correspondence of the the Boulder Canyon Project Act be decreed to be contracting parties to establish the meaning of a treaty unconstitutional and void; that the Secretary of the when not clear, has no application to oral statements Interior and California, Nevada, Utah, New Mexico, made by those engaged in negotiating the treaty which Colorado and Wyoming be permanently enjoined from were not embodied in any writing and were not carrying out said Compact or said Act; and that they be communicated to the Government of the negotiator or to enjoined from performing contracts which had been its ratifying body. P. 360. executed by the Secretary on behalf of the United States for the use of stored water and developed power after the COUNSEL: Mr. Arthur T. LaPrade, Attorney General of project shall have been completed, and from doing any Arizona, and Messrs. Charles A. Carson, Jr., and A. M. other thing under color of the Act. The bill was Crawford were on the brief for plaintiff. "dismissed without prejudice to an application for relief Page 6 292 U.S. 341, *344; 54 S. Ct. 735, **736; 78 L. Ed. 1298, ***1299; 1934 U.S. LEXIS 714 in case the stored water is used in such a way as to [*346] (f) The General Regulation of the Secretary interfere with the enjoyment by Arizona, or those of the Interior, concerning the storage of water in Boulder claiming under it, of any rights already perfected or with Dam Reservoir and the delivery thereof, dated April 23, the right of Arizona to make additional legal 1930, as amended September 28, 1931. appropriation and to enjoy the same." Arizona v. California, 283 U.S. 423, 464. [***1300] The bill alleges, among other things: [*345] On February 14, 1934, Arizona moved for That no right of Arizona has yet been interfered with; leave to file in this Court its original bill of complaint to that attempts will be made hereafter to interfere with its perpetuate testimony in an action or actions arising out of rights; that it is not possible to bring the issues which will the Boulder Canyon Project Act which "at some time in arise to an immediate judicial investigation or the future" it will commence in this Court against determination and it may be years before this can be done California, and others therein named as defendants. 1 The because "the cause or causes of action have not accrued bill sets forth: and may not accrue for years to come"; that facts known only to certain named persons will be evidence material 1 Namely, Colorado, Nevada, New Mexico, in the determination of such controversy or Utah, Wyoming, Harold L. Ickes, Secretary of the controversies; that these persons will be necessary Interior, Palo Verde Irrigation District, Imperial witnesses in the prosecution of the action or actions Irrigation District, Coachella Valley Water which Arizona will be compelled to institute in order to District, Metropolitan Water District of Southern protect its rights and those of persons claiming under it; California, City of Los Angeles, City of San and that all the persons with present knowledge of the Diego, and County of San Diego. present facts may not be available as witnesses when the cause or causes of action shall have accrued to the (a) The Act of Congress, August 19, 1921, c. 72, 42 plaintiff. The prayer is for process to take the oral Stat. 171, which authorized Arizona, California, depositions and to perpetuate the testimony of these Colorado, Nevada, New Mexico, Utah and Wyoming to witnesses. enter into a compact regarding the waters of the Colorado River; and the appointment of a representative to act for On February 20, 1934, a rule issued to those named the United States. as defendants to show cause why leave to file the bill should not be granted. All filed returns. Colorado, (b) The Colorado River Compact dated November Nevada, New Mexico, Utah and Wyoming stated that 24, 1922, signed by representatives of the seven States -- they have no objection to the filing of the bill or to the to "become binding and obligatory when it shall have taking of any competent testimony; and prayed that to been approved by the legislature of each of the signatory each state should be granted the right of States and by the Congress of the United States." cross-examination and the right to object to any such testimony on any ground either at the time of the taking (c) The Act of Congress, December 21, 1928, known or of its presentation to this Court. California and the as the Boulder Canyon Project Act, c. 42, 45 Stat. 1057, public agencies of that state expressed a doubt as to the which approved the Colorado River Compact subject to existence of jurisdiction in this Court. They opposed the certain limitations and conditions, the approval to become granting of the motion on the ground that the testimony effective upon the ratification of the compact, as so if taken [*347] would not be admissible in evidence; modified, by the legislature of California and at least five opposed also on the ground that the United States is an of the other six States. indispensable party; and insisted that the bill should not be received in the absence of consent by the United States (d) The Act of California, c. 16, March 4, 1929, to be sued. The Secretary of the Interior conceded that limiting its use of the waters of the Colorado River in this Court has jurisdiction, but objected on the same conformity with the Boulder Canyon Project Act. grounds as California to granting the motion. Thereupon, [**737] (e) The Proclamation of the President a brief was filed by Arizona, reply briefs by respondents declaring the Boulder Canyon Project Act to be in effect, and a brief amicus curiae by the City and County of June 25, 1929, 46 Stat. 3000. Denver, Colorado. Page 7 292 U.S. 341, *347; 54 S. Ct. 735, **737; 78 L. Ed. 1298, ***1300; 1934 U.S. LEXIS 714 First. No bill to perpetuate testimony has heretofore sufficient to show danger of losing the evidence by delay; been filed in this Court; but no reason appears why such and also to show Arizona's inability to perpetuate the [HN1] a bill may not be entertained in aid of litigation testimony by the ordinary methods prescribed by law for pending in this Court, or to be begun here. Bills to the taking of depositions. The only question which perpetuate testimony had been known as an independent requires consideration is whether the testimony which it branch of equity jurisdiction before the adoption of the is proposed to take would be material and competent Constitution. 2 Congress provided for its exercise by the evidence in the litigation contemplated. lower federal courts. 3 There the jurisdiction has been repeatedly invoked; 4 and it has been recognized by this Second. The action or actions which Arizona expects Court. 5 to bring may rest upon a claim that "the stored water is used in such a way as to interfere with the enjoyment by 2 1 Pomeroy's Equity Jurisprudence, (4th ed.) § Arizona, or those claiming under it, of any rights already 211; West v. Lord Sackville, L.R. [1903] 2 Ch. perfected or with the right of Arizona to make additional Div. 378. legal appropriations and to enjoy the same." Specifically, 3 Revised Statutes, § 866: ". . . any circuit Arizona claims rights under § 4 (a) of the Boulder [district] court upon application to it as a court of Canyon Project Act; these rights, it is said, are governed equity, may, according to the usages of chancery, in turn by the terms of the Colorado River Compact. direct depositions to be taken in perpetuam rei Briefly, the Compact apportions the waters of the memoriam, if they relate to any matters that may Colorado River between a group of States, termed the be cognizable in any court of the United States. . . upper basin, north of Lee Ferry, and a group south ." thereof, the lower basin, among which are Arizona and 4 New York & Baltimore Coffee Polishing Co. v. California. The interference apprehended will, it is New York Polishing Co., 9 Fed. 578; 11 Fed. 813; alleged, arise out of a refusal of the respondents to accept Richter v. Jerome, 25 Fed. 679; Westinghouse as correct that construction of Article III (b) of the Machinery Co. v. Electric Storage Battery Co., [*349] Compact which Arizona contends is the proper 170 Fed. 430; reversing 165 Fed. 992; The West one. It claims that this paragraph, which declares: Ira, 24 F.2d 858; Todd Engineering Co. v. United States, 32 F.2d 734; Union Solvents Corp. v. "In addition to the apportionment in Paragraph (a), Butacet Corp., 2 F.Supp. 375. the lower basin is hereby given the right to increase its 5 Richter v. Union Trust Co., 115 U.S. 55; beneficial consumptive use of such waters by 1,000,000 compare Green v. Compagnia Generale, 82 Fed. acre-feet per annum" 490, 494-5. means: [1]The sole purpose of such a suit is to perpetuate the "that the waters apportioned by Article III (b) of said testimony. [HN2] To sustain a bill of this character, it compact are for the sole and exclusive use and benefit of must appear that the facts which the plaintiff expects the State of Arizona." [***1301] to prove [*348] by the testimony of the witnesses sought to be examined will be material in the The bill charges that the Secretary of the Interior and determination of the matter in controversy; that the the other defendants refuse to accept such construction; testimony will be competent evidence; that depositions of and that, by certain contracts made between the the witnesses cannot be taken and perpetuated in the Secretary and the California defendants, they are ordinary methods prescribed by law, because the then asserting a right to appropriate the said 1,000,000 condition of the suit (if one is pending) renders it acre-feet of water to California uses. The bill states that impossible, or (if no suit is then pending) because the the decision in some future action construing Paragraph plaintiff is not in a position to start one in which the issue (b) will materially affect rights of Arizona arising under may be determined; and that taking of the testimony on the Boulder Canyon Project Act, in particular § 4 (a) bill in equity [**738] is made necessary by the danger thereof. 6 that it may be lost by delay. 6 It is claimed that a future decision as to the The allegations of the bill presented by Arizona are meaning of Article III (b) will affect rights also Page 8 292 U.S. 341, *349; 54 S. Ct. 735, **738; 78 L. Ed. 1298, ***1301; 1934 U.S. LEXIS 714 under (a) the Colorado River Compact, (b) the one million acre-feet per annum.' conditions required by the Boulder Canyon Project Act to be attached to patents, grants, "It was agreed between all the representatives of the contracts, concessions, leases, permits, rights of various States and the representative of the United States, way and other privileges from the United States, negotiating said compact, that said one million acre-feet (c) the relative and respective rights of each of the apportioned by subdivision (b) of Article III of said parties (to the suit to perpetuate testimony) in the compact was intended for and should go to the State of waters of the Colorado and its tributaries, and the Arizona to compensate for the waters of the Gila River use thereof and the burdens and restrictions upon and [*351] its tributaries being included within the such use. definition of the Colorado River System and the allocations of said compact, and that said one million Arizona seeks, as stated in the bill, to perpetuate, and acre-feet was to be used exclusively by and for the State proposes to introduce in support of its construction of of Arizona, that being the approximate amount of water Paragraph (b) of Article III, of the Compact, in the then in use within the State of Arizona from the Gila actions to be brought in the future, testimony to the River and its tributaries, and it was agreed that in view of following effect by those who in 1922 were connected the fact that no appropriation or allocation of water had with the negotiation of the Compact: otherwise been made by said compact directly to any State, the one million acre-feet for the State of Arizona "The representatives of all the States and the United should be included in said compact by an allocation for States except the Arizona delegation were in agreement the Lower Basin. And it was further agreed that a [*350] as to the definition of the Colorado River System, supplemental compact between the States, California, including the [***1302] Gila River and its tributaries, Nevada and Arizona should be adopted and that such and as to the division proposed, which substantially supplemental compact should so provide. apportioned the waters of the Colorado River at Lee Ferry, the point selected as dividing the Upper Basin "The Arizona delegation stated that if it were agreed from the Lower Basin. The Arizona delegation refused by all the representatives of the several States and of the and declined to accept the proposed compact because of United States that said million acre-feet should be for the the inclusion of the Gila River and its tributaries without exclusive benefit of the State of Arizona to provide any compensating provision to the State of Arizona in compensation to Arizona on account of the inclusion of lieu of the waters thereof, which had already been the waters of the Gila River and its tributaries in said appropriated and in which no other State could have any compact, they would accept said compact, otherwise they interest on account of the further fact that the waters of would refuse to accept said compact. It was thereupon the Gila River and its tributaries enter the Colorado River agreed by all representatives of all the States and of the at Yuma, at a point so far down stream and of such low United States, participating in said negotiations and elevation that it was and is impossible to put the waters conferences, that the waters apportioned by Article III (b) thereof to beneficial use in the United States after they of said compact were for the sole and exclusive use and reach the main stream of the Colorado River. Hence, the benefit of the State of Arizona, and it was further agreed Arizona delegation pointed out that the conference was that a supplemental compact between the States of discussing something which had already been disposed of California, Nevada and Arizona should be adopted and and in any event could not concern any State, other than that such supplemental compact should so provide. Arizona. Several days elapsed in a discussion between Thereupon said compact was signed by the the said representatives of this problem before a solution representatives of the several States and of the United was found. The problem was finally thought solved by States." adding subdivision (b) of Article III to the compact as finally approved by said representatives which reads as Third. In this suit Arizona asserts rights under the follows: Boulder Canyon Project Act of 1928, not under the Colorado River Compact, which she has refused to ratify. "'(b) In addition to the apportionment in paragraph [*352] [HN3] That Act approved the Colorado River (a), the Lower Basin is hereby given [**739] the right to Compact [***1303] subject to certain limitations and increase its beneficial consumptive use of such waters by conditions, the approval to become effective upon the Page 9 292 U.S. 341, *352; 54 S. Ct. 735, **739; 78 L. Ed. 1298, ***1303; 1934 U.S. LEXIS 714 ratification of the Compact, as so modified, by the (a), the lower basin is hereby given the right to increase legislatures of California and at least five of the six other its beneficial consumptive [**740] use of such waters states. It was so ratified. Arizona claims that § 4 (a) of by 1,000,000 acre-feet per annum." that Act imposing limitations on the use of water by California was intended for her benefit; that § 4 (a) "(d) The States of the upper division [Colorado, New embodies by reference Article III (b), among others, of Mexico, Utah and Wyoming] will not cause the flow of the Compact for the purpose of defining the limitation the river at Lee Ferry to be depleted below an aggregate and that the proper interpretation of Article III (b) will be, of 75,000,000 acre-feet for any period of 10 consecutive therefore, essential to a determination of Arizona's rights years reckoned in continuing progressive series beginning under the statute; that, read in the light of other sections with the first day of October next succeeding the of the Compact, Article III (b) is ambiguous; and that the ratification of this compact." testimony sought to be perpetuated will be material and [HN6] Article III does not in terms apportion as admissible in removing the ambiguity. The elaborate between the upper and the lower basin the surplus waters argument in support of these contentions appears to be, in in excess of the amounts specifically allocated. But it substance, as follows: recognizes in Paragraph (c) that there may be "surplus" 1. Colorado River Compact, apportions the water of waters in the River, applicable to the lower basin. 7 the Colorado River System between the upper and the 7 Paragraph (c) provides: "If, as a matter of lower basin. [HN4] By Article II it defines the terms international comity, the United States of used: America, shall hereafter recognize in the United "(a) The term 'Colorado River system' means that States of Mexico any right to the use of any portion of the Colorado River and its tributaries within waters of the Colorado River system, such waters the United States of America." shall be supplied first from the waters which are surplus over and above the aggregate of the "(b) The term 'Colorado River Basin' means all of the quantities specified in paragraphs (a) and (b); and drainage area of the Colorado River system and all other if such surplus shall prove insufficient for this territory within the United States of America to which the purpose, then, the burden of such deficiency shall waters of the Colorado River system shall be beneficially be equally borne by the upper basin and the lower applied." basin, and whenever necessary the States of the upper division shall deliver at Lee Ferry water to "(g) The term 'Lower Basin' means those parts of the supply one-half of the deficiency so recognized in States of Arizona, California, Nevada, New Mexico and addition to that provided in paragraph (d). Utah within and from which waters naturally drain into the Colorado River system below Lee Ferry and also all 2. [HN7] The Colorado River Compact does not parts of said States located without the drainage area of purport to apportion between the States of the lower basin the Colorado River system which are now or shall [***1304] the share of each in the waters of the hereafter be beneficially served by waters diverted from Colorado River System; [*354] but Boulder Canyon the system below Lee Ferry." Project Act makes some provision for such apportionment. By § 4 (a) it provides that: [*353] [HN5] By Article III, the apportionment is made: "California, by act of its legislature, shall agree irrevocably and unconditionally with the United States "(a) There is hereby apportioned from the Colorado and for the benefit of the States of Arizona, Colorado, River system in perpetuity to the upper basin and to the Nevada, New Mexico, Utah and Wyoming, as an express lower basin, respectively, the exclusive beneficial covenant and in consideration of the passage of this Act, consumptive use of 7,500,000 acre-feet of water per that the aggregate annual consumptive use (diversions annum, which shall include all water necessary for the less returns to the river) of water of and from the supply of any rights which may now exist." Colorado River for use in the State of California, including all uses under contracts made under the "(b) In addition to the apportionment in Paragraph provisions of this Act and all water necessary for the Page 10 292 U.S. 341, *354; 54 S. Ct. 735, **740; 78 L. Ed. 1298, ***1304; 1934 U.S. LEXIS 714 supply of any rights which may now exist, shall not of the Compact plus one-half [**741] of the "surplus exceed four million four hundred thousand acre-feet of waters unapportioned by said compact"; that § 4 (a) the waters apportioned to the lower basin States by declares that such uses by California are "always to be paragraph (a) of Article III of the Colorado River subject to the terms of said compact"; that California compact, plus not more than one-half of any excess or claims that, in addition to the waters already mentioned, surplus waters unapportioned by said compact, such uses she is entitled, as one of the parties to the Compact, to always to be subject to the terms of said compact." draw upon the Article III (b) waters; and that, acting upon this assumption, the Secretary of the Interior has already And that [HN8] section authorizes Arizona, contracted with California users for delivery of 5,362,000 California and Nevada to enter into an agreement which, acre-feet of water per annum from the main [*356] among other things, shall provide: stream of the Colorado River, though this water is not yet being delivered; whereas [***1305] Arizona contends "(1) That of the 7,500,000 acre-feet annually that by a proper interpretation of Article III (b) California apportioned to the lower basin States by paragraph (a) of is excluded from all the waters thereunder in favor of Article III of the Colorado River compact, there shall be Arizona. apportioned to the State of Nevada 300,000 acre-feet and to the State of Arizona 2,800,000 acre-feet for exclusive 5. In support of the contention that Article III (b) is beneficial consumptive use in perpetuity, and (2) that the ambiguous, Arizona points out that, whereas the Compact State of Arizona may annually use one-half of the excess awards to the lower basin, in the aggregate, 8,500,000 or surplus water unapportioned by the Colorado River acre-feet of water, 8 Article III (d) of the Compact shows compact, and (3) that the State of Arizona shall have the that only 7,500,000 of this is to come from the main exclusive beneficial use of the Gila River and its stream of the Colorado River, since that section provides: tributaries within the boundaries of said State . . . (7) said agreement to take effect upon the ratification of [*355] 8 That is the 7,500,000 of the Article III (a) the Colorado River compact by Arizona, California and waters and the 1,000,000 of the Article III (b) Nevada." waters. 3. Arizona refused to ratify the Colorado River "The States of the upper division will not cause the Compact, and the authority conferred upon Arizona, flow of the River at Lee Ferry to be depleted below an Nevada and California by the Boulder Canyon Project aggregate of 75,000,000 acre-feet for any period of 10 Act to enter into an agreement for apportioning the consecutive years reckoned in continuing progressive waters has not been acted on. But California bound itself, series beginning with the first day of October next by the Act of its legislature, March 16, 1929, to the succeeding the ratification of this compact." limitation of 4,400,000 acre-feet, plus one-half of the surplus; Arizona claims that the limitation on California's It argues that the 75,000,000 was doubtless arrived at use must have been enacted for the benefit solely of through multiplying by ten the 7,500,000 acre-feet per Arizona, since geographically she alone could use waters annum apportioned to the lower basin under Article III in the lower basin which California may not use; and (a); that though the lower basin is entitled to 8,500,000 that, because it is embodied in a statute, the limitation acre-feet, it can only call on the upper basin to release imposed by Congress on California's use confers rights 7,500,000 acre-feet from the main stream; that the only upon Arizona, although she failed to sign either the other waters below Lee Ferry which are available to the principal or the subsidiary compact. lower basin come from tributaries entirely in Arizona; that these waters enter the Colorado River at a point so 4. In support of the contention that Article III (b) of far south that they could not be used in the United States the Compact has a bearing on the interpretation of the after they enter the Colorado; and they have in fact been limitation of § 4 (a) of the Act, Arizona points to the fact appropriated for use in Arizona; that, therefore, what has that while the Boulder Canyon Project Act makes no in terms been awarded to the lower basin is in practical mention of the 1,000,000 acre-feet assigned to the lower effect available only to that part of the lower basin basin by Article III (b) of the Compact, § 4 (a) of the Act constituted by Arizona. limits California, in terms, to 4,400,000 acre-feet of the waters apportioned to the lower basin under Article III (a) [2]Fourth. It is clear that the meaning of the Page 11 292 U.S. 341, *356; 54 S. Ct. 735, **741; 78 L. Ed. 1298, ***1305; 1934 U.S. LEXIS 714 Compact, considered merely as a contract, can never be Act. material in the contemplated litigation, since Arizona refused to ratify [*357] the Compact. Arizona rests her [3]Sixth. The considerations to which Arizona calls rights wholly upon the Acts of Congress and of attention do not show that there is any ambiguity in California. Arizona claims that California's construction Article III (b) of the Compact. Doubtless, the anticipated of § 4 (a) of the statute would allow her water which physical sources of the waters which combine to make under the Compact has been assigned to Arizona, and that the total of 8,500,000 acre-feet are as Arizona contends, a conflict is thus raised between the statute and the but neither Article III (a) nor (b) deal with the waters on Compact which the suggested testimony is competent to the basis of their source. Paragraph (a) apportions waters resolve. But the resolution of this alleged conflict can "from the Colorado River system," i. e., the Colorado and never be material to any case based on the Compact its tributaries, and (b) permits an additional use "of such considered as contract, since Arizona neither has nor waters." The Compact makes an apportionment only claims any contractual right. between the upper and lower basin; the apportionment among the states in each basin being left to later Fifth. Nor does Arizona show that Article III (b) of agreement. Arizona is one of the states of the lower basin the Compact is relevant to an interpretation of § 4 (a) of and any waters useful to her are by that fact useful to the the Boulder Canyon Project Act upon which she bases lower basin. But the fact that they are solely useful to her claim of right. It may be true that the Boulder Arizona, or the fact that they have been appropriated by Canyon Project Act leaves in doubt the apportionment her, does not contradict the intent clearly expressed in among the states of the lower basin of the waters to Paragraph (b) (nor the rational character thereof) to which the lower basin is entitled under Article III (b). apportion the 1,000,000 acre-feet to the states of the But [HN9] the Act does not purport to apportion among lower basin and not specifically to Arizona alone. It may the states of the lower basin the waters to which the lower be that, in apportioning among the states the 8,500,000 basin is entitled under the Compact. The Act merely acre-feet allotted to the lower basin, Arizona's share of places limits on California's use of waters under Article waters from the main stream will be affected by the fact III (a) and of surplus waters; and it is "such" uses which that certain of the waters assigned to the lower basin can are "subject to the terms of said compact." be used only by her; but that is a matter entirely outside the scope of the Compact. There can be no claim that Article III (b) is relevant in defining surplus waters under § 4 (a) of the Act; for [HN10] The provision of Article III (b), like that of both Arizona and California apparently consider the Article III (a) is entirely referable to the main intent of waters under Article III (b) as apportioned. 9 It is true that the [*359] Compact which was to apportion the waters Arizona alleges (not in the bill however but in her brief) as between the upper and lower basins. The effect of that she "hopes to be able to show in the case hereafter to Article III (b) (at least in the event that the lower basin be brought" by evidence of Congressional Committee puts the 8,500,000 acre-feet of water to beneficial uses) is hearings and other legislative history that the failure in to preclude any claim by the upper basin that any part of the statute to apportion the 1,000,000 acre-feet of waters the 7,500,000 acre-feet released at Lee Ferry to the lower was due to an [***1306] understanding by Congress basin may be considered as "surplus" because of Arizona that Article [*358] III (b) of the Compact had already waters which are available to the lower basin alone. assigned these waters to Arizona and that the limitation Congress apparently expected that a complete on California was passed in the light of this apportionment of the waters among the States of the understanding. This hope if fulfilled would not make lower basin would be made by the sub-compact which it Article III (b) relevant. The allegation is, not that authorized Arizona, California and Nevada to make. If Congress incorporated Article III (b) into the Act; it is Arizona's rights are in doubt it is, in large part, because that Congress understood that Article III [**742] (b) had she has not entered into the Colorado River Compact or allotted all the waters therein to Arizona. into the suggested sub-compact. 9 The Secretary of the Interior in his brief seems [4]Seventh. Even if the construction to be given to be of the opinion that waters under Article III Paragraph (b) of the Compact were relevant to the (b) might be surplus waters under § 4 (a) of the interpretation of any provision in the Boulder Canyon Page 12 292 U.S. 341, *359; 54 S. Ct. 735, **742; 78 L. Ed. 1298, ***1306; 1934 U.S. LEXIS 714 Project Act and such provision were ambiguous, the v. Thompson, 263 U.S. 197, 223; Cook v. United States, evidence sought to be perpetuated is not of a character 288 U.S. 102. See Yu, The Interpretation of Treaties, pp. which would be competent to prove that Congress 138, 192; Chang, The Interpretation of Treaties, p. 59 et intended by § 4(a) of the 1928 Act to exclude California seq. But that rule has no application to oral statements entirely from the waters allotted by Article III (b) to the made by those engaged in negotiating the treaty which states of the lower basin and to reserve all of those waters were not embodied in any writing and were not to Arizona. The evidence sought to be perpetuated is not communicated to the government of the negotiator or to documentary. It is testimony as to what divers persons its ratifying body. There is no allegation that the alleged said six years earlier while negotiating a compact with a agreement between the negotiators made in 1922 was view to preparing the proposal for submission to the called to the attention of Congress in 1928 when enacting legislatures of the seven States and to Congress for the Act; nor that it was called to the attention of the approval -- a proposal which Arizona has not ratified and legislatures of the several States. which the six other States and Congress did ratify, as later modified, by statutes enacted in 1928 and 1929. The As Arizona has failed to show that the testimony Boulder Canyon Project Act rests, not upon what was which she seeks to have perpetuated could conceivably thought or said in 1922 by negotiators of the Compact, be material or competent evidence bearing upon the but upon its ratification by the six States. construction to be given Article III, Paragraph (b), in any action which may hereafter be brought, the motion for [***1307] It has often been said that [HN11] when leave to file the bill should be denied. We have no the meaning of a treaty is not clear, recourse may be had occasion to determine whether leave to file the bill should to the negotiations, [*360] preparatory works, and be denied also because [**743] the United States was diplomatic correspondence of the contracting parties to not made a party and has not consented to be sued. establish its meaning. Nielsen v. Johnson, 279 U.S. 47, 52; compare United States v. Texas, 162 U.S. 1; Terrace Leave to file bill denied. Page 1 MARGUERITE D. BLAIR et al. v. STATE TAX ASSESSOR Law Docket No. Sag-83-379 Supreme Judicial Court of Maine 485 A.2d 957; 1984 Me. LEXIS 856 September 4, 1984, Argued December 13, 1984, Decided DISPOSITION: [**1] The entry is: Judgment granted in favor of the assessor. affirmed. CORE TERMS: retirement allowances, retirement CASE SUMMARY: benefits, gross income, taxation, exemption, adjusted, different meaning, taxable income, repeal, assessor's, state income tax, income tax, implied repeal, contractual, PROCEDURAL POSTURE: Plaintiff certified class of retirement, repealed, earlier act, state income, subject taxpayers sought review of the decision of the Superior matter, summary judgment, employees' contributions, Court, Sagadahoc County (Maine), which granted term used, pertinent part, personal exemptions, defendant state tax assessor's motion for summary modifications, instituted, tax-exempt, exempted, judgment in the certified class's action that sought review semantic, bare of the assessor's determination that Maine state retirement benefits and allowances in excess of employees' LexisNexis(R) Headnotes contributions were subject to state income tax. OVERVIEW: The lower court granted the assessor's summary judgment motion after deciding that by enactment of the state income tax in 1969, the legislature Tax Law > State & Local Taxes > Administration & impliedly repealed Me. Rev. Stat. Ann. tit. 5, § 1003 Proceedings > General Overview (Supp. 1984), which exempted state retirement benefits [HN1] Me. Rev. Stat. Ann. tit. 36, § 5102(11) (Supp. from taxation. The court held that the enactment of the 1984) provides in part: Any other term used in this part state income tax system in 1969 did in fact repeal by has the same meaning as when used in a comparable implication the exempt status of state retirement benefits. context in the laws of the United States relating to federal There was no merit in the certified class's contention that income taxes, unless a different meaning is clearly there was no inconsistency between the statutes on which required. to premise an implied repeal of § 1003. The legislature in 1969 enacted a comprehensive system of state income Pensions & Benefits Law > Governmental Employees > taxation that pre-empted the entire area, and the court State Pensions noted that it had to give effect to the later statute as the Tax Law > State & Local Taxes > Administration & most recent expression of the legislative will. Proceedings > General Overview Tax Law > State & Local Taxes > Income Tax > OUTCOME: The court affirmed the summary judgment Page 2 485 A.2d 957, *; 1984 Me. LEXIS 856, **1 Individuals, Estates & Trusts > General Overview art. 9, § 9. [HN2] Me. Rev. Stat. Ann. tit. 5, § 1003 (Supp. 1984) states in part: The right of a person to a retirement COUNSEL: Attorney for the Plaintiffs: Roger S. Golin, allowance, such retirement allowance itself, to the return Esq. (orally). Bath. of contributions, any optional benefit or death benefit or any other right accrued or accruing to any person under Attorneys for the Defendant: James E. Tierney, Esq. this chapter, and the moneys in the various funds created Attorney General. Crombie J. D. Garrett, Esq. (orally). thereby, shall be exempted from any state, county or Jerome S. Matus, Esq. Assistant Attorneys General. municipal tax in the State. Bureau of Taxation. Augusta. JUDGES: Glassman, J. wrote the opinion. McKusick, Pensions & Benefits Law > Governmental Employees > C.J., and Nichols, Roberts, Violette, Wathen, Glassman, State Pensions and Scolnik, JJ. Tax Law > Federal Income Tax Computation > Dependent & Personal Exemptions (IRC secs. 151-153) OPINION BY: GLASSMAN Tax Law > Federal Taxpayer Groups > Individuals > Adjustments to Income (IRC secs. 62, 71, 215, 911) > OPINION Adjusted Gross Income (IRC sec. 62) [HN3] Me. Rev. Stat. Ann. tit. 36, § 5111 imposes a tax [*958] The plaintiffs, 1 a certified class consisting for each taxable year on the entire taxable income of of all persons who receive Maine state retirement every resident individual of this state. Me. Rev. Stat. allowances and are subject to income taxation by the Ann. tit. 36, § 5121 (1978) defines "entire taxable State of Maine, appeal from an order of the Superior income" as: federal adjusted gross income as defined in Court, Sagadahoc County, granting the defendant's the laws of the United States with the modifications and motion for summary judgment. We agree with the less the deductions and personal exemptions provided in decision of the Superior Court and affirm the judgment. this chapter. The Internal Revenue Code defines adjusted gross income as gross income minus enumerated 1 The case was certified as a class action deductions, none of which apply to the retirement pursuant to M.R. Civ. P. 23 on July 11, 1980. The benefits in excess of employees' contributions at issue court's order certified the class to be "all persons here. I.R.C. § 62. The Code clearly includes income receiving Maine State Retirement benefits who derived from pensions and retirement allowances in an are subject to income taxation by the State of individual's federal gross income. I.R.C. § 61(a)(11). Maine, not excluding those who are not presently taxed on said retirement benefits under federal law." Governments > Legislation > Expirations, Repeals & Suspensions [**2] Following the state tax assessor's decision on [HN4] The court will find a repeal by implication when a the petition of the plaintiffs for reconsideration, the later enactment encompasses the entire subject matter of plaintiffs instituted this action against the assessor in the an earlier act, or when a later statute is inconsistent with Superior Court. The plaintiffs sought review of the or repugnant to an earlier statute. When a later statute assessor's determination that Maine state retirement does not cover the earlier act in its entirety, but is benefits and allowances in excess of employees' inconsistent with only some of its provisions, a repeal by contributions were subject to state income tax. The implication occurs to the extent of the conflict. complaint also alleged the plaintiffs' federal and state constitutional rights to due process, freedom of contract, and equal protection had been violated by the assessor's Constitutional Law > Congressional Duties & Powers > decision. Contracts Clause > General Overview Governments > State & Territorial Governments > Both parties moved for summary judgment, neither Legislatures presenting issues of fact for resolution. The Superior [HN5] The legislature shall never, in any manner, Court granted the defendant's motion, deciding that by suspend or surrender the power of taxation. Me. Const. enactment of the state income tax in 1969, the legislature Page 3 485 A.2d 957, *958; 1984 Me. LEXIS 856, **2 impliedly repealed 5 M.R.S.A. § 1003 (Supp. 1984), attachment, assignment or other process." 5 which exempted state retirement benefits from taxation. M.R.S.A. § 1003 (Supp. 1984). The court found that the "enactment of a comprehensive system of taxation 'completely covers' the subject matter The precise question presented is whether enactment of state income taxation and its exemptions." The court of the state income tax system in 1969 repealed by further found that by adopting the specific federal implication the exempt status of state retirement benefits. definition of "income," the legislature intended to repeal [HN3] Title 36 M.R.S.A. § 5111 imposes a tax "for each section 1003. Additionally, the court [**3] held that taxable year on the entire taxable income of every subsection 11 of 36 M.R.S.A. § 5102 bars reference to 5 resident individual of this State." 36 M.R.S.A. § 5111 M.R.S.A. § 1003 to support a different meaning for a (Supp. 1984). Section 5121 of title 36 defines "entire term used in the income tax statutes. 2 Finally, the court taxable income" as: found the [*959] plaintiffs' constitutional and contract claims to be without merit. federal adjusted gross income as defined in the laws of the United States with the 2 [HN1] Subsection 11 provides in pertinent modifications [**5] and less the part: deductions and personal exemptions provided in this chapter. 11. Other terms. Any other term used in this Part has the same 36 M.R.S.A. § 5121 (1978). The Internal Revenue Code meaning as when used in a defines adjusted gross income as gross income minus comparable context in the laws of enumerated deductions, none of which apply to the the United States relating to federal retirement benefits in excess of employees' contributions income taxes, unless a different at issue here. See I.R.C. § 62. The Code clearly includes meaning is clearly required. income derived from pensions and retirement allowances in an individual's federal gross income. I.R.C. § 36 M.R.S.A. § 5102, subsec. 11 (Supp. 1984). 61(a)(11). None of the modifications, deductions, or personal exemptions provided by chapter 805 of title 36 This case involves the continued vitality of the first involves state retirement allowances. See 36 M.R.S.A. §§ paragraph of 5 M.R.S.A. § 1003, originally enacted in 5122, 5123, 5124-A, 5125, 5126 (1978 & Supp. 1984). essentially its present form in 1942, when the Maine state retirement system was instituted. 3 [HN2] The section [HN4] This court will find a repeal by implication states in pertinent part: when a later enactment encompasses the entire subject matter of an earlier act, or when a later statute is The right of a person to a retirement inconsistent with or repugnant to an earlier statute. State allowance, such retirement allowance v. London, 156 Me. 123, 127, 162 A.2d 150, 152 (1960); itself, to the return of contributions, any accord State ex rel. Tierney v. Ford Motor Co., 436 A.2d optional benefit or death benefit or any 866, 871 (Me. 1981). When a later statute does not cover other right [**4] accrued or accruing to the earlier act in its entirety, but is inconsistent with only any person under this chapter, and the some of its provisions, a repeal by implication occurs moneys in the various funds created [**6] to the extent of the conflict. State v. London, 156 thereby, shall be exempted from any state, Me. at 128, 162 A.2d at 153. county or municipal tax in the State . . . . We find no merit in the plaintiffs' contention that 5 M.R.S.A. § 1003 (Supp. 1984). there is no inconsistency between the statutes on which to premise an implied repeal of section 1003. Relying on 3 Section 1003 was amended in 1983 by the subsection 11 of 36 M.R.S.A. § 5102, the plaintiffs claim addition of a second paragraph providing for the that section 1003 "clearly requires" a different meaning availability of state retirement allowances "to than that ascribed to "entire taxable income" by the laws satisfy child support obligations otherwise of the United States. We agree with the Superior Court's enforceable by execution, garnishment, holding that the subsection 11 language "unless a Page 4 485 A.2d 957, *959; 1984 Me. LEXIS 856, **6 different meaning is clearly required" applies only to the comprehensive system of state income taxation that tax statutes in title 36 M.R.S.A. 4 The legislature's pre-empted the entire area, wherever in the revised statute adoption in section 5121 of the federal definition of reference may be found. "adjusted gross income," which incontrovertibly includes retirement allowances, is patently contrary to the 1942 This court has never favored finding the implied exemption. repeal of one statute by another and will not uphold such a result in a dubious case. State v. London, 156 Me. at 4 We do not, however, perceive subsection 11 126, 162 A.2d at 152; accord State ex rel. Tierney v. to command our passive acceptance of all Ford Motor Co., 436 A.2d at 871. In this case there is no interpretations of language in the federal statute as question that the adoption of the federal definition of pronounced by federal tribunals. Central Maine "adjusted gross income" is clearly inconsistent with the Power Co. v. Public Utilities Commission, 382 1942 exemption from state tax in section 1003. 5 We A.2d 302, 320 (Me. 1978). therefore give effect to the later statute as the most recent expression of the legislative will. State v. London, 156 [**7] In Tiedemann v. Johnson, this court discussed Me. at 128-29, 162 A.2d at 153-54 (quoting Knight v. the legislative intent behind the adoption of federal Aroostook River Railroad Co., 67 Me. 291, 293 (1877)). adjusted gross income as the standard by which "entire taxable income" would be measured in Maine, 5 Our decision has no effect on the remaining concluding: provisions of section 1003; the section is repealed by implication only to the extent of the conflict [*960] The Legislature intended to with the 1969 enactment. resolve, a priori, semantic conflicts such as those suggested by the bare words of [**9] The plaintiffs argue that a repeal of section the statute. As evidence of this intent, the 1003 would amount to a breach of contract, on the theory Legislature did not undertake creation of a that the tax-exempt status of their retirement benefits is unique or complicated income tax scheme. an essential term of their "contractual" retirement plan Nor did it provide the vast administrative arrangement with the state. They also argue that an machinery which would be necessary to implied repeal of section 1003 deprives the plaintiffs of supply the interpretive and investigative property without due process and violates the plaintiffs' functions of the Internal Revenue Service. equal protection right. Even if we were to find the We think . . . that our Legislature sought exemption to be a contractual right of state employment, to foreclose the necessity for the legislative grant of such a right would violate the determination of the "source, nature or Maine Constitution, which states: [HN5] "The composition of the funds." Legislature shall never, in any manner, suspend or surrender the power of taxation." Me. Const. art. 9, § 9. 316 A.2d 359, 364 (Me. 1974) (quoting Katzenberg v. We cannot presume the legislature would intentionally Comptroller of the Treasury, 263 Md. 189, 282 A.2d 465, enact a statute that would contract away the power to tax 473 (1971)). on a permanent basis. We hold that the plaintiffs have no contractual entitlement to tax-exempt retirement benefits; The plaintiffs contend that our determination of the we therefore need not reach the plaintiffs' constitutional legislature's intent in Tiedemann applies only to title 36 challenges. and does not affect the exemptions of 5 M.R.S.A. § 1003. We find the plaintiffs' construction of "semantic conflicts The entry is: such as those suggested by the bare words [**8] of the Judgment affirmed. statute" too narrow. The legislature in 1969 enacted a Page 1 W. A. BOLTON, Respondent, v. TERRA BELLA IRRIGATION DISTRICT, Appellant Civ. No. 215 COURT OF APPEAL OF CALIFORNIA, FOURTH APPELLATE DISTRICT 106 Cal. App. 313; 289 P. 678; 1930 Cal. App. LEXIS 525 June 9, 1930, Decided SUBSEQUENT HISTORY: [***1] A Petition for a free from the lien of the district assessments. The court Rehearing of this Cause was Denied by the District Court determined that the purchaser acquired the land by virtue of Appeal on June 30, 1930, and a Petition by of Cal. Pol. Code § 3785, which provided that a deed Respondent to have the Cause Heard in the Supreme could not be delivered until redemption was made of all Court, after Judgment in the District Court of Appeal, taxes of any previous delinquency and that such deed was was Denied by the Supreme Court on August 7, 1930. subject to the provisions of Cal. Pol. Code § 3787. The court found that § 3787 provided that title would pass by PRIOR HISTORY: APPEAL from a judgment of the the deed and that district taxes were an exception to the Superior Court of San Diego County. S. M. Marsh, clear title. The court concluded that aside from § 3787, Judge. there was no statute providing that an unencumbered deed passed to the purchaser from the tax sale and in the DISPOSITION: Reversed. absence of statutes providing otherwise, the deed was subject to all existing liens, including the district's CASE SUMMARY: assessment liens. OUTCOME: The court reversed a judgment against the PROCEDURAL POSTURE: Appellant irrigation irrigation district's lien on property acquired by the district challenged an order from the Superior Court of purchaser from a tax sale. San Diego County (California), which in respondent purchaser's partition action against his partner and the CORE TERMS: deed, irrigation district, levied, state district, adjudicated that the district had no lien upon land taxes, tax deed, tax sales, delinquent, county taxes, acquired by the purchaser and his partner in a tax sale. legislative intent, encumbrances, collected, purchaser, delegated, convey, public agency, tax collector, legal OVERVIEW: The purchaser acquired land in a tax sale rights, statutory construction, conveyed, quiet, municipal, and commenced an action against his partner and the general laws, state government, power of taxation, irrigation district seeking, inter alia, to quiet his title to equitable relief, real property, incorporating, irrigation, the property as against the district's lien for the prior grantee, annual owner's delinquencies in the payment of assessments. The lower court found that the district had no lien against LexisNexis(R) Headnotes the property. On appeal, the court reversed the judgment holding that the purchaser did not take title to the land Page 2 106 Cal. App. 313, *; 289 P. 678, **; 1930 Cal. App. LEXIS 525, ***1 Governments > State & Territorial Governments > having no personal interest in it, or with its concerns, and Legislatures only acting as organs of the state in effecting a great Tax Law > State & Local Taxes > Administration & public improvement, it is a public corporation. Proceedings > Tax Liens Tax Law > State & Local Taxes > Real Property Tax > Tax Law > State & Local Taxes > Administration & Assessment & Valuation > General Overview Proceedings > Assessments [HN1] Section 40 of the Irrigation District Act provides Tax Law > State & Local Taxes > Administration & that the assessment upon land is a lien against the Proceedings > Tax Liens property assessed from and after the first Monday in Tax Law > State & Local Taxes > Sales Tax > General March for any year. County taxes also become a lien on Overview the first Monday in March in each year. Cal. Pol. Code § [HN3] Where a statute makes the state taxes a superior 3718. An irrigation district is a public agency of the state. lien to municipal taxes or local assessments, or where The legislature can without referring the matter to local both classes of taxes are to be collected in the same authority, institute and carry out projects, having manner and by the same proceedings, those of the latter purposes similar to those of an irrigation district. The class will be cut off and their lien extinguished by a sale legislature has power to determine how revenues shall be for state taxes in which the local taxes or assessments levied and collected, whether by the state itself or by might have been included. But otherwise the purchaser local legislative or administrative agencies. The county is will take subject to existing taxes of the inferior class. an agency of the state for performing certain functions of government. The legislature has likewise provided for, and authorized, irrigation districts to carry out another Governments > Public Improvements > Assessments function of government. Governments > State & Territorial Governments > Legislatures Tax Law > State & Local Taxes > Real Property Tax > Governments > Local Governments > Elections General Overview Governments > Public Improvements > General [HN4] An irrigation district assessment, although it is an Overview annual charge, it is an assessment for benefits. The Tax Law > State & Local Taxes > Real Property Tax > legislature is authorized to apportion the amount of Assessment & Valuation > General Overview money to be raised in order to meet the expenses of an [HN2] For the purpose of meeting the cost of acquiring improvement according to either the ad valorem or property, the district is authorized, upon the vote of a assessment according to benefits plan, or to adopt any majority of its electors, to issue its bonds, and these principle of apportionment which might be devised under bonds and the interest thereon are to be paid by revenues the sovereign power of taxation. derived under the power of taxation, and for which all the real property in the district is to be assessed. Under this power of taxation, one of the highest attributes of Real Property Law > Financing > Secondary Financing sovereignty, the title of the delinquent owner of the real > Lien Priorities estate assessed, may be divested by sale, and power is Tax Law > State & Local Taxes > Administration & conferred upon the board of directors to establish Proceedings > Tax Liens equitable by-laws, rules, and regulations for the Tax Law > State & Local Taxes > Real Property Tax > distribution and use of water among the owners of said General Overview lands, and generally to perform all such acts as shall be [HN5] A lien for unpaid taxes or assessments is superior necessary to fully carry out the purpose of the act. Here to all contract liens, whether prior or subsequent in time. are found the essential elements of a public corporation, But even a tax lien is not entitled to rank ahead of a none of which pertain to a private corporation. The preexisting mortgage or other contract lien, unless the property held by the corporation is in trust for the public, legislative enactment creating the tax lien has given it and subject to the control of the state. Its officers are priority. It is competent for the legislature to make taxes a public officers, chosen by the electors of the district, and paramount lien on the property of the taxpayer, the invested with public duties. Where a corporation is consequence being that a lien for taxes takes precedence composed exclusively of officers of the government, of every other lien or claim upon the property of Page 3 106 Cal. App. 313, *; 289 P. 678, **; 1930 Cal. App. LEXIS 525, ***1 whatsoever kind, however created, and whether attaching [HN8] Cal. Pol. Code § 3787 was amended to provide before or after the assessment of taxes. But this that the deed under Cal. Pol. Code § 3785 conveys to the preference does not belong to the tax lien unless it is so state the absolute title to the property described therein, declared by statute, and a law, for example, which merely free of all encumbrances, except any lien for taxes levied enacts that taxes shall be a lien on real property does not for municipal, or for irrigation, reclamation, protection, make them a first lien. flood control, public utility or other district purposes, or for special assessments which are collected on tax-rolls, and except any lien or assessment for other amounts Tax Law > State & Local Taxes > Real Property Tax > which by law are collected upon tax-rolls by or for Collection > Tax Deeds & Tax Sales account of municipalities, and except interest and [HN6] Cal. Pol. Code §§ 3764 and 3771 provide for a penalties on the same, and other amounts which would be sale by the tax collector direct to an individual. Cal. Pol. paid municipalities or for their account in the event of Code § 3785b provides the form of a deed where real redemption of such property from sales for such taxes, property should be sold to an individual instead of to the assessments or other amounts, and except when the land state and also provides that such deed should not be is owned by the United States or this state. delivered until redemption has been made of all taxes and penalties of any previous tax sale or delinquency. It further provides that the provisions of Cal. Pol. Code §§ Real Property Law > Deeds > Types > Tax Deeds 3786 and 3787 are made applicable to the deed herein Tax Law > State & Local Taxes > Real Property Tax > provided for. General Overview [HN9] The phrase "such deed," with which both Cal. Pol. Code §§ 3786 and 3787 begin, must, in the present Real Property Law > Title Quality > General Overview condition of the code, be understood to refer both to the Tax Law > State & Local Taxes > Administration & deed authorized by Cal. Pol. Code § 3785 and to that Proceedings > Tax Liens authorized by Cal. Pol. Code § 3785b. Tax Law > State & Local Taxes > Real Property Tax > Assessment & Valuation > General Overview [HN7] Cal. Pol. Code § 3786 provides that the deed Governments > Legislation > Effect & Operation > under Cal. Pol. Code § 3785 is primary evidence of Amendments certain things set forth in that section. Cal. Pol. Code § Governments > Legislation > Interpretation 3787 provides that such deed is conclusive evidence of [HN10] When one statute by reference incorporates certain other proceedings, and also provides what title another, the effect is as though the wording of the shall pass by the deed. In 1913, that portion was amended incorporated statute had been written at length into the to provide that taxes levied for municipal purposes should incorporating statute, and that no subsequent amendment be an additional exception to the clear title passed by or repeal of the statute incorporated has any effect upon such a deed. In 1917 that portion of § 3787 was again the incorporating statute. amended to include irrigation district taxes as an additional exception, and to provide that such deed Governments > Legislation > Interpretation conveys to the state the absolute title to the property Governments > Legislation > Special Acts described therein, free of all encumbrances, except any [HN11] It is a rule of statutory construction that the lien of taxes levied for municipal or irrigation district adoption in one statute, for the purpose of carrying its purposes and except when the land is owned by the provisions into effect, of the provisions of another statute United States or this state. by reference thereto, does not include subsequent modifications of these provisions in the statute referred Tax Law > State & Local Taxes > Administration & to, unless a clear intent to do so is expressed. This rule is Proceedings > Assessments subject to a qualified exception in cases of the adoption Tax Law > State & Local Taxes > Administration & into a special act of the provisions of law then in force by Proceedings > Tax Liens virtue of general laws. In such cases, subsequent Tax Law > State & Local Taxes > Public Utilities Tax > modifications of the general law will be deemed to be General Overview within the intent of such adoption, so far as they are Page 4 106 Cal. App. 313, *; 289 P. 678, **; 1930 Cal. App. LEXIS 525, ***1 consistent with the purposes of the particular act. A of irrigation districts. The word includes both general repeal of the adopted statute will not take from the taxes and special assessments. adopting statute the operative force of these provisions, so far as they may be necessary to carry the later statute Governments > State & Territorial Governments > into effect, but these provisions will be regarded as if Legislatures they had been originally incorporated therein at length. Tax Law > State & Local Taxes > Real Property Tax > Under the same principles, any amendment of these General Overview provisions of the statute thus adopted, whether it be a Tax Law > State & Local Taxes > Sales Tax > General particular act or a general law, which so far modifies Overview them as to subvert the purpose of the statute by which [HN16] Section 46 of the California Irrigation District they were adopted, will be regarded in the same light as a Act provides that on filing the certificates of sale with repeal. such county recorder the lien of the assessments vests with the purchaser, and is only divested by the payment Governments > Legislation > Interpretation to him, or to the collector for his use, of the purchase [HN12] The main object of all statutory construction is to money. ascertain the legislative will, and, as it is to be assumed that the legislature intends its acts to have effective Governments > State & Territorial Governments > operation, such amendments will not be construed as Property depriving the adopting statute of all effect, unless there is Tax Law > State & Local Taxes > Real Property Tax > a clear necessity for such construction. General Overview [HN17] The constitution and laws upon the subject of Governments > State & Territorial Governments > taxing property are to be understood as referring to Property private property and persons, and not including public Tax Law > State & Local Taxes > Real Property Tax > property of the state, or any subordinate part of the state Collection > General Overview government. Statutes authorizing liens on or forced sales Tax Law > State & Local Taxes > Sales Tax > General of property, generally, will not be held applicable to Overview public property, unless the intention to make them so [HN13] The provisions of Cal. Pol. Code § 3787 are, by expressly or plainly appears. Cal. Pol. Code § 3785b, expressly made applicable to deeds executed by the tax collector conveying lands sold Tax Law > State & Local Taxes > Administration & to the state to purchasers after the five-year period of Proceedings > General Overview redemption. No exceptions are there noted. [HN18] An individual must stand upon his legal rights and cannot ask for equitable relief against taxes Governments > Legislation > Interpretation authorized by the state. [HN14] A statute should always be so construed, if reasonably possible, as to give each part thereof the HEADNOTES meaning and effect, which from the act as a whole, appears to have been intended. CALIFORNIA OFFICIAL REPORTS HEADNOTES (1) Taxation--Irrigation Districts--State Agencies. -- Tax Law > State & Local Taxes > Administration & --An irrigation district is a public agency of the state; and Proceedings > Assessments the legislature has the power to provide for, and Tax Law > State & Local Taxes > Administration & authorize, irrigation districts to carry out an irrigation Proceedings > Tax Liens project, and to determine how revenues shall be levied Tax Law > State & Local Taxes > Real Property Tax > and collected, whether by the state itself or by local Assessment & Valuation > General Overview legislative or administrative agencies. [HN15] The word "taxes" as used in the 1917 amendment to Cal. Pol. Code § 3787 refers to the annual assessments (2) Id.--Tax Deeds--Priority--Legislative Intent. -- --Where an individual claiming title under a tax deed Page 5 106 Cal. App. 313, *; 289 P. 678, **; 1930 Cal. App. LEXIS 525, ***1 from the county tax collector is seeking to quiet title The facts are stated in the opinion of the court. against assessments levied by an agency created and empowered to levy assessments by authority delegated COUNSEL: Farnsworth, Burke & Maddox for from the state, his claims must rest on his strict legal Appellant. rights, and these depend upon the proper interpretation of statutory enactments, and the question of priority is one Herbert C. Kelly for Respondent. of legislative intent. Hankins & Hankins, Griffin & Boone, A. L. Cowell and (3) Id.--Statutory Construction--Reading Sections Charles L. Childers, as Amici Curiae. Together. -- --In giving effect to the plain intent of the legislature it is necessary to read the various code JUDGES: BARNARD, J. Marks, Acting P. J., and sections relating to taxation and tax sales together and in Beaumont, J., pro tem., concurred. relation to each other, and they are to be construed, if reasonably possible, so as to give each part thereof the OPINION BY: BARNARD meaning and effect which, from the sections as a whole, appears to have been intended. OPINION (4) Id.--Tax Deed--Excepted Liens. -- --While an [**679] [*314] BARNARD, J. This action is in assessment is not in all respects the same as a tax, it has form one of partition, although the plaintiff seeks to quiet many of the same qualities; and as used in the 1917 his title against the defendants. On June 30, 1924, amendment to section 3787 of the Political Code, the plaintiff, with one T. G. Kelly, purchased at a tax sale a word "taxes" refers to and includes annual assessments of parcel of land situated within the borders of Terra Bella irrigation districts, as well as general taxes; and under Irrigation District, in Tulare County, California. The land said section a tax deed from the county tax collector is was sold for delinquent county taxes of the fiscal year subject to irrigation district assessments. 1918-19, and said purchasers received a deed from the county tax collector of Tulare County. It is admitted (5) Id.--Existing Liens--Statutory Construction. -- [***2] that all proceedings leading [*315] up to and --An individual cannot wipe out a part of the taxes or included within this sale were regular and valid in all assessments legally levied under authority of the state respects. Commencing with the year 1918 and up to and government, unless that result clearly and expressly including the year 1924, Terra Bella Irrigation District appears to be authorized by statute, and any doubt has to had in each and every year levied assessments for district be resolved in favor of the public institution and against purposes on said land. No part of these assessments has the individual. even been paid and at the date of the above-mentioned sale, they were all delinquent. From year to year the land (6) Id.--Quieting Title--Equitable Relief--Legal Rights. was noticed for sale for these delinquencies, and -- --In an action by an individual claiming title under a certificates of sale therefor were delivered to said tax deed from the county assessor to quiet title as against Irrigation District in accordance with the Irrigation the lien of unpaid irrigation district assessments, the District Act, but no deed has yet been passed. Plaintiff plaintiff must stand upon his legal rights and cannot ask commenced this action against the said T. G. Kelly and for equitable relief against taxes authorized by the state. numerous other defendants for the partition of a number of pieces of land, including the land above referred to, (7) Id.--Priority--Constitutional Law. -- --The seeking to quiet his title to the same, and joining the amendment of 1917 to section 3787 of the Political Code appellant Irrigation District as a party defendant, as providing that irrigation district taxes shall be excepted claiming a lien on the particular parcel referred to. The from the absolute title to be conveyed by a tax deed from defendant Terra Bella Irrigation District appeared and set the county assessor does not give a priority to irrigation up its lien for the unpaid assessments levied by it, as district taxes over state taxes, and said section as thus aforesaid. Defendant Kelly joined with plaintiff against amended is not unconstitutional as being in violation of the Terra Bella Irrigation District. [***3] After a trial article XII, section 6, of the state Constitution. upon stipulated facts, the trial court adjudged that as against the plaintiff and T. G. Kelly, the defendant Terra SYLLABUS Bella Irrigation District has no lien upon the land and Page 6 106 Cal. App. 313, *315; 289 P. 678, **679; 1930 Cal. App. LEXIS 525, ***3 entered its interlocutory decree accordingly. The trust for the public, and subject to the control of the state. defendant Irrigation District has appealed from that Its officers are public officers, chosen by the electors of portion of the decree. the district, and invested with public duties. Its object is for the good of the public, and to promote the prosperity The only question herein presented is whether or not and welfare of the public. 'Where a corporation is a purchaser of land upon a sale thereof for delinquent composed exclusively of officers of the government, county taxes, takes title thereto free from any lien for having no personal interest in it, or with its concerns, and delinquent irrigation district taxes or assessments levied only acting as organs of the state in effecting a great on the same land. public improvement, it is a public corporation.' (Angell and Ames on Corporations, sec. 32.)" [HN1] Section 40 of the Irrigation District Act provides, "The assessment upon land is a lien against the Such districts have been held to be public agencies. ( property assessed from and after the first Monday in Lindsay-Strathmore Irr. Dist. v. Superior Court, 182 Cal. March for any year." (Henning's Gen. Laws, p. 1255.) 315 [187 P. 1056].) In the case of Whiteman v. County taxes also become a lien on the first Monday in Anderson-Cottonwood Irr. Dist., 60 Cal. App. 234 [212 March in each year. (Sec. 3718, Pol. Code.) (1) An P. 706, 708], the court said: irrigation district is a public agency of the state. It has been held that the legislature could, without referring the "In fact, it has been consistently held by the Supreme matter to local authority, institute and carry out projects, Court from the beginning, [***6] that these districts having purposes similar to those of an irrigation district. ( created under [*317] the elaborate scheme devised for People v. Sacramento Drainage Dist., 155 Cal. 373 [103 their organization and operation by the legislature are P. 207].) The legislature has [***4] power to determine public agencies for the promotion of a public purpose." how revenues shall be levied and collected, [*316] whether by the state itself or by local legislative or The general rule in reference to the relation of state administrative agencies. The county is an agency of the taxes to local assessments is thus put in 37 Cyc. 1478. state for performing certain functions of government. The [HN3] "Where the statute makes the state taxes a legislature has likewise provided for, and authorized, superior lien to municipal taxes or local assessments, or irrigation districts to carry out another function of where both classes of taxes are to be collected in the government. In the case of In re Madera Irr. Dist., 92 same manner and by the same proceedings, those of the Cal. 296 [27 Am. St. Rep. 106, 14 L. R. A. 755, 28 P. latter class will be cut off and their lien extinguished by a 272, 675], [**680] in discussing the nature and powers sale for state taxes in which the local taxes or assessments of an irrigation district the court said: might have been included. But otherwise the purchaser [HN2] "For the purpose of meeting the cost of will take subject to existing taxes of the inferior class." acquiring this property, the district is authorized, upon the It is true that [HN4] an irrigation district assessment, vote of a majority of its electors, to issue its bonds, and although it be an annual charge, has been usually these bonds and the interest thereon are to be paid by interpreted as an assessment for benefits. ( San Diego v. revenues derived under the power of taxation, and for Linda Vista Irr. Dist., 108 Cal. 189 [35 L. R. A. 33, 41 P. which all the real property in the district is to be assessed. 291]; In re Madera Irr. Dist., supra; Barber v. Galloway, Under this power of taxation, -- one of the highest 195 Cal. 1 [231 P. 34].) In referring to the method used attributes of sovereignty, -- the title of the delinquent by irrigation districts in making assessments, the owner of the real estate assessed, may be divested by Supreme Court has said: sale, and power is conferred upon the board of directors to establish equitable by-laws, rules, and regulations for ". . . this court [***7] . . . basing its decision upon the distribution and use of [***5] water among the the very early case of Emery v. San Francisco, 28 Cal. owners of said lands, and generally to perform all such 345, as approved in the case of In re Madera Irr. Dist., 92 acts as shall be necessary to fully carry out the purpose of Cal. 296 [27 Am. St. Rep. 106, 14 L. R. A. 755, 28 P. the act. Here are found the essential elements of a public 272, 675], . . . held that the legislature was authorized to corporation, none of which pertain to a private apportion the amount of money to be raised in order to corporation. The property held by the corporation is in meet the expenses of the improvement according to either Page 7 106 Cal. App. 313, *317; 289 P. 678, **680; 1930 Cal. App. LEXIS 525, ***7 the ad valorem or assessment according to benefits plan, the property free from any other lien basing its decision or to adopt any principle of apportionment which might upon the statute as it then existed, which provided that be devised under the sovereign power of taxation." ( such deed conveys to the grantee the absolute title to the County of Los Angeles v. Hunt, 198 Cal. 753 [247 P. 897, land described therein free of all encumbrances except 902].) the lien for taxes which may have attached subsequent to the sale. This case also held that while it is within the In the Municipal Utility Act (Stats. 1921, p. 245), the power of the legislature to make the lien of taxes distinction between assessments and taxes is entirely paramount to all other liens upon the land, so that when a eliminated. Under that act its so-called assessments sale is made the purchaser takes title free from all become taxes and are collected with other taxes. While encumbrances, whether or not this state has so provided county taxes are made up of a composite rate for general is to be determined [***10] only by its statutes, the court purposes, for road districts, for school districts and for a saying: "As this matter, the power being conceded, number of other purposes, irrigation taxes are not depends for its determination entirely upon statutory included. It is true, however, that such assessments are enactment, adjudications [*319] in sister states will be levied by an agency created by the state for a public of little value unless based upon identical laws." purpose, and under an authority delegated by the state. While the cases [***8] have referred to the annual (2) This case being one where an individual is [*318] assessments levied by an irrigation district as seeking to quiet title against assessments levied by an assessments rather than as taxes, they are in many agency created and empowered to levy assessments by respects more like county taxes than like assessments for authority delegated from the state, his claims must rest on street improvements or assessments for the benefit of his strict legal rights and these depend upon the proper other particular property. While general county taxes are interpretation of statutory enactments. The question of often referred to as state taxes, as a matter of fact, no priority is one of legislative intent. In Guinn v. taxes for purely state purposes have been levied on real McReynolds, 177 Cal. 230 [170 P. 421, 422], the court estate in California since 1911, but all general taxes have said: been levied by authority delegated from the state, either to the county or some other subdivision or district. [HN5] "A lien for unpaid taxes or assessments is During the same time there has also been apparent a generally held to be superior to all contract liens, whether growing tendency, as shown by the statutes adopted by prior or subsequent in time. But the authorities declare, the legislature, to treat the taxes or assessments levied virtually without dissent, that even a tax lien is not under such delegated authority as equal. entitled to rank ahead of a preexisting mortgage or other contract lien, unless the legislative enactment creating the The respondent relies upon the decisions in a number tax lien has given it priority," citing 37 Cyc. 1143, where of cases from other jurisdictions and in such cases as the rule is stated thus: Dougherty v. Henarie, 47 Cal. 9, and California Loan etc. Co. v. Weis, 118 Cal. 489 [50 P. 697, 699]. In "It is competent for the legislature to make taxes a Dougherty v. Henarie the court held that a deed based paramount lien on the property [***11] of the taxpayer, upon a tax sale transferred the title free from all prior and this has been done in many states, the consequence liens for taxes or assessments. This [**681] decision being that a lien for taxes takes precedence of every other [***9] was based on a statute then existing which lien or claim upon the property of whatsoever kind, provided that the tax deed "shall convey to the grantee however created, and whether attaching before or after the absolute title to the lands described in said deed, free the assessment of taxes. But this preference does not and clear of all encumbrances, liens, claims, rights, titles belong to the tax lien unless it is so declared by statute, and interest of every kind, of any person or persons . . . and a law, for example, which merely enacts that taxes excepting only the right and title of the United States or shall be a lien on real property does not make them a first of the State of California," and further that "all right, title, lien." interest, claim, and possession acquired by any Again in the case of Guinn v. McReynolds the court individual, corporation, or body politic has been said: subrogated to the grantee." In California Loan etc. Co. v. Weis, supra, the court also held that a tax deed conveyed "In dealing with taxes or assessment liens, as with Page 8 106 Cal. App. 313, *319; 289 P. 678, **681; 1930 Cal. App. LEXIS 525, ***11 others, our decisions have recognized that the question of "Such deed conveys to the state the absolute title to priority is one of legislative intent." the property described therein, free of all encumbrances, except any lien for taxes levied for municipal, or for There is no statute making county taxes paramount irrigation, [**682] reclamation, protection, flood to irrigation district assessments in the sense here control, public utility or other district purposes, or for claimed, unless this results from a proper interpretation of special assessments which are collected on tax-rolls, and those sections of the Political Code governing deeds except any lien or assessment for other amounts which by given to an individual in pursuance of sales whereby law are collected upon tax-rolls by or for account of former owners have been divested of title for nonpayment municipalities, and except interest and penalties on the of taxes. same, and other amounts which would be paid municipalities or for their account in the event of Prior to 1913 all sales for delinquent state and county redemption of such property from sales for such taxes, taxes were made only to the state, the form of such a deed assessments or other amounts, and except when the land to the state being provided in section 3785 of the Political is owned by the United [***14] States or this state . . ." [***12] Code. In 1913, [HN6] sections 3764 and 3771 of the Political Code [*320] were amended to provide also [*321] Section 3785b was amended in 1925 to for a sale by the tax collector direct to an individual, and correct the reference therein to section 3771 of the same it is pursuant to such a sale that the respondent herein code. Prior to this change in 1925, 3785b had authorized claims title. In 1913 section 3785b was added to the same a deed whenever a sale had been made to an individual, code, providing the form of a deed where real property "in pursuance of section 3771 of this code." But in 1921 should be sold to an individual instead of to the state, in the legislature had added 3771a to that code, and the accordance with the amendments of that year, and also provision authorizing a sale to an individual, instead of to providing that such deed should not be delivered until the state, which had previously been in section 3771, was redemption had been made of all taxes and penalties of then placed in the new section 3771a. any previous tax sale or delinquency. It further provided as follows: After the above-mentioned changes in 1913, the provisions of section 3787 of the Political Code referred "The provisions of sections 3786 and 3787 of this to the deed provided for in section 3785b, as well as to code are hereby made applicable to the deed herein that of section 3785. In Bernhard v. Wall, 184 Cal. 612 provided for." [194 P. 1040, 1045], the court defines the meaning of the phrase "such deed" as used in these sections, as follows: [HN7] Section 3786 has not since been amended and provides that such deed is primary evidence of certain "It is proper here to explain that [HN9] the phrase things set forth in that section. Section 3787 provides that 'such deed,' with which both sections 3786 and 3787 such deed is conclusive evidence of certain other begin, must, in the present condition of the code, be proceedings, and also provides what title shall pass by the understood to refer both to the deed authorized by section deed. In 1913, that portion was amended to provide that 3785 and to that authorized by section 3785b. When the taxes levied for municipal purposes should be an code was first enacted, and until the year 1909, the three additional exception to the clear title passed by such a sections -- [***15] 3785, 3786 and 3787 -- appeared deed. In 1917 that portion [***13] of section 3787 was therein in regular consecutive order, with no intervening again amended to include irrigation district taxes as an sections. The phrase 'such deed' in sections 3786 and additional exception, and then read as follows: 3787 then necessarily referred to section 3785, it being then the only section authorizing a tax deed. In 1909 "Such deed conveys to the state the absolute title to section 3785a, and in 1913 section 3785b, were the property described therein, free of all encumbrances, interpolated between section 3785 and section 3786, thus except any lien of taxes levied for municipal or irrigation giving rise to some uncertainty as to the particular deed district purposes and except when the land is owned by or deeds to which the phrase 'such deed' applied. We are the United States or this state . . ." satisfied that it now refers both to section 3785 and section 3785b, and applies to the deeds authorized by Again in 1927, [HN8] this section was amended so both sections." that that portion thereof reads as follows: Page 9 106 Cal. App. 313, *321; 289 P. 678, **682; 1930 Cal. App. LEXIS 525, ***15 While the court there mentions only the phrase "such Sutherland on Statutory Construction, sec. 257.) Under deed" in the first paragraph of the section, it is perfectly the same principles, any amendment of these provisions apparent that the same reasoning applies to the same of the statute thus adopted, whether it be a particular act phrase in the second paragraph thereof. or a general law, which so far modifies them as to subvert the purpose of the statute by which they were adopted, Respondent argues that it is a general rule that [***18] will be regarded in the same light as a repeal. [HN10] when one statute by reference incorporates [HN12] The main object of all statutory construction is to another, the effect is as though the wording of the ascertain the legislative will, and, as it is to be assumed incorporated statute had been written at length into the that the legislature [*323] intends its acts to have incorporating statute, and that no subsequent amendment effective operation, such amendments will not be or repeal of the statute incorporated has any effect upon construed as depriving the adopting statute of all effect, the incorporating statute. In support of this he cites unless there is a clear necessity for such construction." People v. Whipple [***16] , 47 Cal. 592; Spring [*322] Valley W. W. v. San Francisco, 22 Cal. 434; Ventura In the decisions relied upon by respondent the County v. Clay, 112 Cal. 65 [44 P. 488]; In re Burke, 190 Supreme Court has, of course, followed the [**683] Cal. 326 [212 P. 193]; Vallejo v. Reed, 177 Cal. 249 [170 intention of the legislature. In People v. Whipple, the P. 426]; Ramish v. Hartwell, 126 Cal. 443 [58 P. 920, incorporating statute in creating an office defined the 921]. He therefore argues that since the amendment to duties thereof by referring to another statute, and the section 3787, making irrigation district taxes an court held that a later repeal of the other statute did not additional exception to the clear title passed by such affect the incorporating statute as it, in effect, included deed, was adopted in 1917, and such a provision was not the words of the other statute within itself. Ventura Co. in that section in 1913 when the provisions of said v. Clay, 112 Cal. 65 [44 P. 488], involves a similar state section were by the terms of section 3785b made of facts. In Spring Valley W. W. v. San Francisco it was applicable to the deed therein authorized, this ipso facto held that the amendments made such a complete change gives priority to state taxes over irrigation district taxes. that the sections referred to were entirely insufficient to As we have heretofore noted, this depends upon cover the matter in question without the addition of other legislative intent. In Ramish v. Hartwell, supra, the court sections. In re Burke expressly reserves an opinion on the uses the following language: [***19] point now under discussion so far as the facts in that case are concerned. In Vallejo v. Reed, an entirely [HN11] "It is a rule of statutory construction that the new section of the number in question had later been adoption in one statute, for the purpose of carrying its adopted, which contained no vestige of the original provisions into effect, of the provisions of another statute section. We think that these cases are not controlling in by reference thereto, does not include subsequent the matter before us, and that the instant case comes modifications of these provisions in the statute referred rather under both of the exceptions mentioned in Ramish to, unless a clear intent to do so [***17] is expressed. v. Hartwell. This rule is subject to a qualified exception in cases of the adoption into a special act of the provisions of law then in Since sections 3786 and 3787 contained in 1913, and force by virtue of general laws. In such cases, subsequent still contain, all of the statutory provisions defining the modifications of the general law will be deemed to be effect of the deed in question and what title shall pass within the intent of such adoption, so far as they are thereby, including all of the general laws on that consistent with the purposes of the particular act. (See particular subject, it would seem to come under one of Kirk v. Rhoads, 46 Cal. 398.) A repeal of the adopted the exceptions noted. Also, a careful reading of all of the statute will not take from the adopting statute the sections involved seems to disclose a clear intent on the operative force of these provisions, so far as they may be part of the legislature to make amendments of section necessary to carry the later statute into effect, but these 3787 apply to section 3787b. Prior to 1913, section 3787 provisions will be regarded as if they had been originally referred to the deed to the state mentioned in section incorporated therein at length. ( Spring Valley W. W. v. 3785. An entirely new plan for disposing of land upon San Francisco, 22 Cal. 434; People v. Clunie, 70 Cal. which taxes had remained unpaid for five years was 504 [11 P. 775]; Collins v. Blake, 79 Me. 218 [9 A. 358]; introduced by the amendments of 1913, and section Darmstaetter v. Maloney, 45 Mich. 621 [8 N.W. 574]; 3785b was interpolated for the purpose of providing for Page 10 106 Cal. App. 313, *323; 289 P. 678, **683; 1930 Cal. App. LEXIS 525, ***19 the giving of a deed [***20] in accordance with such applies to his case as a separate law. Aside from section new plan. The fact that it made applicable to the new 3787 there is no statute providing what [*325] such a deed therein provided for, all of the statutory provisions deed as is relied on by respondent shall convey to him. In covering the title that should be conveyed thereby and the the absence of statutes providing otherwise, respondent's effect thereof, which had [*324] applied and which deed would be subject to all existing liens which would continued to apply to the other and older plan of deed to include the irrigation district assessment liens here in the state, which provisions were all set forth in sections question. Respondent is forced to rely upon section 3787 3786 and 3787, is a strong indication that it was the to place his title above other encumbrances. He does, in intention of the legislature to make the deed to an fact, place implicit reliance upon it, insisting, however, individual, in respect to the title conveyed, a counterpart that he is entitled to stand upon it as it existed in 1913. If, of the deed to the state. No good reason appears why the however, that section applied to his deed in 1924, it two deeds should be different, nor why the one to an applied as it stood in 1924, and his deed was subject to individual should convey more than the one to the state, taxes levied for irrigation district purposes. Irrespective and a reading of the code sections indicates that such was of whether this amendment was included in section not the legislative intent. Having in mind the purpose to 3785b by legislative intent, no reason appears why it is be accomplished, and the fact that a new deed was being not, of itself, an additional qualification of the effect of provided for, that otherwise followed the plan of the older respondent's deed. There is nothing in section 3785b, as it deed, the language used, "The provisions of sections stood in 1913, including its reference [***23] to section 3786 and 3787 of the code are hereby made applicable to 3787, which forbids the adoption of new qualifications of the deed herein provided for" lends some support to this the same deed. Section 3787, as it stood in 1924, applied view. It must also be borne in mind that the amendment to the deed relied on by respondent just as much as if the of 1917 made no change in the general purpose [***21] 1917 amendment thereto had been put into section 3785b, of section 3787, but merely included another item of the or adopted as an additional section of the code. same general nature. It is also most significant that when in 1925 it became necessary for the legislature to amend [**684] The fallacy of such an interpretation of section 3785b, in order to correct a reference therein to these various statutes as is insisted upon by respondent, is section 3771 of the Political Code, as hereinbefore seen from the fact that to take the exact language used, referred to, although section 3787 had in the meantime without regard to the real meaning and intent of the been amended by the insertion of the clause about legislature, and without allowing for obvious errors in irrigation district taxes, the provision now under changing certain sections without correcting co-related consideration was not changed. It would, therefore, seem sections, would necessarily result in the holding that that it was within the intention of the legislature in respondent has no deed at all, because he relies upon a adopting section 3785b in 1913, to include such an deed given in accordance with section 3785b of the amendment to 3787 as followed in 1917. Political Code, and insists that he is entitled to rely on that section absolutely as it stood in 1913, unaffected by In the case of Gottstein v. Holmes, 89 Cal. App. 145 later amendments of any other sections and governed by [264 P. 310, 311], decided in 1928, in passing upon a tax the strict language of that section alone. But he acquired sale made in 1923 when the law was the same as it was his deed under a sale made in 1924. At that time section when the sale here in question was made in 1924, the 3785b provided that when property had been sold to a court said: [HN13] "The provisions of section 3787 are, purchaser at delinquent tax sale, other than the state of by section 3785b, expressly made applicable to deeds California, in pursuance [***24] to section 3771 of that executed by the tax collector conveying lands sold to the code, a deed should be issued in the form set forth in said state to purchasers after the five-year period of section. But at that time section 3771 of this code did not redemption." No exceptions are there noted. provide for or authorize or contemplate any deed. In 1921 the law had been changed and the provision authorizing Even if it should be held that the amendment of such a deed had been moved from section 3771 to section section 3787 in 1917 did [***22] not become a part of 3771a of that code. section 3785b, through the reference provision therein, still section 3787 as amended in 1917, was in full force [*326] (3) In giving effect to the plain intent of the and effect at the time respondent's rights arose and legislature it is necessary to read the various sections Page 11 106 Cal. App. 313, *326; 289 P. 678, **684; 1930 Cal. App. LEXIS 525, ***24 together and in relation to each other. [HN14] "A statute narrow a construction of the language of the section. The should always be so construed, if reasonably possible, as source of all power to tax within the state, whether by the to give each part thereof the meaning and effect, which state, the city, the town, or the county, is the legislature. from the act as a whole, appears to have been intended." ( The legislature has the right to provide for the protection In re Reineger, 184 Cal. 97 [193 P. 81, 83].) (4) There of all such taxes. The policy of the law is to insure the can be no question that [HN15] the word "taxes" as used collection of all taxes. We must assume that the in the 1917 amendment to section 3787 refers to the legislature intended no conflict between the systems of annual assessments of irrigation districts. The word taxation provided by it for the several political divisions includes both general taxes and special assessments. ( Los above referred to. It could not have intended that a sale Angeles County F. C. Dist. v. Hamilton, 177 Cal. 119 for taxes by one division should cut off and nullify sales [169 P. 1028].) While an assessment is not in all respects made by other divisions for other taxes. The more the same as a tax, it has many of the same qualities of a reasonable [***27] construction of this section is one tax and an irrigation district assessment has been that preserves all liens for taxes, whether state, county, specifically given a lien [***25] on the real property town or city. All of these political subdivisions represent within the district, and the provisions of section 3787 of the people of the state, and their taxes are all claims of the Political Code make such a deed as is relied on by the the people of the state. This construction results in effect respondent, subject to irrigation district assessments. in the principle that no individual can secure a perfect title to real property, purchased upon a tax sale, without An additional reason why the irrigation district paying all taxes thereon imposed by any political assessment in question has not been wiped out by the tax subdivision of the state. This is a reasonable and salutary sale referred to is found in another express provision doctrine." adopted by the state legislature. In speaking of such assessments, [HN16] section 46 of the California In Webster v. Board of Regents, 163 Cal. 705 [126 P. Irrigation District Act says: 974, 976], in referring to a tax sale as against a mortgage held by the state the court said: ". . . on filing the certificates (of sale) with such County Recorder the lien of the assessments vests with "The rule applicable thereto is thus expressed in the purchaser, and is only divested by the payment to People v. Doe, 36 Cal. 220: [HN17] 'The Constitution him, or to the collector for his use, of the purchase money and laws upon the subject of taxing property, are, . . ." therefore, to be understood as referring to private property and persons, and not including public property While, as has been pointed out, the decisions of other of the state, or any subordinate part of the state states are of little value unless based upon similar government.' (See, also, People v. McCreery, 34 Cal. statutes, we desire to call attention to a decision from the 432; Low v. Lewis, 46 Cal. 549; Doyle v. Austin, 47 Cal. state of New York. The New York statute provided that a 353; Smith v. Santa Monica, 162 Cal. 221 [121 P. 920].) conveyance upon a sale of land for a state tax vested in The general [***28] rule applied in all such cases is that the grantee an absolute estate in fee, subject, however, to statutes authorizing liens on or forced sales of property, all of the claims which the people of the state had [**685] generally, will not be held applicable to public thereupon for taxes or other liens or encumbrances. We property, unless the intention to make them so expressly take it this statute is not essentially [***26] dissimilar or plainly appears." from our own in the respect under discussion, since an irrigation district is a public agency deriving its power to (5) In the absence of statutory provisions to the tax from the state itself. In Rochester v. Kapell, 86 A.D. contrary, the same reasoning would apply to an attempt 224 [83 N.Y.S. 640], affirmed in 177 N.Y. 533 [69 N.E. upon the part of an individual to wipe out a part of the 1121], the court said: taxes or assessments legally levied under authority of the state government. We think this cannot be done unless "The tax for the nonpayment of which the sale to that [*328] result clearly and expressly appears to be appellant was made included a state tax to be collected by authorized by statute. Any doubt would necessarily have the [*327] county, and it is claimed that the only tax to be resolved in favor of the public institution and liens which are preserved under the language of this against the individual. section, are pure state taxes. This, we apprehend, is too Page 12 106 Cal. App. 313, *328; 289 P. 678, **685; 1930 Cal. App. LEXIS 525, ***28 (6) In such an action as the one at bar, [HN18] an of California. No such priority is thus given. And no individual must stand upon his legal rights and cannot ask power of taxation has been thereby surrendered or for equitable relief against taxes authorized by the state. ( suspended by any grant or contract. Any such powers as Couts v. Cornell, 147 Cal. 560 [109 Am. St. Rep. 168, 82 have been delegated to irrigation districts by the P. 194]; Esterbrook v. O'Brien, 98 Cal. 671 [33 P. 765].) legislature may be at any time changed or withdrawn. In Imperial Land Co. v. Imperial Irr. Dist., 173 Cal. 660 [161 P. 113, 116], the court said: [*329] The respondent argues in reference to the two sorts of taxes here involved that a sale under one "The complaint contained no offer to pay the amount must of necessity extinguish the other. This does not due. 'It is now firmly settled by our decisions that [***29] necessarily follow, and we think that the legislature where a property owner applies for equitable relief intended to protect the interests of each of these agencies against the public authorities, as, for example, to restrain of the state government. The question before us is not as proceedings for the collection or enforcement of taxes to which party would get title if at the same time the land assessed against it, or to enjoin the execution of a tax was sold to one for delinquent county taxes, and to deed, or to cancel a lien or charge for taxes, of record another for delinquent irrigation district assessments. The against his land, and it appears that all or some part of the only question here involved is as to whether one who has tax charged is justly and equitably due from plaintiff, or purchased land at a general tax sale takes the title thereto chargeable upon the land, he must, as a condition of free from the lien of any irrigation district assessments obtaining such relief, first pay or offer to pay the amount [***31] which have theretofore been levied against it. justly due, or he must be required to do so before the This being entirely a matter of legislative enactment, relief to which he shows himself entitled is given.' (Citing under the statutes controlling in this case, we are of the cases.) The principle has been applied to an action to opinion that he does not. enjoin a sale of land for delinquent assessments of an irrigation district organized under the Wright Act, in For the reasons given it follows that the portion of force prior to the enactment of the statute here involved." the interlocutory decree appealed from should be reversed, and it is so ordered. (7) It is further urged that the amendment of 1917 to section 3787 of the Political Code providing that Marks, Acting P. J., and Beaumont, J., pro tem., irrigation district taxes shall be excepted from the concurred. absolute title to be conveyed by the sort of deed here in A petition for a rehearing of this cause was denied by question, is unconstitutional. The only point raised in the District Court of Appeal on June 30, 1930, and a addition to those which have been frequently passed upon petition by respondent to have the cause heard in the by our courts, in [***30] connection with irrigation Supreme Court, after judgment in the District Court of district assessments, is the contention that if this Appeal, was denied by the Supreme Court on August 7, amendment were allowed to stand it would give priority 1930. to irrigation assessments over state taxes, and thereby be in violation of article XIII, section 6, of the Constitution Page 1 The TRUSTEES OF DARTMOUTH COLLEGE v. WOODWARD. SUPREME COURT OF THE UNITED STATES 17 U.S. 518; 4 L. Ed. 629; 1819 U.S. LEXIS 330; 4 Wheat. 518 February 25, 1819, Decided PRIOR HISTORY: [***1] ERROR to the Superior New-Hampshire in New-England in America, that the Court of the State of New-Hampshire. Reverend Eleazar Wheelock, of Lebanon, in the colony of Connecticut, in New-England aforesaid, now Doctor in This was an action of trover brought in the State Divinity, did, no or about the year of our Lord one Court, in which the plaintiffs in error declared for two thousand seven hundred and fifty-four, at his own books of records, purporting to contain the records of all expense, on his own estate and plantation, set on foot an the doings and proceedings of the trustees of Dartmouth Indian Charity School, and for several years, through the College, from the establishment of the corporation until assistance of well disposed persons in America, clothed, the 7th day of October, 1816; the original charter, or maintained and educated a number of the children of the letters patent, constituting the college; the common seal; Indian natives, with a view to their carrying the gospel in and four volumes or books of account, purporting to their own language, and spreading the knowledge of the contain the charges and accounts in favour of the college. great Redeemer, among their savage tribes, and hath The defendant pleaded the general issue, and at the trial actually employed a number of them as missionaries and the following special verdict was found: school masters in the wilderness for that purpose: and by the blessing of God upon the endeavours of said "The said jurors, upon their oath, say, that his Wheelock, the design became reputable among the Majesty George the Third, King of Great Britain, &c. Indians, insomuch that a larger number desired the issued his letters patent, under the public seal of the education of their children in said school, and were also Province, now State, of New-Hampshire, bearing date the disposed to receive missionaries and school masters in 13th day of December, in the 10th year of his reign, and the wilderness, [***3] more than could be supported by in the year of our Lord, one thousand seven hundred and the charitable contributions in these American colonies. sixty-nine, in the words following: Whereupon, the said Eleazar Wheelock thought it GEORGE the THIRD, by the grace of GOD, of expedient, that endeavours should be used to raise Great Britain, France, and Ireland, KING, Defender of contributions from well disposed persons in England, for the Faith, and so forth. the carrying on and extending said undertaking; and for that purpose the said Eleazar Wheelock requested the To all to whom these presents shall come . . . Rev. Nathaniel Whitaker, now doctor in divinity, to go [***2] GREETING: over to England for that purpose, and sent over with him the Rev. Samson Occom, and Indian minister, who had WHEREAS is hath been represented to our trusty been educated by the said Wheelock. And to enable the and well beloved John Wentworth, Esq. Governor and said Whitaker to the more successful performance of said commander in chief, in and over our Province of work, on which he was sent, said Wheelock gave him a Page 2 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***3; 4 Wheat. 518 full power of attorney, by which said Whitaker solicited by the liberal contributions of many noblemen and those worthy and generous contributors to the charity, gentlemen in England, and especially by the viz. The Right Honourable William, Earl of Dartmouth, consideration, that such a situation would be as the Honourable Sir Sydney Stafford Smythe, Knight, one convenient as any for carrying on the great design among of the Barons of his Majesty's Court of Exchequer, John the Indians; and also, considering, that without the least Thornton, of Clapham, in the county of Surrey, Esquire, impediment to the said design, the same school may be Samuel Roffey, of Lincoln's Innfields, in the county of enlarged and improved to promote learning among the Middlesex, Esquire, Charles Hardy, of the parish of Saint English, and be a means to supply a great number of Mary-le-bonne, in said county, Esquire, Daniel West, of churches and congregations, which are likely soon to be Christ's church, [***4] Spitalfields, in the county formed [***6] in that new country, with a learned and aforesaid, Esquire, Samuel Savage, of the same place, orthodox ministry; they, the said proprietors, have Gentleman, Josiah Roberts, of the parish of Saint promised large tracts of land, for the uses aforesaid, Edmund, the King, Lombard Street, London, Gentleman, provided the school shall be settled in the western part of and Robert Keen, of the parish of Saint Batolph Aldgate, our said province. And they, the said right honourable, London, Gentleman, to receive the several sums of honourable, and worthy trustees, before mentioned, money which should be contributed, and to be trustees for having maturely considered the reasons and arguments, in the contributors to such charity, which they cheerfully favour of the several places proposed, have given the agreed to. preference to the western part of our said province, lying on Connecticut river, as a situation most convenient for Whereupon, the said Whitaker did, by virtue of said said school. power of attorney, constitute and appoint the said Earl of Dartmouth, Sir Sydney Stafford Smythe, John Thornton, And the said Wheelock has further represented a Samuel Roffey, Charles Hardy, and Daniel West, necessity of a legal incorporation, in order to the safety Esquires, and Samuel Savage, Josiah Roberts, and Robert and well being of said seminary, and its being capable of Keen, Gentlemen, to be trustees of the money which had the tenure and disposal of lands and bequests for the use then been contributed, and which should, by his means, of the same. be contributed for said purpose; which trust they have accepted, as by their engrossed declaration of the same, And the said Wheelock has also represented, that for under their hands and seals sell executed, fully appears, many weighty reasons, it will be expedient, at least in the and the same has also been ratified, by a deed of trust, infancy of said institution, or till it can be accommodated well executed, by the said Wheelock. in that new country, and he and his friends be able to remove and settle by and round about it, that the And the said Wheelock further represents, that he gentlemen, whom he has already nominated in his last has, by power of attorney, for many weighty reasons, will, (which he has transmitted to the aforesaid gentlemen given full power to the said trustees, [***5] to fix upon of the trust in England,) [***7] to be trustees in and determine the place for said school, most subservient America, should be of the corporation now proposed. to the great end in view; and to enable them And, also, as there are already large collections for said understandingly to give the preference, the said school, in the hands of the aforesaid gentlemen of the Wheelock has laid before the said trustees, the several trust in England, and all reason to believe, from their offers which have been generously made in the several singular wisdom, piety, and zeal to promote the governments in America, to encourage and invite the Redeemer's cause, (which has already procured for them settlement of said school among them, for their own the utmost confidence of the kingdom,) we may expect private emolument, and the increase of learning in their they will appoint successors in time to come, who will be respective places, as well as for the furtherance of the men of the same spirit, whereby great good may and will general design in view. accrue many ways to the institution, and much be done by their example and influence to encourage and facilitate And whereas a large number of the proprietors of the whole design in view; for which reason, said lands in the western part of this our province of Wheelock desires, that the trustees aforesaid may be New-Hampshire, animated and excited thereto, by the vested with all that power therein, which can consist with generous example of his excellency their governor, and their distance from the same. Page 3 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***7; 4 Wheat. 518 Know ye, therefore, That We, considering the trustees consisting, and hereafter forever to consist, of premises, and being willing to encourage the laudable twelve, and no more,) to be trustees of said Dartmouth and charitable design of spreading christian knowledge College, in this our province of New-Hampshire. among the savages of our American wilderness, and also that the best means of education be established in our [***10] And we do further, of our special grace, province of New-Hampshire, for the benefit of said certain knowledge, and mere motion, for us, our heirs and province, do, of our special grace, certain knowledge, and successors, will, give, grant, and appoint, that the said mere motion, [***8] by and with the advice of our trustees and their successors shall forever hereafter be, in counsel for said province, by these presents, will, ordain, deed, act, and name, a body corporate and politic, and grant, and constitute, that there be a college erected in our that they, the said body corporate and politic, shall be said province of New-Hampshire, by the name of known and distinguished, in all deeds, grants, bargains, Dartmouth College, for the education and instruction of sales, writings, evidences, or otherwise howsoever, and in youth of the Indian tribes in this land, in reading, writing, all Courts forever hereafter plead and be impleaded by and all parts of learning, which shall appear necessary the name of The Trustees of Dartmouth College; and that and expedient, for civilizing and christianizing children the said corporation, by the name aforesaid, shall be able, of pagans, as well as in all liberal arts and sciences, and and in law capable, for the use of said Dartmouth also of English youth and any others. And the trustees of College, to have, get, acquire, purchase, receive, hold, said college may and shall be one body corporate and possess, and enjoy, tenements, hereditaments, politic, in deed, action, and name, and shall be called, jurisdications, and franchises, for themselves and their named, and distinguished, by the name of the Trustees of successors, in fee simple, or otherwise howsoever, and to Dartmouth College. purchase, receive, or build, any house or houses, or any other buildings, as they shall think needful and And further, we have willed, given, granted, convenient, for the use of said Dartmouth College, and in constituted, and ordained, and by this our present charter, such town in the western part of our said province of of our special grace, certain knowledge, and mere New-Hampshire, as shall, by said trustees, or the major motion, with the advice aforesaid, do, for us, our heirs part of them, be agreed on; their said agreement [***11] and successors forever, will, give, grant, constitute, and to be evidenced by an instrument in writing, under their ordain, that there shall be in the said Dartmouth College, hands, ascertaining the same -- And also to receive and from henceforth and forever a body politic, consisting of dispose of any lands, goods, chattels, and other things, of Trustees of said Dartmouth College. And for the more what nature soever, for the use aforesaid -- And also to full and perfect erection [***9] of said corporation and have, accept, and receive any rents, profits, annuities, body politic, consisting of trustees of Dartmouth College, gifts, legacies, donations, or bequests of any kind we, of our special grace, certain knowledge, and mere whatsoever, for the use aforesaid; so, nevertheless, that motion, do, by these presents, for us, our heirs and the yearly value of the premises do not exceed the sum of successors, make, ordain, constitute, and appoint our six thousand pounds sterling; and therewith, or otherwise, trusty and well beloved John Wentworth, Esq. governor to support and pay, as the said trustees, or the major part of our said province, and the governor of our said of such of them as are regularly convened for the province of New-Hampshire for the time being, and our purpose, shall agree, the President, Tutors, and other trusty and well beloved Theodore Atkinson, Esq. now officers and ministers of said Dartmouth College; and president of our council of our said province, George also to pay all such missionaries and school masters as Jaffrey and Daniel Peirce, Esqrs. both of our said council, shall be authorized, appointed, and employed by them, and Peter Gilman, Esq. now speaker of our house of for civilizing, and christianizing, and instructing the representatives in said province, and William Pitkin, Esq. Indian natives of this land, their several allowances; and one of the assistants of our colony of Connecticut, and also their respective annual salaries or allowances, and all our said trusty and well beloved Eleazar Wheelock, of such necessary and contingent charges, as from time to Lebanon, doctor in divinity, Benjamin Pomroy, of time shall arise and accrue, relating to the said Dartmouth Hebron, James Lockwood, of Weathersfield, Timothy College: And also, to bargain, sell, let, or assign, lands, Pitkin and John Smalley, of Farmington, and William tenements, [***12] or hereditaments, goods or chattels, Patten, of Hartford, all of our said colony of Connecticut, and all other things whatsoever, by the name aforesaid, in ministers of the gospel, (the whole number of said as full and ample a manner, to all intents and purposes, as Page 4 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***12; 4 Wheat. 518 a natural person, or other body politic or corporate, is the execution of their offices or trusts, or within one year able to do by the laws of our realm of Great-Birtain, or of after, take the oaths and subscribe the declaration said province of New-Hampshire. provided by an act of Parliament made in the first year of King George the First, entitled, "An act for the further And further, of our special grace, certain knowledge, security of his Majesty's person and government, and the and mere motion, to the intent that our said corporation, succession of the crown in the heirs of the late Princess and body politic, may answer the end of their erection Sophia, being protestants, and for the extinguishing the and constitution, and may have perpetual succession and hopes of the pretended Prince of Wales, and his open and continuance forever, we do, for us, our heirs and secret abettors;" that is to say, the President, before the successors, will, give, and grant, unto the Trustees of Governor of our said Province for the time being, or by Dartmouth College, and to their successors forever, that one by him empowered to that service, or by the there shall be, once a year, and every year, a meeting of president of our said council, and the trustees, professors, said trustees, held at said Dartmouth College, at such tutors, and other officers, before the president of said time as by said trustees, or the major part of them, at any college for the time being, who is hereby empowered to legal meeting of said trustees, shall be agreed on; the first administer the same; [***15] an entry of all which shall meeting to be called by the said Eleazar Wheelock, as be made in the records of said college. soon as conveniently may be, within one year next after the enrollment of these our letters patent, at such time and And we do, for us, our heirs, and successors, hereby place as he shall judge proper. And the said trustees, or will, give, and grant, full power and authority to the the major part of any seven or more of them, [***13] president hereafter by us named, and to his successors, or, shall then determine on the time for holding the annual in case of his failure, to any three or more of the said meeting aforesaid, which may be altered as they shall trustees, to appoint other occasional meetings, from time hereafter find most convenient. And we farther order and to time, of the said seven trustees, or any greater number direct, that the said Eleazar Wheelock shall notify the of them, to transact any matter or thing necessary to be time for holding said first meeting, to be called as done before the next annual meeting, and to order notice aforesaid, by sending a letter to each of said trustees, and to the said seven, or any greater number of them, of the causing an advertisement thereof to be printed in the times and places of meeting for the service aforesaid, by New-Hampshire Gazette, and in some public newspaper a letter under his or their hands, of the same, one month printed in the colony of Connecticut. But in case of the before said meeting -- Provided always, that no standing death or incapacity of the said Wheelock, then such rule or order be made or altered, for the regulation of said meeting to be notified in manner aforesaid, by the college, nor any president or professor be chosen or governor or commander in chief of our said province for displaced, nor any other matter or thing transacted or the time being. And we do also, for us, our heirs and done, which shall continue in force after the then next successors, hereby will, give, and grant, unto the said annual meeting of the said trustees, as aforesaid. Trustees of Dartmouth College, aforesaid, and to their successors forever, that when any seven or more of the And, further, we do, by these presents, for us, our said trustees, or their successors, are convened and met heirs and successors, create, make, constitute, nominate, together, for the service of said Dartmouth College, at and appoint our trusty and well beloved Eleazar any time or times, such seven or more shall be capable to Wheelock, [***16] Doctor in Divinity, the founder of act as fully and amply, to all intents and purposes, as if all said college, to be President of said Dartmouth College, the trustees of said College were personally present -- and and to have the immediate care of the education and all affairs and actions [***14] whatsoever, under the care government of such students as shall be admitted into of said trustees, shall be determined by the majority or said Dartmouth College for instruction and education; greater number of those seven or more trustees so and do will, give, and grant, to him, in said office, full convened and met together. power, authority, and right, to nominate, appoint, constitute, and ordain, by his last will, such suitable and And we do further will, ordain, and direct, that the meet person or persons as be shall choose to succeed him president, trustees, professors, tutors, and all such officers in the presidency of said Dartmouth College; and the as shall be appointed for the public instruction and person so appointed, by his last will, to continue in office, government of said college, shall, before they undertake vested with all the powers, prinvileges, jurisdiction, and Page 5 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***16; 4 Wheat. 518 authority, of a President of said Dartmouth College; that pleasure of said trustees, as fully and freely as any like is to say, so long and until such appointment by said last officers in any of our universities, colleges, or seminaries will shall be disapproved by the Trustees of said of learning in our realm of Great-Britain, lawfully may or Dartmouth College. ought to do. And also, that the said trustees and [***19] their successors, or the major part of any seven or more And we do also, for us, our heirs, and successors, of them, which shall convene for that purpose as is above will, give, and grant to the said trustees of said Dartmouth directed, as often as one or more of said trustees shall die, College, and to their successors forever, or any seven or or by removal or otherwise shall, according to their more of them convened as aforesaid, that in the case of judgment, become unfit or incapable to serve the interests the ceasing or failure of a president by any means of said College, do, as soon as may be after the death, whatsoever, that the said trustees do elect, nominate, and removal, or such unfitness or incapacity of such trustee or appoint such qualified person [***17] as they, or the trustees, elect and appoint such trustee or trustees as shall major part of any seven or more of them, convened for supply the place of him or them so dying, or becoming that purpose as above directed, shall think fit, to be incapable to serve the interests of said College; and every president of said Dartmouth College, and to have the care trustee so elected and appointed shall, by virtue of these of the education and government of the students as presents and such election and appointment, be vested aforesaid; and in case of the ceasing of a president as with all the powers and privileges which any of the other aforesaid, the senior professor or tutor, being one of the trustees of said College are hereby vested with. And we trustees, shall exercise the office of a president, until the do further will, ordain, and direct, that from and after the trustees shall make choice of, and appoint, a president as expiration of two years from the enrolment of these aforesaid; and such professor or tutor, or any three or presents, such vacancy or vacancies as may or shall more of the trustees, shall immediately appoint a meeting happen, by death or otherwise, in the aforesaid number of of the body of the trustees for the purpose aforesaid. And trustees, shall be filled up by election as aforesaid, so that also we do will, give, and grant to the said trustees when such vacancies shall be filled up unto the complete convened as aforesaid, that they elect, nominate, and number of twelve trustees, eight of the aforesaid [***20] appoint so many tutors and professors to assist the whole number of the body of trustees shall be resident, president in the education and government of the students and respectable freeholders of our said Province of belonging thereto, as they the said trustees shall, from New-Hampshire, and seven of said whole number shall time to time, think needful and serviceable to the interests be laymen. of said Dartmouth College. And also, that the said trustees or their successors, or the major part of any seven And we do further, of our special grace, certain or more of them convened for that purpose as above knowledge, and mere motion, will, give, and grant, unto directed, shall at any time displace and discharge from the said Trustees of Darmouth College, that they, and [***18] the service of said Dartmouth College any or all their successors, or the major part of any seven of them such officers, and elect others in their room and stead as which shall convene for that purpose as is above directed, before directed. And also that the said trustees, or their may make, and they are hereby fully impowered, from successors, or the major part of any seven of them which time to time, fully and lawfully to make and establish shall convene for that purpose as above directed, do, from such ordinances, orders, and laws, as may tend to the time to time, as occasion shall require, elect, constitute, good and wholesome government of the said college, and and appoint a treasurer, a clerk, an usher, and a steward all the students and the several officers and ministers for the said Dartmouth College, and appoint to them and thereof, and to the public benefit of the same, not each of them their respective businesses and trust; and repugnant to the laws and statutes of our realm of Great displace and discharge from the service of said College, Britain, or of this our province of New-Hampshire, and such treasurer, clerk, usher or steward, and to elect others not excluding any person of any religious denomination in their room and stead; which officers so elected, as whatsoever, from free and equal liberty and advantage of before directed, we do for us, our heirs and successors, by education, or from any of the liberties and privileges or these presents, constitute and establish in their respective immunities of the said college, on account of his or their offices, and do give to each and every of them full power speculative sentiments in religion, and of his or their and authority to exercise the same in said Dartmouth being of a religious profession [***21] different from the College, according to the directions, and during the said trustees of the said Dartmouth College. And such Page 6 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***21; 4 Wheat. 518 ordinance, orders, and laws, which shall as aforesid be college, not herein particularly named or mentioned; made, we do for us, our heirs and successors, by these which officers and ministers we do hereby impower to presents ratify, allow of, and confirm, as good and execute their offices and trusts, as fully and freely as any effectual to oblige and bind all the students, and the of the officers and ministers in our universities or several officers and ministers of the said college. And we colleges in our realm of Great Britain lawfully may or do hereby authorize and impower the said Trustees of ought to do. Dartmouth College, and the president, tutors, and professors, by them elected and appointed as aforesaid, to And further, that the generous contributors to the put such ordinances, orders, and laws, in execution, to all support of this design of spreading the knowledge of the proper intents and purposes. only true God and Saviour among the American savages, may, from time to time, be satisfied that their liberalities And we do further, of our special grace, certain are faithfully disposed of, in the best manner, for that knowledge, and mere motion, will, give, and grant unto purpose, and that others may, in future time, be the said Trustees of said Dartmouth College, for the encouraged in the exercise of the like liberality for encouragement of learning, and animating the students of promoting the same pious design, it shall be the duty of said college to diligence and industry, and a laudable the President of said Dartmouth College, and of his progress in literature, that they, and their successors, or successors, annually, or as often as he shall be thereunto the major part of any seven or more of them, convened desired or required, to transmit to the right honourable, for that purpose as above directed, do, by the president of honourable, and worthy gentlemen of the trust in England said college, for the time being, or any other deputed by before mentioned, a faithful account of the improvements them, give, and grant any such degree or degrees to any and disbursements [***24] of the several sums he shall of the students of the said college, or [***22] any others receive from the donations and bequests made in by them thought worthy thereof, as are usually granted in England, through the hands of said trustees, and also either of the universities, or any other college in our advise them of the general plans laid, and prospects realm of Great Britain; and that they sign and seal exhibited, as well as a faithful account of all remarkable diplomas or certificates of such graduations, to be kept by occurrences, in order, if they shall think expedient, that the graduates as perpetual memorials and testimonials they may be published. And this to continue so long as thereof. they shall perpetuate their board of trust, and there shall be any of the Indian natives remaining to be proper And we do further, of our special grace, certain objects of that charity.And, lastly, our express will and knowledge, and mere motion, by these presents, for us, pleasure is, and we do, by these presents, for us, our heirs our heirs and successors, give and grant unto the Trustees and successors, give and grant unto the said Trustees of of said Dartmouth College, and to their successors, that Dartmouth College, and to their successors forever, that they and their successors shall have a common seal, these our letters patent, on the enrolment thereof in the under which they may pass all diplomas or certificates of Secretary's office of our Province of New-Hampshire degrees, and all other affairs and business of, and aforesaid, shall be good and effectual in the law, to all concerning the said college; which shall be engraven in intents and purposes, against us, our heirs and successors, such a form, and with such an inscription as shall be without any other license, grant, or confirmation from us, devised by the said trustees, for the time being, or by the our heirs and successors, hereafter by the said trustees to major part of any seven or more of them convened for the be had and obtained, notwithstanding the not writing or service of the said college as is above directed. misrecital, not naming or misnaming the aforesaid offices, franchises, privileges, immunities, [***25] or And we do further, for us, our heirs and sucessors, other the premises, or any of them, and notwithstanding a give and grant unto the said trustees of the said writ of ad quod damnum hath not issued forth to inquire Dartmouth College, and their successors, or to the major of the premises, or any of them, before the ensealing part of any seven or more of them convened for the hereof, any statute, act, ordinance, or provision, or any service of the said college, [***23] full power and other matter or thing, to the contrary notwithstanding. To authority, from time to time, to nominate and appoint all have and to hold all and singular the privileges, other officers and ministers, which they shall think advantages, liberties, immunities, and all other the convenient and necessary for the service of the said premises herein and hereby granted, or which are meant, Page 7 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***25; 4 Wheat. 518 mentioned, or intended to be herein and hereby given and tenements, hereditaments, goods, chattels, and moneys, granted unto them, the said Trustees of Dartmouth acquired in manner aforesaid, the yearly income of the College, and to their successors forever. In testimony same, not exceeding the sum of 26,666 dollars, for the whereof, we have caused these our letters to be made use of said Dartmouth College, as specified in said letters patent, and the public Seal of our said Province of patent. New-Hampshire to be hereunto affixed.Witness our trusty and well beloved John Wentworth, Esquire, And the said jurors, upon their oath, further say, that Governor and Commander in Chief in and over our said part of the said lands, so acquired and holden by the said Province, &c. this thirteenth day of December, in the trustees as aforesaid, were granted by (and are situate in) tenth year of our reign, and in the year of our Lord one the State of Vermont, A.D. 1785, and are of great value; thousand seven hundred and sixty-nine. and other part of said lands, so acquired and holden as aforesaid, were granted by (and are situate in) the State of N.B. The words " and such professor, or tutor, or New-Hampshire, in the years 1789, and 1807, and are of any three or more of the trustees, shall immediately great value. appoint a meeting of the body of the trustees, for the purpose aforesaid," between [***26] the first and second And the said jurors, upon their oath, further say, lines, also the words "or more," between the [***28] that the said Trusteees of Dartmouth College, so twenty-seventh and twenty-eighth lines, also the words constituted as aforesaid, on the same 27th day of June, "or more," between the twenty-eighth and twenty-ninth A.D. 1816, were possessed of the goods and chattels in lines, and also the words "to all intents and purposes," the declaration of the said trustees specified, and at the between the thirty-seventh and thirty-eighth line of this place therein mentioned, as of their own proper goods sheet, were respectively interlined before signing and and chattels, and continued so possessed until, and at the sealing. time of the demand and refusal of the same as hereinafter mentioned, unless devested thereof, and their title thereto And the said jurors, upon their oath, further say, that defeated, and rendered invalid, by the provisions of the afterwards, upon the eighteenth day of the same act of the State of New-Hampshire, made and passed on December, the said letters patent were duly enrolled and the same 27th day of June, A.D. 1816, and the doings recorded in the Secretary's office of said Province, now under the same, as hereinafter mentioned and recited. State, of New-Hampshire -- And afterwards, and within one year from the issuing of the same letters patent, all And the said jurors, upon their oath, further say, that the persons named as trustees in the same accepted the on the 27th day of June, A.D. 1816, the legislature of said said letters patent, and assented thereunto, and the State of New-Hampshire made and passed a certain act, corporation therein and thereby created and erected was entitled, "An act to amend the charter, and enlarge and duly organized, and has, until the passing of the act of the improve the corporation of Dartmouth College," in the legislature of the State of New-Hampshire, of the 27th of words following: -- June, A.D. 1816, and ever since, (unless prevented by An act to amend the charter, and enlarge and said act and the doings under the same,) continued to be a improve the Corporation of Dartmouth College. corporation. WHEREAS knowledge and learing generally And the said jurors, upon their oath, further say, that diffused through a community, are essential to the immediately after its erection and organization as [***27] preservation of a free government, and extending [***29] aforesaid, the said corporation had, took, acquired, and the opportunities and advantages of education is highly received, by gift, donation, devise, and otherwise, lands, conducive to promote this end, and by the constitution it goods, chattels, and moneys of great value; and from time is made the duty of the legislators and magistrates, to to tiem since have had, taken, received, and acquired, in cherish the interests of literature, and the sciences, and all manner aforesaid, and otherwise, lands, goods, chattels, seminaries established for their advancement -- and as the and moneys of great value; and on the same 27th day of college of the State may, in the opinion of the legislature, June, A.D. 1816, the said corporation, erected and be rendered more extensively useful; Therefore, organized as aforesaid, had, held, and enjoyed, and ever since have had, held, and enjoyed, divers lands, SECT. 1. Be it enacted by the senate and house of Page 8 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***29; 4 Wheat. 518 representatives, in general court convened, That the negative of the board of overseers be expressed, corporation, heretofore called and known by the name of according to the provisions f this act. the Trustees of Dartmouth College, shall ever hereafter he called and known by the name of the Trustees of SECT. 3. Be it further enacted, That there shall be a Dartmouth University. -- And the whole number of said treasurer of said corporation, who shall be duly sworn, trustees shall be twenty-one, a majority of whom shall and who, before he enters upon the duties of his office, from a quorum for the transaction of business. -- And shall give bonds, with sureties, to the satisfaction of the they and their successors in that capacity, as hereby corporation, for the faithful performance thereof; and also constituted, shall respectively forever have, hold, use, a secretary to each of the boards of trustees and exercise and enjoy all the powers, authorities, rights, overseers, to be elected by the said boards [***32] property, liberties, privileges and immunities which have respectively, who shall keep a just and true record of the hitherto been possessed, enjoyed and used by the proceedings of the board for which he was chosen. And Trustees of Dartmouth College -- except so far as the it shall furthermore be the duty of the secretary of the same may be varied or limited by the provisions [***30] board of trustees to furnish, as soon as may be, to the said of this act. And they shall have power to determine the board of overseers, copies of the records of such votes times and places of their meetings, and manner of and proceedings, as by the provisions of this act are made notifying the saem; to organize colleges in the university; subject to their revision and control. to establish an institute and elect fellows and members SECT. 4. Be it further enacted, That the president of proper, and determine their duties and compensation, and Dartmouth University, and his successors in office, shall also to displace them; to delegate the power of supplying have the superintendence of the government and vacancies in any of the offices of the university, for any instruction of the students, and may preside at all term of time not extending beyond their next meeting: to meetings of the trustees, and do and execute all the duties pass ordinances for the government of the students, with devolving by usage on the president of a university. He reasonable penalties, not inconsistent with the shall render annually to the governor of this state an constitution and laws of this State; to prescribe the course account of the number of students, and of the state of the of education, and confer degrees; and to arrange, invest, funds of the university; and likewise copies of all and employ the funds of the university. important votes and proceedings of the corporation and SECT. 2. And be it further enacted, That there shall overseers, which shall be made out by the secretaries of be a board of overseers, who shall have perpetual the respective boards. succession, and whose number shall be twenty-five, SECT. 5. Be it further enacted, That the president fifteen of whom shall constitute a quorum for the and professors of the university shall be nominated by the transaction of business. The president of the senate, and trustees, and approved by the overseers: and shall be the speaker of the house of representatives of liable to be suspended [***33] or removed from office in New-Hampshire, the governor and lieutant governor of manner as before provided. And each of the two boards Vermont, for the time being, shall be members of said of trustees and overseers shall have power to suspend and board, ex officio. The board of overseers shall have remove any member of their respective boards. power to [***31] determine the times and places of their meetings, and manner of notifying the same; to inspect SECT. 6. Be it further enacted, That the governor and confirm, or disapprove and negative, such votes and and council are hereby authorized to fill all vacancies in proceedins of the board of trustees as shall relate to the the board of overseers, whether the same be original appointment and removal of president, professors, and vacancies, or are occasioned by the death, resignation or other permanent officers of the university, and determine removal of any member. And the governor and council their salries; to the establishment of colleges and in like manner shall, by appointments, as soon as may be, professorships, and the erection of new college buildings. complete the present board of trustees to the number of Provided always, that the said negative shall be expressed twenty-one, as provided for by this act, and shall have within sixty days from the time of said overseers being power also to fill all vacancies that may occur previous furnished with copies of such acts. -- Provided also, that to, or during the first meeting of the said board of all votes and proceedings of the board of trustees shall be trustees. But the president of said university for the time valid and effectual, to all intents and purposes, until such being, shall, nevertheless, be a member of said board of Page 9 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***33; 4 Wheat. 518 trustees ex officio. And the governor and council shall thereto, or in amendment thereof, but have continued to have power to inspect the doings and proceedings of the act, and still claim the right of acting, under the said corporation, and of all the officers of the university, letters patent. whenever they deem it expedient -- and they are hereby required to make such inspection, and report the same to And the said jurors, upon their oath, further say, that, the legislature of this State, as often as once in every five on the seventh day of October, A.D. 1816, and before the [***34] years. And the governor is hereby authorized commencement of this suit, the said Trustees of and requested to summon the first meeting of the said Dartmouth College demanded [***36] of the said trustees and overseers, to be held at Hanover, on the 26th William H. Woodward the property, goods, and chattels day of August next. in the said declaration specified, and requested the said William H. Woodward, who then had the same in his SECT. 7. Be it further enacted, That the president hands and possession, to deliver the same to them, which and professors of the university, before entering upon the the said William H. Woodward then and there refused to duties of their offices, shall take the oath to support the do, and has ever since neglected and refused to do, but constitution of the United States and of this State; converted the same to his own use, if the said Trustees of certificates of which shall be in the office of the Secretary Dartmouth College could, after the passing of the said act of this State, within sixty days from their entering on of the 27th day of June, lawfully demand the same, and if their offices respectively. the said William H. Woodward was not, by law, authorized to retain the same in his possession after such SECT. 8. Be it further enacted, That perfect freedom demand. of religious opinion shall be enjoyed by all the officers and students of the university; and no officer or student And the said jurors, upon their oath, further say, that shall be deprived of any honours, privileges, or benefits on the 18th day of December, A.D. 1816, the legislature of the institution, on account of his religious creed or of said State of New-Hampshire made and passed a belief.The theological colleges which may be established certain other act, entitled, "An act in addition to, and in in the university shall be founded on the same principles amendment of, an act, entitled, An act to amend the of religious freedom; and any man, or body of men, shall charter, and enlarge and improve the corporation of have a right to endow colleges or professorships of any Dartmouth College," in the words following: sect of the protestant christian religion: And the trustees shall be held and obliged to appoint professors of An act in addition to, and in amendment of, an act, learning and piety of such [***35] sects according to the entitled, "An act to amend the charter, and enlarge and will of the donors. improve the Corporation of Dartmouth College." Approved, June 27th, 1816. WHEREAS the meetings of the Trustees and Overseers [***37] of Dartmouth University, which were And the said jurors, upon their oath, further say, that, summoned agreeably to the provisions of said act, failed at the annual meeting of the Trustees of Dartmouth of being duly holden, in consequence of a quorum of College, constituted agreeably to the letters patent neither said trustees nor overseers attending at the ime aforesaid, and in no other way or manner, holden at said and place appointed, whereby the proceedings of said college, on the 28th day of August, A.D. 1816, the said corporation have hitherto been, and still are delayed: trustees voted and resolved, and caused the said vote and resolve to be entered on their records, that they do not SECTION 1. Be it enacted by the senate and house accept the provisions of the said act of the legislature of of representatives, in general Court convened, That the New-Hampshire of the 27th of June, 1816, above recited, governor be, and he is hereby authorized and requested to but do, by the said vote and resolve, expressly refuse to summon a meeting of the Trustees of Dartmouth accept or act under the same. University, at such time and place as he may deem expedient. And the said trustees, at such meeting, may And the said jurors, upon their oath, further say, that do and transact any matter or thing, within the limits of the said Trustees of Dartmouth College have never their jurisdiction and power, as such trustees, to every accepted, assented to, or acted under the said act of the intent and purpose, and as fully and completely as if the 27th of June, A.D. 1816, or any act passed in addition same were transacted at any annual, or other meeting. Page 10 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***37; 4 Wheat. 518 And the governor, with advice of council, is authorized to improve the corporation of Dartmouth College." fill all vacancies that have happened, or may happen in the board of said trustees, previous to their next annual Be it enacted by the senate and house of meeting. And the governor is hereby authorized to representatives in general Court convened, That if any summon a meeting of the overseers of said university, at person or persons shall assume the office of president, such time and place as he may consider proper. An trustee, professor, secretary, treasurer, [***40] librarian, provided a less [***38] number than a quorum of said or other officer of Dartmouth University; or by any name, board of overseers convene at the time and place or under any pretext, shall, directly or indirectly, take appointed for such meeting of their board, they shall have upon himself or themselves the discharge of any of the power to adjourn, from time to time, until a quorum shall duties of either of those offices, except it be pursuant to, have convened. and in conformity with, the provisions of an act, entitled, "an act to amend the charter and enlarge and improve the SECTION 2. And be it further enacted, That so corporation of Dartmouth College," or, of the "act, in much of the act, to which this is an addition, as makes addition to and in amendment of an act, entitled, an act to necessary any particular number of trustees or overseers amend the charter and enlarge and improve the of said University, to constitute a quorum for the corporation of Dartmouth College," or shall in any way, transaction of business, be, and the same hereby is directly or indirectly, wilfully impede or hinder any such repealed; and that hereafter nine of said trustees, officer or officers already existing, or hereafter to be convened agreeably to the provisions of this act, or to appointed agreeably to the provisions of the acts those of that to which this is an addition, shall be a aforesaid, in the free and entire discharge of the duties of quorum for transacting business; and that in the board of their respective offices, conformably to the provisions of trustees six votes at least shall be necessary for the said acts, the person or persons so offending shall for passage of any act or resolution. And provided also, that each offence forfeit and pay the sum of five hundred any smaller number than nine of said trustees, convened dollars, to be recovered by any person who shall sue at the time and place appointed for any meeting of their therefore, one half thereof to the use of the prosecutor, board, according to the provisions of this act, or that to and the other half to the use of said University. which this is an addition, shall have power to adjourn from time to time, until a quorum shall have convened. And be it further enacted, That the person or persons who sustained [***41] the offices of secretary and SECTION 3. And be it further enacted, That each treasurer of the trustees of Dartmouth College, next member of said board of trustees, already appointed or before the passage of the act, entitled, "an act to amend chosen, [***39] or hereafter to be appointed or chosen, the charter and enlarge and improve the corporation of shall, before entering on the duties of his office, make Dartmouth College," shall continue to hold and discharge and subscribe an oath for the faithful discharge of the the duties of those offices, as secretary and treasurer of duties aforesaid; which oath shall be returned to, and filed the Trustees of Dartmouth University, until another in the office of the secretary of state, previous to the next person or persons be appointed, in his or their stead, by regular meeting of said board, after said member enters the trustees of said University. And that the treasurer of on the duties of his office, as aforesaid. said University, so existing, shall in his office have the care, management, direction, and superintendance of the Approved, December 18, 1816. property of said corporation, whether real or personal, until a quorum of said trustees shall have convened in a And the said jurors, upon their oath, further say, that regular meeting. on the 26th day of December, A.D. 1816, the legislature of said State of New-Hampshire made and passed a Approved, December 26, 1816. certain other act, entitled, "An act in addition to an act, entitled, an act in addition to, and in amendment of, an And the said jurors, upon their oath, further say, that act, entitled, an act to amend the charter and enlarge and the said William H. Woodward, before the said 27th day improve the corporation of Dartmouth College," in the of June, had been duly appointed by the said Trustees of words following: -- An act in addition to an act, entitled, Dartmouth College, secretary and treasurer of the said "an act in addition to, and in amendment of, an act, corporation, and was duly qualified t exercise, and did entitled, an act to amend the charter and enlarge and exercise the said offices, and perform the duties of the Page 11 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***41; 4 Wheat. 518 same; and as such secretary and treasurer, rightfully had, Woodward hath above in pleading alleged. [***44] But while he so continued sucretary and treasurer as [***42] if upon the whole matter aforesaid, it shall seem to the aforesaid, the custody and keeping of the several goods, Court here, that the said acts last mentioned are not valid chattels, and property, in said declaration specified. in law, and are not binding on the said trustees of Dartmouth College without acceptance thereof, and And the said jurors, upon their oath, further say, that assent thereto, by them, so as render them incapable of the said William H. Woodward was removed by said maintaining this action, and that the said acts are Trustees of Dartmouth College (if the said trustees could, repugnant to the constitution of the United States and by law, do the said acts) from said office of secretary, on void, then the said jurors, upon their oath, say that the the 27th day of August, A.D. 1816, and from said office said William H. Woodward is guilty of the premises of treasurer, on the 27th day of September then next above laid to his charge, by the declaration aforesaid, and following, of which said removals he, the said William H. in that case, they assess the damages of them, the said Woodward, had due notice on each of said days last trustees of Dartmouth College, by occasion thereof, at mentioned. twenty thousand dollars. And the said jurors, upon their oath, further say, that Judgment having been afterwards rendered upon the the corporation, called the Trustees of Dartmouth said special verdict by the Superior Court of the State of University, was duly organized on the fourth day of New-Hampshire, being the highest Court of law or equity February, A.D. 1817, pursuant to, and under the said of said State, for the plaintiff below, the cause was recited acts of the 27th day of June, and of the 18th and brought before this Court by writ of error. 26th days of December, A.D. 1816; and the said William H. Woodward was, on the said fourth day of February, CASE SUMMARY: A.D. 1817, duly appointed by the said Trustees of Dartmouth University, secretary and treasurer of the said Trustees of Dartmouth University, and then and there PROCEDURAL POSTURE: Plaintiffs, the trustees of a accepted both said offices. college, brought action in trover in the state court for the book of records, corporate seal, and other corporate And the said jurors, upon their oath, further say, that property, to which plaintiffs alleged they were entitled. this suit [***43] was commenced on the eighth day of The state court, in a special verdict, found for defendant, February, A.D. 1817. if certain acts of the legislature were valid. Plaintiffs sought review from a decision of the Superior Court of But whether upon the whole matter aforesaid, by the the State of New Hampshire, which rendered judgment jurors aforesaid, in manner and form aforesaid found, the for defendant. said acts of the 27th of June, 18th and 26th of December, A.D. 1816, are valid in law, and binding on the said OVERVIEW: Plaintiffs, the trustees of a college, trustees of Dartmouth College, without acceptance brought an action in trover against defendant for thereof and assent thereunto by them, so as to render the corporate property to which plaintiffs alleged they were plaintiffs incapable of maintaining this action, or whether entitled. Defendant claimed under three acts of the the same acts are repugnant to the constitution of the legislature of New Hampshire, one of which amended the United States, and so void, the said jurors are wholly charter of the college and increased the number of ignorant, and pray the advice of the Court upon the trustees to 21, that such acts gave over the appointment of premises. And if upon the said matter, it shall seem to the additional members to the executive of the state, and the Court here, that the said acts last mentioned are valid created a board of overseers, with the power to inspect in law, and binding on said trustees of Dartmouth and control the most important acts of the trustees. College, without acceptance thereof, and assent thereto, Plaintiffs refused to accept this amended charter, and by them, so as to render the plaintiffs incapable of brought suit for the corporate property. On appeal, the maintaining this action, and are not repugnant to the Supreme Court stated that the circumstances of the case constitution of the United States, then the said jurors, constituted a contract, as an application was made to the upon their oath, say, that the said William H. Woodward crown for a charter to incorporate a religious and literary is not guility of the premises above laid to his charge, by institution. The donors, the trustees, and the crown were the declaration aforesaid, as the said William H. Page 12 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***44; 4 Wheat. 518 the original parties to the contract, which was one made the objects about which the Constitution is solicitous, and on valuable consideration. The court held that the to which its protection is extended. obligation of the contract could not be impaired without violating the Constitution. As the acts of the legislature Business & Corporate Law > Corporations > Formation were repugnant to the Constitution, the Court reversed > Corporate Existence, Powers & Purpose > General the judgment of the state court below. Overview OUTCOME: The Court reversed the decision of the Business & Corporate Law > Nonprofit Corporations & state court on the grounds that the legislative acts Organizations > General Overview impaired contractual obligations. Education Law > Administration & Operation > Boards of Postsecondary Schools > Authority CORE TERMS: charter, charity, franchise, founder, [HN4] Almost all eleemosynary corporations, those vested, eleemosynary, donor, incorporation, founded, which are created for the promotion of religion, of appoint, donation, governor, youth, visitatorial, charity, or of education, are of the same character. In appointed, declare, grantee, charitable, appointment, every literary or charitable institution, unless the objects impairing, valuable consideration, hereditament, of the bounty be themselves incorporated, the whole legal endowment, marriage, impair, bounty, endowed, interest is in trustees, and can be asserted only by them. beneficial interest, corporator, repugnant Constitutional Law > Congressional Duties & Powers > LexisNexis(R) Headnotes Contracts Clause > General Overview [HN5] The legislature of a state shall pass no act impairing the obligation of contracts. Business & Corporate Law > Corporations > Formation Constitutional Law > Substantive Due Process > Scope > Corporate Existence, Powers & Purpose > General of Protection Overview [HN6] In private eleemosynary institutions, the body [HN1] A corporation is an artificial being, invisible, corporate, as possessing the whole legal and equitable intangible, and existing only in contemplation of law. interest, and completely representing the donors, for the Being the mere creature of law, it possesses only those purpose of executing the trust, has rights which are properties which the charter of its creation confers upon protected by the constitution. it, either expressly, or as incidental to its very existence. LAWYERS' EDITION HEADNOTES: Business & Corporate Law > Corporations > Formation > Corporate Existence, Powers & Purpose > General The charter granted by the British crown to the Overview trustees of Dartmouth College, in New Hampshire, in the Education Law > Faculty & Staff > Compensation > year 1769, is a contract within the meaning of that clause Payment of the constitution of the United States, art. 1, s. 10, [HN2] There can be no reason for implying in a charter, which declares that no state shall make any law impairing given for a valuable consideration, a power which is not the obligation of contracts. The charter was not dissolved only not expressed, but is in direct contradiction to its by the revolution. express stipulations. An act of the state legislature of New Hampshire, Constitutional Law > Congressional Duties & Powers > altering the charter, without the consent of the Contracts Clause > General Overview corporation, in a material respect, is an act impairing the Contracts Law > Consideration > Enforcement of obligation of the charter, and is unconstitutional and void. Promises > General Overview Under its charter, Dartmouth College was a private [HN3] Contracts, the parties to which have a vested and not a public corporation. That a corporation is beneficial interest, and those only, it has been said, are established for purposes of general charity, or for Page 13 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***44; 4 Wheat. 518 education generally, does not, per se, make it a public corporation, and with power to hold and dispose of lands corporation, liable to the control of the legislature. and goods, for the use of the College, with all the ordinary powers of corporations. They are in their SYLLABUS discretion to apply the funds and property of the College to the support of the president, tutors, ministers, and other The charter granted by the British crown to the officers of the College, and such missionaries and trustees of Dartmouth College, in New-Hampshire, in the schoolmasters as they may see fit to employ among year 1769, is a contract within the meaning of that clause [***47] the Indians. There are to be twelve trustees of the constitution of the United States, (art. 1. s. 10.) forever, and no more; and they are to have the right of which declares that [***45] no State shall make any law filling vacancies occuring in their own body. The Rev. impairing the obligation of contracts. The charter was Mr. Wheelock is declared to be the FOUNDER of the not dissolved by the revolution. College, and is, by the charter, appointed first president, with power to appoint a successor, by his last will. All An act of the State legislature of New-Hampshire, proper powers of government, superintendence, and altering the charter, without the consent of the visitation, are vested in the trustees. They are to appoint corporation, in a material respect, is an act impairing the and remove all officers at their discretion; to fix their obligation of the charter, and is unconstitutional and void. salaries, and assign their duties; and to make all Under its charter, Dartmouth College was a private ordinances, orders, and laws, for the government of the and not a public corporation. That a corporation is students. And to the end that the persons who had acted established for purposes of general charity, or for as depositaries of the contributions in England, and who education generally, does not, per se, make it a public had also been contributors themselves, might be satisfied corporation, liable to the control of the legislature. of the good use of their contributions, the president was annually, or when required, to transmit to them an COUNSEL: Mr. Webster, for the plaintiffs in error. The account of the progress of the institution, and the general question is, whether the acts of the 27th of June, disbursements of its funds, so along as they should and of the 18th and 26th of December, 1816, are valid continue to act in that trust. These letters patent are to be and binding on the rights of the plaintiffs, without their good and effectual in law, against the king, his heirs and acceptance or assent. successors forever, without further grant or confirmation; and the trustees are to hold all [***48] and singular these The substance of the facts recited in the preamble to the privileges, advantages, liberties, and immunities, to them charter is, that Dr. Wheelock had founded a CHARITY, and to their successors forever. No funds are given to the on funds owned and procured by himself; that he was, at college by this charter. A corporate existence and that time, the sole dispenser and sole administrator, as capacity are given to the trustees, with the privileges and well as the legal owner of these funds; that he had made immunities which have been mentioned, to enable the his will, devising this property in trust to continue the founder and his associates the better to manage the funds existence [***46] and uses of the school, and appointed which they themselves had contributed, and such others trustees; that, in this state of things, he had been invited as they might afterwards obtain. to fix his school permanently in New-Hampshire, and to extend the design of it to the education of the youth of After the institution, thus created and constituted, had that province; that, before he removed his school, or existed, uninterruptedly and usefully, nearly fifty years, accepted this invitation, which his friends in England had the legislature of New-Hampshire passed the acts in advised him to accept, he applied for a charter, to be question. The first act makes the twelve trustees under granted, not to whomsoever the king or government of the charter, and nine other individuals to be appointed by the province should please, but to such persons as he the governor and council, a corporation, by a new name; named and appointed, viz. the persons whom he had and to this new corporation transfers all the property, already appointed to be the future trustees of his charity rights, powers, liberties, and privileges of the old by his will. The Charter, or letters patent, then proceed to corporation; with further power to establish NEW create such a corporation, and to appoint twelve persons COLLEGES AND AN INSTITUTE, and to apply all or to constitute it, by the name of the "Trustees of any part of the funds to these purposes, subject to the Dartmouth College;" to have perpetual existence, as such power and control of a board of twenty-five overseers, to Page 14 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***48; 4 Wheat. 518 be appointed by the governor and council. The second the corporation.They affect the rights of the whole body, act makes further provisions for executing [***49] the as a corporation, and the rights of the individuals who objects of the first, and the last act authorizes the compose it. They revoke corporate powers and defendant, the treasurer of the plaintiffs, to retain and franchises. They alienate and transfer the property of the hold their property, against their will. College to others. By the charter, the trustees had a right to fill vacancies in their own number. This is now taken If these acts are valid, the old corporation is abolished, away. They were to consist of twelve, and by express and a new one created. The first act does, in fact, if it can provision, of no more. This is altered. They and their have effect, create a new corporation, and transfer to it all successors, appointed by themselves, where forever to the property and franchises of the old. The two hold the property. The legislature has found successors corporations are not the same, in any thing which for them, before their seats are vacant. The powers and essentially belongs to the existence of a corporation. privileges, which the twelve were to exercise exclusively, They have different names, and different powers, rights are now to be exercised by others. By one of the acts, and duties. Their organization is wholly different. The they are subjected to heavy penalties, if they exercise powers of the corporation are not vested in the same, or their offices, or any of those powers and privileges similar hands. In one, the trustees are twelve, and no granted them by charter, and which they had exercised more. In the other, they are twenty-one. In one, the for fifty years. They are to be punished for not accepting power is a single board. In the other, it is divided the new grant, and taking its [***52] benefits. This, it between two boards. Although the act professes to must be confessed, is rather a summary mode of settling a include the old trustees in the new corporation, yet that question of constitutional right. Not only are new was without their assent, and against their remonstrance; trustees forced into the corporation, but new trusts and and no person can be compelled to be a member of such a uses are created. The College is turned into a University. corporation against his will. It was neither expected nor Power is given to create new colleges, and to authorize intended, that they should be members of the new any diversion of the funds, which may be agreeable to the corporation. The act itself treats [***50] the old new boards, sufficient latitude is given by the undefined corporation as at an end, and going on the ground that all power of establishing an Institute. To these new Colleges, its functions have ceased, it provides for the first meeting and this Institute, the funds contributed by the founder, and organization of the new corporation. It expressly Dr. Wheelock, and by the original donors, the Earl of provides, also, that the new corporation shall have and Dartmouth and others, are to be applied, in plain and hold all the property of the old; a provision which would manifest disregard of the uses to which they were given. be quite unnecessary upon any other ground, than that the The president, one of the old trustees, had a right to his old corporation was dissolved. But if it could be office, salary, and emoluments, subject to the twelve contended, that the effect of these acts was not entirely to trustees alone. His title to these is now changed, and he abolish the old corporation, yet it is manifest that they is made accountable to new masters. So also all the impair and invade the rights, property, and powers of the professors and tutors. If the legislature can at pleasure trustees under the charter, as a corporation, and the legal make these alterations and changes, in the rights and rights, privileges, and immunities which belong to them, privileges of the plaintiffs, it may, with equal propriety, as individual members of the corporation.The twelve abolish these rights and privileges altogether. The same trustees were the sole legal owners of all the property power which can do any part of this work, [***53] can acquired under the charter. By the acts others are accomplish the whole. And, indeed, the argument, on admitted, against their will, to be joint owners. The which these acts have been hitherto defended, goes twelve individuals, who are trustees, were possessed of altogether on the ground, that this is such a corporation as all the franchises and immunities conferred by the the legislature may abolish at pleasure; and that its charter. By the acts, nine other trustees, and twenty-five members have no rights, liberties, franchises, property or overseers, are admitted against their will, to divide these privileges, which the legislature may not revoke, annul, franchises and immunities with them. If, either as a alienate or transfer to others whenever it sees fit. corporation, [***51] or as individuals, they have any legal rights, this forcible intrusion of others violates those It will be contended by the plaintiffs, that these acts are rights, as manifestly as an entire and complete ouster and not valid and binding on them without their assent. 1. diapossession. These acts alter the whole constitution of Because they are against common right, and the Page 15 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***53; 4 Wheat. 518 constitution of New-Hampshire. 2. Because they are somewhere, in some department of government, before repugnant to the constitution of the United States. I am the revolution. The British parliament could not have aware of the limits which bound the jurisdiction of the annulled or revoked this grant as an act of ordinary Court in this case; and that on this record nothing ann be legislation. It is had done it at all, it could only have been decided, but the single question, whether these acts are in virtue of that sovereign power, called omnipotent, repugnant to the constitution of the United States. Yet it which does not belong to any [***56] legislature in the may assist in forming an opinion of their true nature and United States. The legislature of New-Hampshire has the character, to compare them with those fundamental same power over this charter, which belonged to the king, principles, introduced into the State governments for the who granted it, and no more.By the law of England, the purpose of limiting the exercise of the legislative power, power to create corporations is a part of the royal and which the constitution of New-Hampshire expresses prerogative. 3 By the revolution, this power may be with great fullness and [***54] accuracy. considered as having devolved on the legislature of the States, and it has accordingly been exercised by the It is not too much to assert, that the legislature of legislature. But the king cannot abolish a corporation, or New-Hampshire would not have been competent to pass new model it, or alter its powers, without its assent. This the acts in question, and to make them binding on the is the acknowledged and well-known doctrine of the plaintiffs without their assent, even if there had been, in common law. "Whatever might have been the notion in the constitution of New-Hampshire, or of the United former times," says Lord Mansfield, "it is most certain States, no special restriction on their power; because now, that the corporations of the universities are lay these acts are not the exercise of a power properly corporations; and that the crown cannot take away from legislative. 1 Their object and effect is to take away from them any rights have been formerly subsisting in them one, rights, property, and franchises, and to grant them to under old charters or prescriptive usage." 4 After another. This is not the exercise of a legislative power. forfeiture duly found, the king may regrant the To justify the taking away of vested rights, there must be franchises; but a grant of franchises already granted, and a forfeiture; to adjudge upon and declare which, is the of which no forfeiture has been found, is void. Corporate proper province of the judiciary. Attainder and franchises can only be forfeited by trial and judgment. 5 confiscation are acts of sovereign power, not acts of In case of a new charter or grant to an existing legislation. The British parliament, among other corporation, it may accept [***57] or reject it as it unlimited powers, claims that of altering and vacating pleases. 6 It may accept such part of the grant as it charters; not as an act of ordinary legislation, but of chooses, and reject the rest. 7 In the very nature of things, uncontrolled authority. It is theoretically omnipotent.Yet, a charter cannot be forced upon any body. No one can be in modern times, it has attempted the exercise of this compelled to accept a grant; and without acceptance the power very rarely. In a celebrated instance, those who grant is necessarily void. 8 It cannot be pretended that the asserted this power in parliament, vindicated its exercise legislature, as successor to the king in this part of his only in a case, in [***55] which it could be shown, 1st. prerogative, has any power to revoke, vacate, or alter this That the charter in question was a charter of political charter. If, therefore, the legislature has not this power power. 2d. That there was a great and overruling state by any specific grant contained in the constitution; nor as necessity, justifying the violation of the charter. 3d. That included in its ordinary legislative powers; nor by reason the charter had been abused, and justly forfeited. 2 The of its succession to the prerogatives of the crown in this bill affecting this charter did not pass. Its history is well particular; on what ground would the authority to pass known. The act which afterwards did pass, passed with these acts rest, even if there were no special prohibitory the assent of the corporation. Even in the worst times, this clauses in the constitution, and the bill of rights? power of parliament to repeal and rescind charters has not often been exercised. The illegal proceedings in the reign 1 Calder et ux. v. Bull, 3 Dall. 386. of Charles II. were under colour of law. Judgments of 2 Annual Reg. 1784, p. 160. Parlia. Reg. 1783. forfeiture were obtained in the Courts. Such was the case Mr. Burke's Speech on Mr. Fox's E. I. Bill. of the quo warranto against the city of London, and the Burke's Works, Vol. III. p. 414, 417. 467, 468. proceedings by which the charter of Massachusetts was 486. vacated. The legislature of New-Hampshire has no more 3 1 Bl. Com. 472. power over the rights of the plaintiffs than existed, 4 3 Burr. 1656. Page 16 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***57; 4 Wheat. 518 5 3 T.R. 244. King v. Passmore. as the legislature sees fit to give, and the grantees to 6 The King v. Vice Chancellor of Cambridge, 3 accept. Burr. 1656. 3 T.R. 240. per Lord Kenyon. 7 Idem, 1661. and King v. Passmore, ubi supra. 9 1 Wooddes. 474. 1 Bl. Com.467. 8 Ellis v. Marshall, 2 Mass. R. 277. 1 Kyd on [***60] The corporation in question is not a civil, Corp. 65, 66. although it is a lay corporation. It is an eleemosynary [***58] But there are prohibitions in the constitution corporation. It is a private charity, originally founded and bill of rights of New-Hampshire, introduced for the and endowed by an individual, with a charter obtained for purpose of limiting the legislative power, and of it at his request, for the better administration of his protecting the rights and property of the citizens. One charity. "The eleemosynary sort of corporations are such prohibition is, "that no person shall be deprived of his as are constituted for the perpetual distributions of the property, immunities or privileges, put out of the free alms or bounty of the founder of them, to such protection of the law, or deprived of his life, liberty, or persons as he has directed. Of this are all hospitals for estate, but by judgment of his peers, or the law of the the maintenance of the poor, sick, and impotent; and all land." In the opinion, however, which was given in the colleges both in our universities and out of them." 10 Court below, it is denied that the trustees, under the Eleemosynary corporations are for the management of charter, had any property, immunity, liberty or privilege, private property, according to the will of the donors. in this corporation, within the meaning of this prohibition They are private corporations. A college is as much a in the bill of rights. It is said, that it is a public private corporation as a hospital; especially a college corporation, and public property. That that trustees have founded as this was, by private bounty. A college is a no greater interest in it than any other individuals. That it charity. "The establishment of learning," says Lord is not private property, which they can sell, or transmit to Hardwicke, "is a charity, and so considered in the statute their heirs; and that, therefore, they have no interest in it. of Elizabeth. A devise to a college, for their benefit, is a That their office is a public trust like that of the governor, laudable charity, and deserves encouragement." 11 The or a judge; and that they have no more concern in the legal signification of a charity is derived chiefly from the property of the college, than the governor in the property statute 43 Eliz. c. 4. [***61] "Those purposes," says Sir. of the State, or than the judges in the fines which they W. Grant, "are considered charitable which that statute impose [***59] on the culprits at their bar. That it is enumerates." 12 Colleges are enumerated as charities in nothing to them whether their powers shall be extended that statute. The government, in these cases, lends its aid or lessened, any more than it is to the Courts, whether to perpetuate the beneficent intention of the donor, by their jurisdiction shall be enlarged or diminished. It is granting a charter, under which his private charity shall necessary, therefore, to inquire into the true nature and continue to be dispensed, after his death. This is done character of the corporation, which was created by the either by incorporating the objects of the charity, as, for charter of 1769. instance, the scholars in a college, or the poor in a hospital; or by incorporating those who are to be There are divers sorts of corporations; and it may be governors, or trustees, of the charity. 13 In cases of the safely admitted, that the legislature has more power over first sort, the founder is, by the common law, vistor. In some, than over others. 9 Some corporations are for early times it became a maxim, that he who gave the government and political arrangement; such for example property might regulate it in future. Cujus est dare, ejus as cities, counties, and the towns in New England. These est disponere. This right of visituation descended from may be changed and modified as public convenience may the founder to his heir, as a right of property, and require, due regard being always had to the rights of precisely as his other property went to his heir; and in property. Of such corporations, all who live within the default of heirs, it went to the King, as all other property limits are of course obliged to be members, and to submit goes to the King, for the want of heirs. the right of to the duties which the law imposes on them as such. visitation arises from the property. It grows out of the Other civil corporations are for the advancement of trade endowment. The founder may, if he please, part with it, and business, such as banks, insurance companies, and at the time when he establishes the [***62] charity, and the like. These are created, not by general law, but may vest it in others. Therefore, if he chooses that usually by grant. Their constitution is special. It is such governors, trustees, or overseers, should be appointed in Page 17 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***62; 4 Wheat. 518 the charter, he may cause it to be done, and his power of the general words visitator sit) the person so constituted visitation will be transferred to them, instead of has all incidental power; but he may be restrained as to descending to his heirs.The persons thus assigned or particular instances. The founder may appoint a special appointed by the founder will be visitors, with all the visitor for a particular purpose and no further. The powers of the founder, in exclusion of his heir. 14 The founder may make a general visitor; and yet appoint an right of visitation then accrues to them as a matter of inferior particular power, to be executed without going to property, by the gift, transfer, or appointment of the the visitor in the first instance." 21 And even if the king founder. This is a private right which they can assert in be founder, if he grant a charter incorporating trustees all legal modes, and in which they have the same and governors, they are visitors, and the king cannot visit. protection of the law as in all other rights. As visitors, 22 A subsequent donation, or engrafted fellowship, falls they may make rules, ordinances, and statutes, and alter under the same general visitatorial power, if not and repeal them, as far as permitted so to do by the otherwise specially provided. 23 In New-England, and charter. 15 Although the charter proceeds from the crown, perhaps throughout [***65] the United States, or the government, it is considered as the will of the eleemosynary corporations have been generally donor. It is obtained at his request. He imposes it as the established in the latter mode, that is, by incorporating rule which is to prevail in the dispensation of his bounty governors or trustees, and vesting in them the right of in all future times. The king, or government, which visitation. Small variations may have been in some grants the charter, is not thereby the founder, but he who instances adopted; as in the case of Harvard College, furnishes the funds. The gift of the revenues is the where some power of inspection is given to the overseers, foundation. [***63] 16 The leading case on this subject but not, strictly speaking, a visitatorial power, which still is Phillips v. Bury. 17 This was an ejectment brought to belongs, it is apprehended, to the fellows, or members of recover the rectory house, &c. of Exeter College, in the corporation. In general, there are many donors. A Oxford. Thie question was, whether the plaintiff or charter is obtained, comprising them all, or some of them, defendant was legal rector. Exeter College was founded and such others as they choose to include, with the right by an individual, and incorporated by a charter granted by of appointing their successors. They are thus the visitors Queen Elizabeth. The controversy turned upon the power of their own charity, and appoint others, such as they may of the visitor, and, in the discussion of the cause, the see fit, to exercise the same office in time to come. All nature of College charters and corporations was very such corporations are private. The case before the Court fully considered; and it was determined that the college is clearly that of an eleemosynary corporation. It is, in was a private corporation, and that the founder had a right the strictest legal sense, a private charity. In King v. St. to appoint a visitor, and give him such power as he Catherine's Hall, 24 that college is called a private thought fit. 18 The learned Bishop Stilling-fleet's eleemosynary lay corporation. It was endowed by a argument in the same cause, as a member of the House of private founder, and incorporated by letters patent. And Lords, when it was there heard, exhibits very clearly the in the same manner was Dartmouth College founded nature of colleges and similar corporations. 19 These [***66] and incorporated. Dr. Wheelock is declared by opinions received the sanction of the House of Lords, and the charter to be its founder. It was established by him, they seem to be settled and undoubted law. Where there on funds contributed and collected by himself. As such is a charter, vesting proper powers of government in founder, he had a right of visitation, which he assigned to trustees, or governors, they are visitors; and there is no the trustees, and they received it by his consent and control in any body else; except only that the Courts of appointment, and held it under the charter. 25 He Equity or of law will interfere so far as to [***64] appointed these trustees visitors, and in that respect to preserve the revenues and prevent the perversion of the take place of his heir; as he might have appointed funds, and to keep the visitors within their prescribed devisees to take his estate, instead of his heir. Little, bounds. 20 "The foundations of colleges," says Lord probably, did he think, at that time, that the legislature Mansfield, "are to be considered in two views, viz. as would ever take away this property and these privileges, they are corporations, and as they are eleemosynary. As and give them to others. Little did he suppose, that this eleemosynary, they are the creatures of the founder; he charter secured to him and his successors no legal rights. may delegate his power, either generally or specially; he Little did the other donors think so. If they had, the may prescribe particular modes and manners, as to the college would have been, what the university is now, a exercise of part of it. If he makes a general visitor, (as by thing upon paper, existing only in name. The numerous Page 18 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***66; 4 Wheat. 518 academies in New-England have been established in this charter. But they are terms of legal signification, substantially in the same manner. They hold their and very properly used in the charter. They are property by the same tenure, and no other. Nor has equivalent with franchises. Blackstone says that franchise Harvard College any surer title than Dartmouth College. and liberty are used as synonymous terms. And after It may, to-day, have more friends; but to-morrow it may enumerating other liberties and franchises, he says, "it is have more enemies. Its legal rights are [***67] the likwise a franchise for a number of persons to be same. so also of Yale College; and indeed of all the incorporated and subsist as a body politic, with a power others. When the legislature gives to these institutions, it to maintain perpetual succession, and do other corporate may, and does, accompany its grants with such conditions acts; and each individual member of such corporation is as it pleases. The grant of lands by the legislature of also said to have a franchise or freedom." 26 Liberties is New-Hampshire to Dartmouth College, in 1789, was the term used in magna charta, as including franchises, accompanied with various conditions. When donations privileges, immunities, and all the rights which belong to are made, by the legislature, or others, to a charity that class. Professor Sullivan says, the term signifies the already existing, without any condition, or the "privileges that some of the subjects, whether single specification of any new use, the donation follows the persons or bodies corporate, have above others by the nature of the charity. Hence the doctrine, that all lawful grant of the king; as the chattels of felons or eleemosynary corporations are private bodies. They are outlaws, and the lands and privileges of corporations." 27 founded by private persons, and on private property. The The privilege, then, of being a member of a corporation, public cannot be charitable in these institutions. It is not under a lawful grant, and of exercising the rights and the money of the public, but of private persons, which is powers of such member, is such a privilege, liberty, or dispensed. It may be public, that is general, in its uses franchise, [***70] as has been the object of legal and advantages; and the State may very laudably add protection, and the subject of a legal interest, from the contributions of its own to the funds; but it is still private time of magna charta to the present moment. The in the tenure of the property, and in the right of plaintiffs have such an interest in this corporation, administering the funds. If the doctrine laid down by individually, as they could assert and maintain in a court Lord Holt, and the House of Lords, in Phillips v. Bury, of law, not as agents of the public, but in their own right. and recognized and established in all the other cases, be Each trustee has a franchise, and if he be disturbed in the correct, the property of this [***68] college was private enjoyment of it, he would have redress, on appealing to property; it was vested in the trustees by the charter, and the law, as promptly as for any other injury. If the other to be administered by them, according to the will of the trustees should conspire against any one of them, to founder and donors, as expressed in the charter. They prevent his equal right and voice in the appointment of a were also visitors of the charity, in the most ample sense. president or professor, or in the passing of any statute or They had, therefore, as they contend, privileges, property, ordinance of the college, he would be entitled to his and immunities, within the true meaning of the bill of action, for depriving him of his franchise. It maks no rights. They had rights, and still have them, which they difference, that this property is to be holden and can assert against the legislature, as well as against other administered, and these franchises exercised, for the wrongdoers. It makes no difference, that the estate is purpose of diffusing learning. No principle and no case holden for certain trusts. The legal estate is still theirs. establishes any such distinction. The public may be They have a right in the property, and they have a right of benefited by the use of this property. But this does not visiting and superintending the trust; and this is an object change the nature of the property, or the rights of the of legal protection, as much as any other right. The owners. The object of the charter may be public good; so charter declares, that the powers conferred on the it is in all other corporations; and this [***71] would as trustees, are "privileges, advantages, liberties, and well justify the resumption or violation of the grant in immunities;" and that they shall be forever holden by any other case as in this. In the case of an advowson, the them and their successors. The New-Hampshire bill of use is public, and the right cannot be turned to any private rights declares, that no one shall be deprived of his benefit or emolument. It is, nevertheless a legal private "property, privileges, or immunities," but by judgment of right, and the property of the owner, as emphatically as his peers, or the law of the land. The argument on the his freehold. The rights and privileges of trustees, other side is, that although these terms [***69] may visitors, or governors of incorporated colleges, stand on mean something in the bill of rights, they mean nothing the same foundation. They are so considered, both by Page 19 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***71; 4 Wheat. 518 Lord Holt and Lord Hardwicke. 28 To contend that the sacred, till forfeited for just cause. That all property, of rights of the plaintiffs may be taken away, because they which the use may be beneficial to the public, belongs derive from them no pecuniary benefit, or private therefore to the public, is quite a new doctrine. It has no emolument, or because they cannot be transmitted to their precedent, and is supported by no known principle. Dr. heirs, or would not be assets to pay their debts, is taking Wheelock might have answered his purposes, in this case, an extremely narrow view of the subject. According to by executing [***74] a private deed of trust. He might this notion, the case would be different, if, in the charter, have conveyed his property to trustees, for precisely such they had stipulated for a commission on the disbursement uses as are described in this charter. Indeed it appears of the funds; and they have ceased to have any interest in that he had contemplated the establishing of his school in the property, because they have undertaken to administer that manner, and had made his will, and devised the it gratuitously. It cannot be necessary to say much in property to the same persons who were afterwards refutation of the idea, that there cannot be a legal interest, appointed trustees in the charter. Many literary and other or ownership, in any thing which does not yield [***72] charitable institutions are founded in that manner, and the a pecuniary profit; as if the law regarded no rights but the trust is renewed, and conferred on other persons, from rights of money, and of visible tangible property. Of time to time, as occasion may require. In such a case, no what nature are all rights of suffrage? No elector has a lawyer would or could say, that the legislature might particular personal interest; but each has a legal right, to devest the trustees constituted by deed or will, seize upon be exercised at his own discretion, and it cannot be taken the property, and give it to other persons, for other away from him. The exercise of this right directly and purposes. And does the granting of a charter, which is very materially affects the public; much more so than the only done to perpetuate the trust in a more convenient exercise of the privileges of a trustee of this college. manner, make any difference? Does or can this change Consequences of the utmost magnitude may sometimes the nature of the charity, and turn it into a public, political depend on the exercise of the right of suffrage by one or a corporation? Happily we are not without authority on this few electors. Nobody was ever yet heard to contend, point. It has been considered and adjudged. Lord however, that on that account the public might take away Hardwicke says, in so many words, "The charter of the the right or impair it. This notion appears to be borrowed crown cannot make a CHARITY more or less public, but from no better source than the repudiated doctrine of the only more permanent than it would otherwise [***75] three judges in the Aylesbury case. 29 That was an action be." 30 The granting of the corporation is but making the against a returning officer, for refusing the plaintiff's trust perpetual, and does not alter the nature of the vote, in the election of a member of parliament. Three of charity. The very object sought in obtaining such charter, the judges of the king's bench held, that the action could and in giving property to such a corporation, is to make not be maintained, because, among other objections, "it and keep it private property, and to clothe it with all the was not any matter of profit, either in presenti or in security and inviolability of private property. The intent futuro." It would not enrich the plaintiff, in presenti, is, that there shall be a legal private ownership, and that [***73] nor would it, in futuro, go to his heirs, or answer the legal owners shall maintain and protect the property, to pay his debts. But Lord Holt and the house of lords for the benefit of those for whose use it was designed. were of another opinion. The judgment of the three Who ever endowed the public? Who ever appointed a judges was reversed, and the doctrine they held, having legislature to administer his charity? Or who ever heard, been exploded for a century, seems now for the first time before, that a gift to a College, or Hospital, or an Asylum, to be revived. Individuals have a right to use their own was, in reality, nothing but a gift to the State? The State property for purposes of benevolence, either towards the of Vermont is a principal donor to Dartmouth College. public, or towards other individuals. They have a right to The lands given lie in that State. This appears in the exercise this benevolence in such lawful manner as they special verdict. Is Vermont to be considered as having may choose; and when the government has induced and intended a gift to the State of New-Hampshire in this excited it, by contracting to give perpetuity to the case; as it has been said is to be the reasonable stipulated manner of exercising it, to rescind this contract, construction of all donations to the College? The and seize on the property, is not law, but violence. legislature of New-Hampshire affects to represent the Whether the State will grant these franchises, and under public, and therefore claims a right to control all property what conditions it will grant them, it decides for itself. destined [***76] to public use. What hinders Vermont But when once granted, the constitution holds them to be from considering herself equally the representative of the Page 20 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***76; 4 Wheat. 518 public, and from resuming her grants, at her own Holt, 715. 1 Show. 360. 4 Mod. 106. Skinn. 447. pleasure? Her right to do so is less doubtful than the 18 Lord Holt's judgment, copied from his own power of New-Hampshire to pass the laws in question. manuscript, is in 2 T.R. 346. In University v. Foy, 31 the Supreme Court of 19 1 Burns' Eccles. Law, 443. North-Carolina pronounced unconstitutional and void, a 20 Green v. Rutherforth, 1 Ves. 472. Attorney law repealing a grant to the University of North-Carolina; General v. Foundling Hospital, 2 Ves. jr. 47. Kyd although that University was originally erected and on Corp. 195. Coop. Eq. Pl. 292. endowed by a statute of the State. That case was a grant 21 St. John's College, Cambridge v. Todington, of lands, and the Court decided that it could not be 1 Burr. 200. resumed. This is the grant of a power and capacity to 22 Attorney General v. Middleton, 2 Ves. 328. hold lands. Where is the difference of the cases, upon 23 Green v. Rutherforth, ubi supra. St. John's principle? In Terret v. Taylor, 32 this Court decided, that College v. Todington, ubi supra. a legislative grant or confirmation of lands for the 24 4 Term Rep. 233. purposes of moral and religious instruction could no more 25 Bl. Com. ub. supr. be rescinded than other grants. The nature of the use was 26 2 Bl. Com. 37. not holden to make any difference. A grant to a parish or 27 Sull. 41st Lec. church, for the purposes which have been mentioned, 28 Phillips v. Bury. Green v. Rutherforth, ubi cannot be distinguished, in respect to the title it confers, supra. Vide also 2 Black. 21. from a grant to a College for the promotion of piety and 29 Ashby v. White, 2 Ld. Raym. 938. learning. To the same purpose may be cited, the case 30 Attorney General v. Pearce, 2 Atk. 87. [***77] of Paylett v. Clark. The State of Vermont, by 31 2 Heywood's R. statute, in 1794, granted to the respective towns in that 32 9 Cranch, 43. State, certain glebe lands lying within those towns, for 33 9 Cranch, 292. the sole use and support of religious worship. In 1799, an act was passed to repeal the act of 1794; but this Court [***78] I hope enough has been said to show, that the declared, that the act of 1794, "so far as it granted the trustees possessed vested liberties, privileges, and glebes to the towns, could not afterwards be repealed by immunities, under this charter; and that such liberties, the legislature, so as to devest the rights of the towns privileges, and immunities, being once lawfully obtained under the grant. 33 It will be for the other side to show, and vested, are as inviolable as any vested rights of that the nature of the use decides the question, whether property whatever. Rights to do certain acts, such, for the legislature has power to resume its grants. It will be instance, as the visitation and super-intendence of a for those who maintain such a doctrine, to show the college, and the appointment of its officers, may surely principles and cases upon which it rests. It will be for be vested rights, to all legal intents, as completely as the them also, to fix the limits and boundaries of their right to possess property. A late learned Judge of this doctrine, and to show what are, and what are not, such Court has said, "when I say, that a right is vested in a uses as to give the legislature this power of resumption citizen, I mean, that he has the power to do certain and revocation. And to furnish an answer to the actions, or to possess certain things, according to the law cases-cited, it will be for them further to show, that a of the land. 34 grant for the use and support of religious worship, stands 34 3 Dal. 394. on other ground than a grant for the promotion of piety and learning. If such be the true nature of the plaintiff's interests under this charter, what are the articles in the New-Hampshire 10 1 Bl. Com. 471. bill of rights which these acts infringe? 11 1 Ves. 537. 12 9 Ves. 405. They infringe the second article; which says, that the 13 1 Wooddes. 474. citizens of the State have a right to hold and possess 14 1 Bl. Com. 471. property. The plaintiffs had a legal property in this 15 2 T.R. 350, 351. charter; and they had acquired property under it. The acts 16 1 Bl. Com. 480. deprive them of both. They impair and take away the 17 Reported in 1 Lord Raymond, 5.Comb. 265. [***79] charter; and they appropriate the property to Page 21 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***79; 4 Wheat. 518 new uses, against their consent. The plaintiffs cannot not to be doubted." In my humble opinion, this surrenders now hold the property acquired by themselves, and which the point. To resist the effect of this admission, however, this article says, they have a right to hold. They infringe the learned judges add, "But how a privilege can be the twentieth article. By that article it is declared, that in protected from the operation of the law of the land, by a questions of property, there is a right to trial. The clause in the constitution, declaring that it shall not be plaintiffs are devested, without trial or judgment. They taken away but by the law of the land, is not very easily infringe the twenty-third article. In is therein declared, understood." This answer goes on the ground, that the that no retrospective laws shall be passed. This article acts in question are laws of the land, within the meaning bears directly on the case. These acts must be deemed of the constitution. If they be so, the argument drawn retrospective, within the settled construction of that term. from this article is fully answered. If they be not so, it What a retrospective law is, has been decided, on the being admitted that the plaintiffs' rights are "privileges," construction of this very article, in the Circuit Court for within the meaning of the article, the argument is not the first circuit. The learned Judge of that circuit, says, answered, and the article is [***82] infringed by the acts. "every statute which takes away, or impairs, vested Are then these acts of the legislature, which affect only rights, acquired under existing laws, must be deemed particular persons and their particular privileges, laws of retrospective." 35 That all such laws are retrospective, the land? Let this question be answered by the text of was decided also in the case of Dash v. Van Kleek, 36 Blackstone: "And first, it (i.e. law) is a rule: not a where a most learned Judge quotes this article from the transient sudden order from a superior, to, or concerning, constitution of New-Hampshire, with manifest a particular person; but something permanent, uniform, approbation, as a plain and clear expression of those and universal. Therefore, a particular act of the fundamental and unalterable [***80] principles of legislature to confiscate the goods of Titius, or to attaint justice, which must lie at the foundation of every free and him of high treason, does not enter into the idea of a just system of laws. Can any man deny, that the plaintiffs municipal law: for the operation of this act is spent upon had rights, under the charter, which were legally vested, Titius only, and has no relation to the community in and that by these acts, those rights are impaired. 37 These general; it is rather a sentence than a law." 38 Lord Coke acts infringe also, the thirty-seventh article of the is equally decisive and emphatic. Citing and commenting constitution of New-Hampshire; which says, that the on the celebrated 29th chap. of Magna Charta, he says, powers of government shall be kept separate. By these "no man shall be disseized, &c. unless it be by the lawful acts, the legislature assumes to exercise a judicial power. judgment, that is, verdict of equals, or by the law of the It declares a forfeiture, and resumes franchises, once land, that is, (to speak it once for all,) by the due course granted, without trial or hearing. If the constitution be and process of law." 39 Have the plaintiffs lost their not altogether waste paper, it has restrained the power of franchises by "due course and process of law?" On the the legislature in these particulars. If it has any meaning, contrary, are not these acts "particular acts of the it is, that the legislature shall pass no act directly and legislature, which have no relation to the [***83] manifestly impairing private property, and private community in general, and which are rather sentences privileges. It shall not judge, by act. It shall not decide, than laws?" By the law of the land is most clearly by act. It shall not deprive, by act. But it shall leave all intended the general law; a law, which hears before it these things to be tried and adjudged by the law of the condemns; which proceeds upon inquiry, and renders land. The fifteenth article has been referred to before. It judgment only after trial. The meaning is, that every declares, that no one shall be "deprived of his property, citizen shall hold his life, liberty, property, and immunities, or privileges, but by the judgment of his immunities, under the protection of the general rules peers, or the law of the land." [***81] Notwithstanding which govern society. Every thing which may pass under the light in which the learned Judges in New-Hampshire the form of an enactment, is not, therefore, to be viewed the rights of the plaintiffs under the charter, and considered the law of the land. If this were so, acts of which has been before adverted to, it is found to be attainder, bills of pains and penalties, acts of confiscation, admitted, in their opinion, that those rights are privileges acts reversing judgments, and acts directly transferring within the meaning of this fifteenth article of the bill of one man's estate to another, legislative judgments, rights. Having quoted that article, they say: "that the decrees, and forfeitures, in all possible forms, would be right to manage the affairs of this college is a privilege, the law of the land. Such a strange construction would within the meaning of this clause of the bill of rights, is render constitutional provisions of the highest importance Page 22 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***83; 4 Wheat. 518 completely inoperative and void. It would tend directly constitutiones futuris certum est dare formam to establish the union of all powers in the legislature. negotiis, non ad facta praeterita revocari, nisi There would be no general permanent law for courts to nominatim, et de praeterito tempore, et adhuc administer, or for men to live under. The administration pendentibus negotiis coutum sit. (Cod. 1. 14. 7.) of justice would be an empty form, an idle ceremony. This passage, according to the best interpretation Judges would sit to execute legislative [***84] of the civilians, relates not merely to future suits, judgments and decrees; not to declare the law, or to but to future as contradistinguished from past administer the justice of the country. "Is that the law of contracts and vested rights.(Perezii Praelec. t.) It the land," said Mr. Burke, "upon which, if a man go to is, indeed, admitted, that the prince may anact a Westminster-Hall, and ask counsel by what title or tenure retrospective law, provided it be done expressly; he holds his privilege or estate according to the law of the for the will of the prince, under the despotism of land, he should be told, that the law of the land is not yet the Roman emperors, was paramount to every known; that no decision or decree has been made in his obligation.Great latitude was anciently allowed to case; that when a decree shall be passed, he will then legislative expositions of statutes; for the know what the law of the land is? Will this be said to be separation of the judicial, from the legislative the law of the land, by any lawyer who has a rag of a power, was not then distinctly known or gown left upon his back, or a wig with one tie upon his prescribed. The prince was in the habit of head?" That the power of electing and appointing the interpreting his own laws for particular occasions. officers of this college is not only a right of the trustees as This was called the interlocutio principis; and a corporation generally, and in the aggregate, but that this, according to Huber's definition, was, quando each individual trustee has also his own individual principes inter partes loquuntur, et jus dicunt. franchise in such right of election and appointment, is (Praelec. Juris. Rom. Vol. 2. 545.) No correct according to the language of all the authorities. Lord civilian, and especially no proud admirer of the Holt says, "it is agreeable to reason and the rules of law, ancient republic, (if any such then existed,) could that a franchise should be vested in the corporation have reflected on this interference with private aggregate, and yet the benefit of it to redound to the rights, and pending suits, without disgust and particular members, and to be enjoyed by them in their indignation; and we are rather surprised to find, private capacity. [***85] Where the privilege of election that under the violent and irregular genius of the is used by particular persons, it is a particular right, Roman government, the principle before us vested in every particular man. 40 should have been acknowledged and obeyed to the extent in which we find it. The fact shows, 35 Society v. Wheeler, 2 Gal. 103. that it must be founded in the clearest justice. Our 36 7 Johns. R. 477. case is happily very different from that of the 37 "It is a principle in the English law, as ancient subjects of Justinian. With us, the power of the as the law itself," says Chief Justice Kent, in the law-giver is limited and defend; the judicial is case last cited, "that a statute, even of its regarded as a distinct independent power; private omnipotent parliament, is not to have a rights have been better understood, and more retrospective effect. Nova constitutio futuris exalted in public estimation, as well as secured by formam imponere debet, et non prateritis. provisions dictated by the spirit of freedom, and (Braction, lib. 4, fol. 228. 2 Inst. 292.) The unknown to the civil law. Our constitutions do maxim in Bracton was probably taken from the not admit the power assumed by the Roman civil law, for we find in that system the same prince; and the principle we are considering, is principle, that the law-giver cannot alter his mind now to be regarded as sacred." to the prejudice of a vested right. Nemo potest 38 1 Bl. Com9 44. mutare consilium suum in alterius injuriam. (Dig. 39 Co. Ins. 46. 50. 17. 75.) This maxim of Papinian is general in 40 2 Lord Raym. 952. its terms; but Dr. Taylor (Elements of the Civil Law, 168.) applies it directly as a restriction upon [***86] It is also to be considered, that the president and the law-giver; and a declaration in the code leaves professors of this college have rights to be affected by no doubt as to the sense of the civil law. Leges at these acts. Their interest is similar to that of fellors in the Page 23 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***86; 4 Wheat. 518 English colleges; because they derive their living wholly, a person of his nomination; and in as much as this was or in part, from the founder's bounty. The president is directly against the charter and constitution of the one of the trustees, or corporators. The professors are not college, he was pleased to add a non obstante clause of necessarily members of the corporation; but they are sufficiently comprehensive import. The fellows were appointed by the trustees, are removable only by them, commanded to admit the person mentioned in the and have fixed salaries, payable out of the general funds mandate, "any statute, custom or constitution to the of the college. Both president and professors have contrary notwithstanding, wherewith we are graciously freeholds in their offices; subject only to be removed, by pleased to dispense, in this behalf." The fellows refused the trustees, as their legal visitors, for good cause. All the obedience to this mandate, and Dr. Hough, a man of authorities speak of fellowships in colleges as freeholds, independence and character, was chosen president by the notwithstanding the fellows may be liable to be fellows, according to the charter and statutes. The king suspended or removed, for misbehaviour, by their then assumed the power, in virtue of his prerogative, constituted visitors. Nothing could have been less [***89] to send down certain commissioners to turn him expected, in this age, than that there should have been an out; which was done accordingly; and Parker, a creature attempt, by acts of the legislature, to take away these suited to the times put in his place. And because the college livings, the inadequate, but the only support of president, who was rightfully and legally elected, would literary men, who have devoted their lives to the not deliver the keys, the doors were broken open. "The instruction of youth. The president and professors were nation, as well as the university," says Bishop Burnet, 41 appointed by the twelve [***87] trustees. They were "looked on all these proceedings with just indignation. It accountable to nobody else, and could be removed by was thought an open piece of robbery and burglary, when nobody else. They accepted their offices on this tenure. men, authorized by no legal commission, came and Yet the legislature has appointed other persons, with forcibly turned men out of their possession and freehold." power to remove these officers, and to deprive them of Mr. Hume, although a man of different themper, and of their livings; and those other persons have exercised that other sentiments, in some respects, than Dr. Burnet, power. No description of private property has been speaks of this arbitrary attempt of prerogative, in terms regarded as more sacred than college livings. They are not less decisive. "The president, and all the fellows," the estates and freeholds of a most deserving class of says he, "except two, who complied, were expelled the men; of scholars who have consented to forego the college; and Parker was put in possession of the office. advantages of professional and public employments, and This act of violence, of all those which were committed to devote themselves to science and literature, and the during the reign of James, is perhaps the most illegal and instruction of youth, in the quiet retreats of academic life. arbitrary. When the dispensing power was the most Whether, to dispossess and oust them; to deprive them of strenuously insisted on by court lawsyers, it had still been their office, and turn them out of their livings; to do this, allowed, that the statutes which regard private property not by the power of their legal visitors, or governors, but could not legally be infringed [***90] by that by acts of the legislature; and to do it without forfeiture, prerogative. Yet, in this instance, it appeared that even and without fault; whether all this be not in the highest these were not now secure from invasion. The privileges degree an indefensible and arbitrary proceeding, is a of a college are attacked; men are illegally dispossessed question, of which there would seem to be but one side fit of their property for adhering to their duty, to their oaths, for a lawyer or a scholar to espouse. Of all the attempts and to their religion." This measure king James lived to of James II. to overturn the law, and the rights [***88] of repent, after repentance was too late. When the charter of his subjects, none was esteemed more arbitrary or London was restored, and other measures of violence tyranical, than his attack on Magdalen College, Oxford: retracted, to avert the impending revolution, the expelled And, yet, that attempt was nothing but to put one president and fellows of Magdalen college were permited president and put in another. The president of that to resume their rights. It is evident that this this was college, according to the charter and statutes, is to be regarded as an arbitrary interference with private chosen by the fellows, who are the corporators. There property. Yet private property was no otherwise attacked, being a vacancy, the king chose to take the appointment than as a person was appointed to administer and enjoy out of the hands of the fellows, the legal electors of a the revenues of a college, in a manner and by persons not president, into his own hands. He therefore sent down his authorized by the constitution of the college. A majority mandate commanding the fellows to admit, for president, of the members of the corporation would not comply with Page 24 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***90; 4 Wheat. 518 the king's wishes. A minority would. The object was, 41 Hist. of his own times, vol. 3. p. 119. therefore, to make this minority, a majority. To this end, 42 Vide a full account of this case in State the king's commissioners were directed to interfere in the Trials, 4 Ed. vol. 4. p. 262. case, and they united with the two complying fellows, and expelled the rest; and thus effected a change [***91] If the view which has been taken of this question be at all in the government of the college. The language in which correct, this was an eleemosynary corporation; a private Mr. Hume, and all other writers, speak of this abortive charity. The property was private property. The trustees attempt of oppression, shows that colleges were esteemed were visitors, and their right to hold the charter, to be, as they truly are, private corporations, and the administer the funds, and visit and govern the college, property and privileges which belong to them, private was a franchise and privilege, solemnly granted to them. property, and private privileges. Court lawyers were The use being public, in no way diminishes their legal found to justify the king in dispensing with the laws; that estate in the property, or their title to the franchise. There is, in assuming and exercising a Legislative authority. is no principle, nor any case, which declares that a gift to But no lawyer, not even a court lawyer, in the reign of such a corporation is a gift to the public. The acts in king James the second, as far as appears, was found to question violate property. They take away privileges, say, that even by this high authority, he could infringe the immunities, and franchises. They deny to the trustees the franchises of the fellows of a college, and take away their protection of the law; and they are retrospective in their livings. Mr. Hume gives the reason; it is, that such operation. In all which respects, they are against the franchises were regarded, in a most emphatic sense, as constitution of New-Hampshire. private property. 42 If it could be made to appear, that the 2. The plaintiffs contend, in the second place, that the trustees and the president and professors held their offices acts in question are repugnant to the 10th section of the and franchises during the pleasure of the legislature, and 1st article of the constitution of [***94] the United that the property holden belonged to the State, then States. The material words of that section are: "no State indeed the legislature have done no more than they had a shall pass any bill of attainder, ex post facto law, or law right to do. But this is not so. The charter is a charter of impairing the obligation of contracts." privileges and immunities; and these are holden by the [***92] trustees expressly against the State forever. It is The object of these most important provisions in the admitted, that the State, by its Courts of law, can enforce national constitution has often been discussed, both here the will of the donor, and compel a faithful execution of and elsewhere.It is exhibited with great clearness and the trust. The plaintiffs claim no exemption from legal force by one of the distinguished persons who framed responsibility. They hold themselves at all times that instrument. "Bills of attainder, ex post facto laws, answerable to the law of the land, for their conduct in the and laws impairing the obligation of contracts, are trust committed to them. They ask only to hold the contrary to the first principles of the social compact, and property of which they are owners, and the franchises to every principle of sound legislation. The two former which belong to them, until they shall be found by due are expressly prohibited by the declarations prefixed to course and process of law to have forfeited them. It can some of the State constitutions, and all of them are make no difference, whether the legislature exercise the prohibited by the spirit and scope of these fundamental power it has assumed, by removing the trustees and the charters. Our own experience has taught us, nevertheless, president and professors, directly, and by name, or by that additional fences against these dangers ought not to appointing others to expel them. The principle is the be omitted. Very properly, therefore, have the same, and, in point of fact, the result has been the same. Convention added this constitutional bulwark in favour of If the entire franchise cannot be taken away, neither can it personal security and private rights; and I am much be essentially impaired. If the trustees are legal owners deceived if they have not, in so doing, as faithfully of the property, they are sole owners. If they are visitors, consulted the genuine sentiments as the undoubted they are sole visitors. No one will be found to say, that if interests of their constituents. The [***95] sober people the legislature may do what it has done, it may not do any of America are weary of the fluctuating policy which has thing and every thing which it may choose to do, relative directed the public councils. They have seen with regret, [***93] to the property of the corporation, and the and with indignation, that sudden changes, and legislative privileges of its members and officers. interferences, in cases affecting personal rights, become Page 25 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***95; 4 Wheat. 518 jobs in the hands of enterprising and influential contracts; and that parties are necessary to give them speculators; and snares to the more industrious and less force and validity. In King v. Dr. Askew, 50 it is said, informed part of the community. They have seen, too, "The crown cannot oblige a man to be a corporator that one legislative interference is but the link of a long without his consent; he shall not be subject to the chain of repetitions; every subsequent interference being inconveniences of it, without accepting it and assenting to naturally produced by the effects of the preceding." 43 It it." These terms, "acceptance," and "assent," are the very has already been decided in this Court, that a grant is a language of contract. In Ellis v. Marshall, 51 it was contract, within the meaning of this provision; and that a expressly adjudged, that the naming of the defendant, grant by a State is also a contract as much as the grant of among others, in an act of incorporation did not, of itself, an individual. 44 It has also been decided, that a grant by make him [***98] a corporator; and that his assent was a State before the revolution, is as much to be protected necessary to that end. The Court speak of the act of as a grant since. 45 But the case of Terret v. Taylor, incorporation as a grant, and observe, "that a man may before cited, is of all others most pertinent to the present refuse a grant, whether from the government or an argument. Indeed, the judgment of the Court in that case individual, seems to be a principle too clear to require the seems to leave little to be argued or decided in this. 46 support of authorities." But Mr. Justice Buller, in King v. This Court, then, does not admit the doctrine, that a Passmore, furnishes, if possible, a still more direct and legislature can repeal statutes [***96] creating private explicit authority. Speaking of a corporation for corporations. If it cannot repeal them altogether, of government, he says, "I do not know how to reason on course it cannot repeal any part of them, or impair them, this point better than in the manner urged by one of the or essentially alter them, without the consent of the relator's counsel, who considered the grant of corporators. If, therefore, it has been shown that this incorporation to be a compact between the crown and a college is to be regarded as a private charity, this case is certain number of the subjects, the latter of whom embraced within the very terms of that decision. A grant undertake, in consideration of the privileges which are of corporate powers and privileges is as much a contract bestowed, to exert themselves for the good government as a grant of land. What proves all charters of this sort to of the place." This language applies, with peculiar be contracts, is, that they must be accepted, to give them propriety and force, to the case before the Court. It was force and effect. If they are not accepted they are void. in consequence of the "privileges bestowed," that Dr. And in the case of an existing corporation, if a new Wheelock and his associates, undertook to exert charter is given it, it may even accept part, and reject the themselves for the instruction and education of youth in rest. In Rex v. Vice Chancellor of Cambridge, 47 Lord this college; and it was on the same consideration that the Mansfield says, "there is a vast deal of difference founder endowed it with his property. And because between a new charter granted to a new corporation, charters of incorporation [***99] are of the nature of (who must take it as it is given,) and a new charter given contracts, they cannot be altered or varied, but by consent to a corporation already in being, and acting either under of the original parties. If a charter be granted by the king, a former charter, or under prescriptive usage. The latter, it may be altered by a new charter granted by the king, a corporation already existing, are not obliged to accept and accepted by the corporators But if the first charter be the new charter in toto, and to receive either all or none granted by parliament, the consent of parliament must be of it; they may act partly under [***97] it, and partly obtained to any alteration.In King v. Miller, 52 Lord under their old charter or prescription. The validity of Kenyon says, "Where a corporation takes its rise from the these new charters must turn upon the acceptance of king's charter, the king by granting, and the corporation them." In the same case, Mr. Justice Wilmot says, "It is by accepting, another charter, may alter it, because it is the concurrence and acceptance of the university that done with the consent of all the parties who are gives the force to the charter of the crown." In the King v. competent to consent to the alteration. 53 There are, in Passmore, 48 Lord Kenyon observes, "some things are this case, all the essential constituent parts of a contract. clear: when a corporation exists, capable of discharging There is something to be contracted about; there are its functions, the crown cannot obtrude another charter parties, and there are plain terms in which the agreement upon them; they may either accept or reject it." 49 In all of the parties, on the subject of the contract, is expressed. cases relative to charters, the acceptance of them is There are mutual considerations and inducements. The uniformly alleged in the pleadings. This shows the charter recites, that the founder, on his part, has agreed to general understanding of the law, that they are grants, or establish his seminary in New-Hampshire, and to enlarge Page 26 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***99; 4 Wheat. 518 it, beyond its original design, among other things, for the sovereignties, it is not to be disguised, that the benefit of that province; and thereupon a charter is given framers of the constitution viewed, with some to him and his associates, [***100] designated by apprehension, the violent acts which might grow himself, promising and assuring to them, under the out of the feelings of the moment; and that the plighted faith of the State, the right of governing the people of the United States, in adopting that college, and administering its concerns, in the manner instrument, have manifested a determination to provided in the charter. There is a complete and perfect shield themselves, and their property, from the grant to them of all the power of superintendance, effects of those sudden and strong passions to visitation, and government. Is not this a contract? If which men are exposed. The restrictions on the lands or money had been granted to him and his legislative power of the States, are obviously associates, for the same purposes, such grant could not be founded in this sentiment; and the constitution of rescinded. And is there any difference, in legal the United States contains what may be deemed a contemplation, between a grant of corporate franchises, bill of rights, for the people of each State." and a grant of tangible property? No such difference is 45 New-Jersey v. Wilson, 7 Cranch, 164. recognized in any decided case, nor does it exist in the 46 "A private corporation," says the Court, common apprehension of mankind. "created by the legislature, may lose its franchises by a misuser or a nonuser of them; and they may 43 Letters of Publius, or The Federalist, (No. be resumed by the government under a judicial 44., by Mr. MADISON.) judgment upon a quo warranto to ascertain and 44 In Fletcher v. Peck, 6 Cranch 87. this Court enforce the forfeiture. This is the common law of says, "a contract is a compact between two or the land, and is a tacit condition annexed to the more parties, and is either executory or executed. creation of every such corporation. Upon a An executory contract is one in which a party change of government, too, it may be admitted binds himself to do, or not to do, a particular that such exclusive privileges attached to a private thing; such was the law under which the corporation as are inconsistent with the new conveyance was made by the government. A government, may be abolished. In respect, also, contract executed is one in which the object of to public corporations which exist only for public contract is performed; and this, says Blackstone, purposes, such as counties, towns, cities, &c. the differs in nothing from a grant. The contract legislature may, under proper limitations, have a between Georgia and the purchasers was executed right to change modify, enlarge, or restrain them, by the grant. A contract executed, as well as one securing, however, the property for the use of which is executory, contains obligations binding those for whom and at whose expense it was on the parties. A grant, in its own nature, originally purchased. But that the legislature can amounts to an extinguishment of the right of the repeal statutes creating private corporations, or grantor, and implies a contract not to reassert that confirming to them property already acquired right. If under a fair construction of the under the faith of previous laws, and by such constitution, grants are comprehended under the repeal can vest the property of such corporations term contracts, is a grant from the State excluded exclusively in the State, or dispose of the same to from the operation of the provision? Is the clause such purposes as they please, without the consent to be considered as inhibiting the State from or default of the corporators, we are not prepared impairing the obligation of contracts between two to admit; and we think ourselves standing upon individuals, but as excluding from that inhibition the principles of natural justice, upon the contracts made with itself? The words themselves fundamental laws of every free government, upon contain no such distinction. They are general, and the spirit and letter of the constitution of the are applicable to contracts of every description. If United States, and upon the decisions of most contracts made with the State are to be exempted respectable judicial tribunals, in resisting such a from their operation, the exception must arise doctrine." from the character of the contracting party, not 47 3 Burr. 1656. from the words which are employed. Whatever 48 3 T.R. 240. respect might have been felt for the State 49 Vide also, 1 Kyd. on Cor. 65. Page 27 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***100; 4 Wheat. 518 50 4 Burr. 2200. youth of modern times. Dartmouth College was 51 2 Mass. R. 279. established under a charter [***103] granted by the 52 6 T.R. 277. provincial government; but a better constitution for a 53 Vide also, 2 Bro. Ch. R. 662. Ex parte Bolton college, or one more adapted to the condition of things School. under the present government, in all material respect, could not now be framed. Nothing in it was found to [***101] It is therefore contended, that this case falls need alteration at the revolution. The wise men of that within the true meaning of this provision of the day saw in it one of the best hopes of future times, and constitution, as expounded in the decisions of this Court; commended it, as it was, with parental care, to the that the charter of 1769, is a contract, a stipulation, or protection and guardianship of the government of the agreement; mutual in its considerations, express and State. A charter of more liberal sentiments, of wiser formal in its terms, and of a most binding and solemn provisions, drawn with more care, or in a better spirit, nature. That the acts in question impair this contract, has could not be expected at any time, or from any source. already been sufficiently shown. They repeal and The college needed no change in its organization or abrogate its most essential parts. government. That which it did need was the kindness, the patronage, the bounty of the legislature; not a mock Much has heretofore been said on the necessity of elevation to the character of a university, without the admitting such a power in the legislature as has been solid benefit of a shilling's donation to sustain the assumed in this case. Many cases of possible evil have character; not the swelling and empty authority of been imagined, which might otherwise be without establishing institutes and other colleges. This remedy. Abuses, it is contended, might arise in the unsubstantial pageantry would seem to have been in management of such institutions, which the ordinary derision of the scanty endowment and limited means of courts of law would be unable to correct. But this is only an unobtrusive, but useful and growing seminary. Least another instance of that habit of supposing extreme cases, of all was there a necessity, or pretence of [***104] and then of reasoning from them, which is the constant necessity, to infringe its legal rights, violate its franchises refuge of those who are obliged to defend a cause which, and privileges, and pour upon it these overwhelming upon its merits, is indefensible. It would be sufficient to streams of litigation. But this argument, from necessity, say, in answer, that it is not pretended, that there was here would equally apply in all other cases. If it be well any such case of necessity. But a still more satisfactory founded, it would prove, that whenever any answer [***102] is, that the apprehension of danger is inconvenience or evil should be experienced from the groundless, and, therefore, the whole argument fails. restrictions imposed on the legislature by the constitution, Experience has not taught us that there is danger of great these restrictions ought to be disregarded. It is enough to evils of of great inconvenience from this source. say, that the people have thought otherwise. They have, Hitherto, neither in our own country nor elsewhere, have most wisely, chosen to take the risk of occasional such cases of necessity occurred. The judicial inconvenience from the want of power, in order that there establishements of the State are presumed to be might be a settled limit ot is exercise, and a permanent competent to prevent abuses and violations of trust, in security against its abuse. They have imposed cases of this kind, as well as in all others. It they be not, prohibitions and restraints; and they have not rendered they are imperfect, and their amendment would be a most these altogether vain and nugatory by conferring the proper subject for legislative wisdom. Under the power of dispensation. If inconvenience should arise, government and protection of the general laws of the which the legislature cannot remedy under the power land, those institutions have always been found safe, as conferred upon it, it is not answerable for such well as useful. They go on with the progress of society, inconvenience. That which it cannot do within the limits accommodating themselves easily, without sudden prescribed to it, it cannot do at all. No legislature in this change or violence, to the alterations which take place in country is able, and may the time never come when it its condition; and in the knowledge, the habits, and shall be able, to apply to itself the memorable [***105] pursuits of men.The English colleges were founded in expression of a Roman pontiff; "Licet hoc DE JURE non Catholic ages.Their religion was reformed with the possumus, volumus tamen DE PLENITUDINE general reformation of the nation; and they are suited POTESTATIS." perfectly well to the purpose of educating the protestant Page 28 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***105; 4 Wheat. 518 The case before the Court is not of ordinary importance, alone gives the Court jurisdiction in this case, did not nor of every day occurrence. It affects not this college extend to grants of political power; to contracts only, but every college, and all the literary institutions of concerning the internal government and police of a the country. They have flourished, hitherto, and have sovereign State. Nor does it extend to contracts which become in a high degree respectable and useful to the relate merely to matters of civil institution, even of a community. They have all a common principle of private nature. Thus marriage is a contract, and a private existence, the inviolability of their charters. It will be a contract; but relating merely to a matter of civil dangerous, a most dangerous experiment, to hold these institution, which every society has an inherent right to institutions subject to the rise and fall of popular parties, regulate as its own wisdom may dictate, it cannot be and the fluctuations of political opinions. If the franchise considered as within the spirit of this prohibitory clause. may be at any time taken away, or impaired, the property Divorces unquestionably impair the obligation of the also may be taken away, or its use perverted. Benefactors nuptial contract; they change the relations of the marriage will have no certainty of effecting the object of their state, without the consent of both the parties, and thus bounty; and learned men will be deterred from devoting come clearly within the letter of the prohibition. But themselves to the service of such institutions, from the surely, no one will contend, that there is locked up in this precarious title of their offices. Colleges and halls will be mystical clause of the constitution [***108] a deserted by all better spirits, and become a theatre for the prohibition to the States to grant divorces, a power contention of politics. Party and faction will be cherished peculiarly appropriate to domestic legislation, and which in the places consecrated to piety and learning. These has been exercised in every age and nation where [***106] consequences are neither remote nor possible civilization has produced that corruption of manners, only. Ther are certain and immediate. which, unfortunately, requires this remedy. Still less can a contract concerning a public office to be exercised, or When the Court in North-Carolina declared the law of the duty to be performed, be included within this prohibition. State, which repealed a grant to its university, The Convention who framed the constitution, did not unconstitutional and void, the legislature had the candour intend to interfere in the exercise of the political powers and the wisdom to repeal the law.This example, so reserved to the State governments. That was left to be honourable to the State which exhibited it, is most fit to regulated by their own local laws and constitutions; with be followed on this occasion. And there is good reason to this exception only, that the Union should guarantee to hope, that a State which has hitherto been so much each State a republican from of government, and defend distinguished for tempeperate councils, cautious it against domestic insurrection and rebellion. Beyond legislation, and regard to law, will not fail to adopt a this, the authorities of the Union have no right to interfere course which will accord with her highest and best in the exercise of the powers reserved to the State. They interest, and, in no small degree, elevate her reputation. are sovereign and independent in their own sphere. If, for It was for many obvious reasons most anxiously desired, example, the legislature of a particular State should that the question of the power of the legislature over this attempt to deprive the judges of its Courts (who, by the charter should have been finally decided in the State State constitution, held their places during good Court. An earnest hope was entertained that the judges of behaviour) of their offices without a trial by that Court might have viewed the case in a light impeachment; or should arbitrarily [***109] and favourable to the rights of the trustees. That hope has capriciously increase the number of the judges so as to failed. It is here that those rights are now to be give the preponderancy in judicature to the prevailing maintained, or they are prostrated forever. Omnia alia political faction, would it be pretended that the minority perfugia bonorum, subsidia, consilia, auxilia, jura could resist such a law, upon the ground of its impairing ceciderunt. Quem enim [***107] alium appellem? the obligation of a contract? Must not the remedy, if any quem obtestor? quem implorem? Nisi hoc loco, nisi apud where existing, be found in the interposition of some vos, nisi per vos, judices, salutem nostram, quae spe State authority to enforce the provisions of the State exigua extremaque pendet, temerimus; nihil est praeterea constitution? The education of youth, and the quo confugere possimus. encouragement of the arts and sciences, is one of the most important objects of civil government. 54 By our Mr. Homes, for the defendant in error, argued, that the constitutions, it is left exclusively to the States, with the prohibition in the constitution of the United States, which exception of copy rights and patents. It was in the Page 29 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***109; 4 Wheat. 518 exercise of this duty of government, that this charter was legislative wisdom, instructed by the lights of the age. originally granted to Dartmouth College. Even when first granted under the colonial government, it was subject to 54 Vattel, L. 1. c. 11. s. 112, 113. the notorious authority of the British parliament over all 55 1 Bl. Com. 485. charters containing grants of political power. It might The conclusion then is, that this charter is not such a have been revoked or modified by act of parliament. 55 contract as is [***112] contemplated by the constitution The revolution, which separated the colony from the of the United States; that it is not a contract of a private parent country, dissolved all connexion between this nature, concerning property or other private interests: but corporation and the crown of Great Britain. But it did not that it is a grant of a public nature, for public purposes, destroy that supreme [***110] authority which every relative to the internal government and police of a State, political society has over its public institutions. That still and, therefore, liable to he revoked or modified by the remained, and was transferred to the people of supreme power of that State. New-Hampshire. They have not relinquished it to the government of the United States, or to any department of Supposing, however, this to be a contract such as was that government. Neither does the constitution of meant to be included in the constitutional prohibition, is New-Hampshire confirm the charter of Dartmouth its obligation impaired by these acts of the legislature of College, so as to give it the immutability of the New-Hampshire? fundamental law. On the contrary, the constitution of the State admonishes the legislature of the duty of The title of the acts of the 27th of June, and the 18th of encouraging science and literature, and thus seems to December, 1816, shows that the legislative will and suppose its power of control over the scientific and intention was to amend the charter, and enlarge and literary institutions of the State. The legislature had, improve the corporation. If by a technical fiction the therefore, a right to modify this trust, the original object grant of the charter can be considered as a contract of which, was the education of the Indian and English between the king (or the State) and the corporators, the youth of the province. It is not necessary to contend, that obligation of that contract is not impaired; but is rather it had the right of wholly diverting the fund from the engorced, by these acts, which continue the same original object of its pious and benevolent founders. Still corporation, for the same objects, under a new name. It is it must be insisted, that a regal grant, with a regal and well settled, that a mere change of the name of a colonial policy, necessarily became subject to the corporation will not affect its identity. An addition to the modification of a republican legislature, whose right, and number of the colleges, the creation of new [***113] whose duty it was, to adapt the education of the youth of fellowships, or an increase of the number of the trustees, the country to the [***111] change in its political do not impair the franchises of the corporate body. Nor is institutions. It is a corollary from the right of the franchise of any individual corporator impaired. In self-government. The ordinary remedies which are the words of Mr. Justice Ashurst, in the case of the King furnished in the Court for a misuser of the corporate v. Passmore, 56 "the members of the old body have no franchises, are not adapted to the great exigencies of a injury or injustice to complain of, for they are all revolution in government. They pre-suppose a included in the new charter of incorporation; and if any of permanently established order of things, and are intended them do not become members of the new incorporation, only to correct occasional deviations, and minor but refuse to accept, it is their own fault." What rights mischiefs. But neither a reformation in religion, nor a which are secured by this alleged contract are invaded by revolution in government, can be accomplished or the acts of the legislature? Is it the right of property, or of confirmed by a writ of quo warranto or mandamus. We privileges? It is not the former, because the corporate do not say, that the corporation has forfeited its charter body is not deprived of the least portion of its property. for misuser; but that it has become unfit for use by a If it be the personal privileges of the corporators that are change of circumstances. Nor does the lapse of time attacked, these must be either a common and universal from 1776 to 1816, infer an acquiescence on the part of privilege, such as the right of suffrage, for interrupting the legislature, or a renunciation of its right to abolish or the exercise of which an action would lie; or they must be reform an institution, which being of a public nature, monopolies and exclusive privileges, which are always cannot hold its privileges by prescription. Our argument subject to be regulated and modified by the supreme is, that it is, at all times, liable to be new modelled by the power of the State. Where a private proprietary interest Page 30 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***113; 4 Wheat. 518 is coupled with the exercise of political power or a should be such that the judge feels a clear and strong [***114] public trust, the charters of corporations have conviction of their incompatibility with each other." 59 In frequently been amended by legislative authority. 57 In Calder et ux. v. Bull et ux. 60 Mr. Justice Chace charters creating artificial persons for purposes expressed himself with his usual emphatic energy, and exclusively private, and not interfering with the common said, "I will not decide any law to be void, but in a very rights of the citizens, it may be admitted that the clear case." Is it, then, a very clear case that these acts of legislature cannot interfere to amend without the consent New-Hampshire are repugnant to the constitution of the of the grantees. The grant of such a charter might United States? perhaps be considered as analogous to a contract between the State and private individuals, affecting their private 58 Calder et ux. v. Bull et ux. 3 Dall. 392, 394, rights, and might thus be regarded as within the spirit of 395. Fletcher v. Peck, 6 Cranch, 87. New-Jersey the constitutional prohibition. But this charter is merely a v. Wilson, 7 Cranch, 164. Terret v. Taylor, 9 mode of exercising one of the great powers of civil Cranch, 43. government. Its amendment, or even repeal, can no more 59 6 Cranch, 128. be considered as the breach of a contract, than the 60 3 Dall. 395. amendment or repeal of any other law. Such repeal or 1. Are they bills of attainder? The elementary writers amendment is an ordinary act of public legislation, and inform us, that an attainder is "the stain or corruption of not an act impairing the obligation of a contract between the blood of a criminal capitally condemned." 61 True it the government and private citizens, under which is, that the Chief Justice says, in Flctcher v. Peck, 62 that personal immunities or proprietary interests are vested in a bill of attainder may affect the life of an individual, or them. may confiscate his estate, or both. But the cause did not 56 3 T.R. 244. turn upon this point, and the Chief Justice was not called 57 Gray v. The Portland Bank, 3 Mass. R. 364. upon to weigh with critical accuracy his expressions in The Commonwealth v. Bird, 12 Mass. R. 443. this part of the case. In England, most certainly, the first idea presented is that of corruption of blood, and The Attorney-General, on the same [***115] side, [***117] consequent forfeiture of the entire property of stated, that the only question properly before the Court the criminal, as the regular and inevitable consequences was, whether the several acts of the legislature of of a capital conviction at common law. Statutes New-Hampshire, mentioned in the special verdict, are sometimes pardon the attainder, and merely forfeit the repugnant to that clause of the constitution of the United estate. But this forfeiture is always complete and entire. States, which provides, that no State shall "pass any bill In the present case, however, it cannot be pretended that of attainder, ex post facto law, or law impairing the any part of the estate of the trustees is forfeited, and, if a obligation of contracts." part, certainly not the whole. Beside its intrinsic difficulty, the extreme delicacy of this 61 4 Bl. Com. 380. question is evinced by the sentiments expressed by the 62 6 Cranch, 138. Court, whenever it has been called to act on such a question. 58 In the case of Fletcher v. Peck, the Court 2. Are these acts "laws impairing the obligation of says, "The question whether a law be void for its contracts?" The mischiefs actually existing at the time the repugnancy to the constitution, is, at all times, a question constitution was established, and which were intended to of much delicacy, which ought seldom, if ever, to be be remedied by this prohibitory clause, will show the decided in the affirmative, in a doubtful case. The Court, nature of the contracts contemplated by its authors. It when impelled by duty to render such a judgment, would was the inviolability of private contracts, and private be unworthy of its station could it be unmindful of the rights acquired under them, which was intended to be solemn obligation which that station imposes. But it is protected; 63 and not contracts which are in their nature not on slight implication and vague conjecture that the matters of civil police, nor grants by a State of power, legislature is to be pronounced to have transcended its and even property, to individuals, in trust to be powers, and its acts are to be considered as void. The administered for purposes merely public."The opposition between the constitution and the law [***116] prohibitions not to make any thing but gold and silver coin a tender in payment of debts, and not to pass any law Page 31 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***117; 4 Wheat. 518 impairing the obligation [***118] of contracts," says Mr. Wheelock [***120] was a contributor, is not found by Justice Chace, "were inserted to secure private rights." 64 the special verdict; and not having been such in truth, it The cases determined in this Court, illustrate the same cannot be added under the agreement to amend the construction of this clause of the constitution. Fletcher v. special verdict. The jury find the charter, and that does Peck was a case where a State legislature attempted to not recite that the college was a private foundation by revoke its grant, so as to devest a beneficial estate in Doctor Wheelock. On the contrary, the real state of the lands; a vested estate; an actual conveyance to individuals case is, that he was the projector; that he had a school on as their private property. 65 In the case of New-Jersey v. his own plantation, for the education of Indians; and Wilson, there was an express contract contained in a through the assistance of others had been employed for public treaty of cession with the Indians, by which the several years in cloathing, maintaining, and educating privilege of perpetual exemption from taxation was them. He solicited contributions, and appointed others to indelibly impressed upon the lands, and could not be solicit. At the foundation of the college, the institution taken away without a violation of the public faith was removed from his estate.The honours paid to him by solemnly pledged. 66 Therret v. Taylor was also a case of the charter were the reward of past services, and of the an attempt to devest an interest in lands actually vested boldness, as well as piety, of the project. The State has under an act amounting to a contract. 67 In all those been a contributor of funds, and this fact is found. It is, instances, the property was held by the grantees, and therefore, not a private charity, but a public institution; those to whom they had conveyed, beneficially, and subject to be modified, altered, and regulated, by the under the sanction of contracts, in the ordinary and supreme power of the State. popular signification of that term. But this is an attempt to extend its obvious and natural meaning, and to apply it This charter is not a contract within the true intent of the by a species of legal fiction to a class of cases which constitution. The acts of New-Hampshire, varying in [***119] have always been supposed to be within the some degree the forms of the charter, do not impair control of the sovereign power. Charters to public [***121] the obligation of a contract. corporations for purposes of public policy are necessarily In a case which is really a case of contract, there is no subject to the legislative discretion, which may revoke or difficulty in ascertaining who are the contracting parties. modify them as the continually fluctuating exigencies of But here they cannot be fixed. Doctor Wheelock can the society may require. Incorporations for the purposes only be said to be a party, on the ground of his of education and other literary objects, in one age, or contributing funds, and thus being the founder and under one form of government, may become unfit for visitor. That ground being removed, he ceases to be a their office in another age, or under another government. party to the contract. Are the other contributors alluded 63 The Federalist, No. 44. 1 Tucker's Bl. Com. to in the charter, and enumerated by Belknap in his part 1. Alpendix, 312. history of New-Hampshire, are they contracting 64 Calder et ux. v. Bull et ux. 3 Dall. 390. parties?They are not, before the Court; and even if they 65 6 Cranch, 87. were, with whom did they contract? With the King of 66 7 Cranch, 164. Great Britain? He, too, is not before the Court; and has 67 9 Cranch, 43. declared, by his Chancellor, in the case of the Attorney General v. The City of London, 68 that he has no longer This charter is said to be a contract between Doctor any connexion with these corporations in America. Has Wheelock and the king; a contract founded on a donation the State of New-Hampshire taken his place? Neither is of private property by Doctor Wheelock. It is hence that State before the Court, nor can it be as a party, infered, that it is a private eleemosynary corporation; and originally defendant.But suppose this to be a contract the right of visitation is said to be in the founder and his between the trustees, and the people of New-Hampshire. heirs; and that the State can have no right to interfere, A contract is always for the benefit and advantage of because it is neither the founder of this charity, nor some person. This contract cannot be for the benefit of contributor to it. the trustees. It [***122] is for the use of the people. The cestui que use is always the contracting party; the trustee But if the basis of this argument is removed, what has nothing to do with stipulating the terms. The people becomes of the superstructure? The fact that Doctor then grant powers for their own use. It is a contract with Page 32 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***122; 4 Wheat. 518 themselves! the one, these municipal corporations are saved from the tyranny of the crown; and by the other, they are preserved 68 The Attorney General v. The City of London, from the infinite perpetuity of inveterate errors. But in 3 Bro. Ch. Cas. 171. 1 Ves. jun. 243. the present case there is no similar qualification of the immutability of the charter, which is contended for in the But if the trustees are parties on one side, what do they argument on the other side. But in truth, neither the give, and what do they receive? They give their time and original principle, nor its qualification, apply to this case; labour. Every society has a right to the services of its for there is here no such beneficial interest and individual members in places of public trust and duty. A town property as are enjoyed by town corporators. appoints, under the authority of the State, an overseer of the poor, or of the highways. He gives, reluctantly, his 69 Peake's N. P. Cas. 154. labour and services; he receives nothing in return but the 70 Rex v. Passmore, 3 T.R. 244. privilege of giving his labour and services. Such appointments to offices of public trust have never been 3.But even admitting it to be a case of contract, its considered as contracts which the sovereign authority obligation is not impaired by these legislative acts. What was not competent to rescind or modify. There can be no vested right has been devested? None! The former contract in which the party does not receive some trustees are [***125] continued. It is true, that new personal, private, individual benefit. To make this trustees are added, but this affords no reasonable ground charter a contract, and a private contract, there must be a of complaint. The privileges of the House of Lords in private beneficial interest vested in the party who pays to England are not impaired by the introduction of new consideration. What is the private beneficial [***123] members. The old corporation is not abolished, for the interest vested in the party in the present case? The right foundation as now regulated is substantially the same. It of appointing the president and professors of the college, is identical in all its essential constituent parts, and all its and of establishing ordinances for its government, &c. former rights are preserved and confirmed. 71 The change But to make these rights an interest which will constitute of name does not change its original rights and the end and object of a contract, the exercise of these franchises. 72 By the revolution which separated this rights must be for the private individual advantage of the country from the British empire, all the powers of the trustees. Here, however, so far from that being the fact, it British government devolved on the States. The is solely for the advantage of the public; for the interests legislature of New-Hampshire then became cloathed with of piety and learning. It was upon these principles that all the powers, both of the king and parliament, over Lord Kenyon determined, in the case of Weller v. these public institutions. On whom, then, did the title to Foundling Hospital, 69 that the governor and members of the property of this college fall? If before the revolution the corporation were competent witnesses, because they it was beneficially vested in any private individuals, or were trustees of a public charity, and had no private corporate body, I do not contend that the revolution personal interest. It is not meant to deny that mere right devested it, and gave it to the State. But it was not before -- a franchise -- an incorporeal hereditament, may be the vested beneficially in the trustees. The use subject of a contract; but it must always be a direct, unquestionably belonged to the people of individual, beneficial interest to the party who takes that New-Hampshire, who were the cestuy que trusts. The right. The rights of municipal corporators are of this legal estate was [***126] indeed vested in the trustees nature. The right of suffrage there belongs beneficially to before the revolution by virtue of the royal charter of the individual elector, and is to be exercised for his own 1769. But that charter was destroyed by the revolution, exclusive advantage. It is in relation to these [***124] 73 and the legal estate, of course, fell upon those who town corporations that Lord Kenyon speaks, when he held the equitable estate -- upon the people. If those who says, hat the king cannot force a new charter upon them. were trustees, carried on the duties of the trust after the 70 This principle is established for the benefit of all the revolution, it must have been subject to the power of the corporators. It is accompanied by another principle, people. If it be said, that the State gave its implied assent without which it would never have been adopted: the to the ters of the old charter, then it must be subject to all power of proposing amendments at the desire of those for the terms on which it was granted; and among these, to whose benefit the charter was granted. These two the oath of allegiance to the king. But if to avoid this principles work together for the good of the whole. By concession, it be said, that the charter must have been so Page 33 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***126; 4 Wheat. 518 far modified as to adapt it to the character of the new youth are not public officers. The argument on the other government, and to the change in our civil institutions; side, if it proves any thing, will prove that professors, that is precisely what we contend for. These civil masters, preceptors, and tutors, are all political persons institutions must be modified, and adapted to the and public officers; and that all education is necessarily mutations of society and manners. They belong to the and exclusively the business of the State. The people, are established for their benefit, and ought to be confutation of such an argument lies in stating it. The subject to their authority. trustees of this college perform no duties, and have no responsibility in any way connected with the [***129] 71 See the Mayor of Colchester v. Seaber, 3 civil government of the State. They derive no Burr. 1866. compensation for their services from the public treasury. 72 1 Sand. 344. n. 1. Luttrel's Case, 4 Co. Rep. They are the gratuitous administrators of a private 87. bounty; the trustees of a literary establishment, standing, 73 Attorney General v. City of London, 3 Bro. in contemplation of law, on the same foundation as Ch. Cas. 171. S. C. 1 Ves. jun. 143. hospitals, and other charities. It is true, that a college, in a popular sense, is a public institution, because its uses [***127] Mr. Hopkinson, in reply, insisted, that the are public, and its benefits may be enjoyed by all who whole argument on the other side proceeded on an choose to enjoy them. But in a legal and technical sense, assumption which was not warranted, and could not be they are not public institutions, but private charities. maintained. The corporation created by this charter is Corporations may, therefore, be very well said to be for called a public corporation. Its members are said to be public use, of which the property and privileges are yet public officers, and agents of government. They were private. Indeed, there may be supposed to be an ultimate officers of the king, it is said, before the revolution, and reference to the public good, in granting all charters of they are officers of the State since. But upon what incorporation; but this does not change the property from authority is all this taken? What is the acknowledged private to public. If the property of this corporation be principle which decides thus of this corporation? Where public property, that is, property belonging to the State, are the cases in which such a doctrine has ever prevailed? when did it become so? It was once private property; No case, no book of authority, has been, or can be, cited when was it surrendered to the public? The object in to this purpose. Every writer on the law of corporations, obtaining the charter, was not surely to transfer the all the cases in law and equity, instruct us that colleges property to the public, but to secure it forever in the are regarded in law as private eleemosynary corporations, hands of those [***130] with whom the original owners especially colleges founded, as this was, by a private saw fit to entrust it. Whence, then, that right of founder. If this settled principle be not overthrown, there ownership and control over this property, which the is no foundation for the defendant's argument. We legislature of New-Hampshire has undertaken to contend that this charter is a contract between the exercise? The distinction between public, political, or government and the members of the corporation created civil corporations, and corporations for the distribution of by it. It is a contract, because it is a grant of valuable private charity, is fully explained, and broadly marked, in rights and privileges; and every grant [***128] implies a the cases which have been cited, and to which no answer contract not to resume the thing granted. Public offices has been given. The hospital of Pennsylvania is quite as are not created by contract or by charter. They are much a public corporation, as this college. It has great provided for by general laws. Judges and magistrates do funds, most wisely and beneficently administered. Is it to not hold their offices under charters. These offices are be supposed, that the legislature might rightfully lay its created by public laws, for public political purposes, and hands on this institution, violate its charter, and direct its filled by appointments made in the exercise of political funds to any purpose which its pleasure might prescribe? power. There is nothing like this in the origin of the The property of this college was private property before powers of the plaintiffs. Nor is there in their duties, any the charter; and the charter has wrought no change in the more than in their origin, any thing which likens them to nature or title of this property. The school had existed as public political agents. Their duties are such as they a charity school, for years before the charter was granted. themselves have chosen to assume, in relation to a fund During this time it was manifestly a private charity. The created by private benefaction, for charitable uses. These case cited from Atkyns, shows, that a charter does not duties relate to the instruction of youth: but instructors of make a charity more public, but only more permanent. Page 34 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***130; 4 Wheat. 518 Before he accepted the charter, [***131] the founder of privileges. The State now claims the right of revoking this college possessed an absolute right to the property this grant, without restoring the consideration which it with which it was endowed, and also the right flowing received for making the grant. Such a pretence may suit from that, of administering and applying it to the despotic power. It may succeed where the authority of purposes of the charity by him established. By taking the the legislature is limited by no rule, and bounded only by charter, he assented that the right to the property, and the its will. It may prevail in those systems in which power of administering it, should go to the corporation of injustice is not always unlawful, and where neither the which he and others were members. The beneficial fundamental constitution of the government sets any purpose to which the property was to be used, was the limits to power, nor any just sentiment or moral feeling consideration on the part of the government for granting affords a practical restraint against a power which in its the charter. The perpetuity which it was calculated to theory is unlimited. But it cannot prevail in the United give to the charity, was the founder's inducement to States, where power is restrained by constitutional solicit it. By this charter, the public faith is solemnly barriers, and where no legislature is, even in theory, pledged, that the arrangement thus made shall be invested with all sovereign powers. Suppose Dr. perpetual. In consideration that the founder would devote Wheelock had chosen to establish and perpetuate this his property to the purposes beneficial to the public, the charity by his last will, [***134] or by a deed, in which government has solemnly covenanted with him to secure he had given the property, appointed the trustees, the administration of that property in the hands of trustees provided for their succession, and prescribed their duties. appointed in the charter. And yet the argument now is, Could the legislature of New-Hampshire have broken in that because he so devoted his property to uses beneficial upon this gift, changed its parties, assumed the to the public, the government may, for that reason, appointment of the trustees, abolished its stipulations and assume the control of it, and take it out of those hands to regulations, or imposed others? This will hardly be which [***132] it was confided by the charter. In other pretended, even in this bold and hardy argument -- and words, because the founder has strictly performed the why not? Because the gift, with all its restrictions and contract on his part, the government, on its part, is at provisions, would be under the general and implied liberty to violate it. This argument is equally unsound in protection of the law. How is it in our case? Why, in morality and in law. The founder proposed to appropriate addition to the general and implied protection afforded to his property, and to render his services, upon condition of all rights and all property, it has an express, specific, receiving a charter which should secure to him and his covenanted assurance of protection and inviolability, associates certain privileges and immunities. He given on good and sufficient considerations, in the usual undertook the discharge of certain duties, in consideration manner of contracts between individuals. There can be of obtaining certain rights. There are rights and duties on no doubt that, in contemplation of law, a charter, such as both sides. On the part of the founder, there is the duty of this, is a contract. It takes effect only with the assent of appropriating the property, and of rendering the services those to whom it is granted. Laws enjoin duties, without imposed on him by the charter, and the right of having or against the will of those who are to perform them. But secured to him and his associates the administration of the duties of the trustees, under this charter, and binding the charity, according to the terms of the charter, forever. upon them only because they have accepted the charter, On the part of the government, there is the duty of [***135] and assented to its terms. maintaining and protecting all the rights and privileges conferred by the charter, and the right of insisting on the But taking this to be a contract, the argument of the compliance of the trustees with the obligations defendant is, that it is not such a contract as the undertaken by them, and of enforcing that compliance by constitution of the United States protects. But why not? all due and regular means. There is a plain, manifest, The constitution speaks of contracts, and ought to include reasonable stipulation, [***133] mixed up of rights and all contracts for property or valuable privileges. There is duties, which cannot be separated but by the hand of no distinction or discrimination made by the constitution injustice and violence. Yet the attempt now is to break itself, which will exclude this case from its protection. the mutuality of this stipulation; to hold the founder's The decisions which have already been made in this property, and yet take away that which was given him as Court are a complete answer to the defendant's argument. the consideration upon which he parted with his property. The Attorney General has insisted, that Dr. Wheelock The charter was a grant of valuable powers and Page 35 17 U.S. 518, *; 4 L. Ed. 629, **; 1819 U.S. LEXIS 330, ***135; 4 Wheat. 518 was not the founder of this college; that other donors institution. Such would not be the legal consequence. If have better title to that character; and that, therefore, the the grant be of privileges and immunities, which are to be plaintiff's argument, so far as it rests on the supposed fact esteemed objects of value, it cannot be revoked. But this of Dr. Wheelock's being the founder, fails. The first case is much stronger than that. Nothing [***138] is answer to this is, that the charter itself declares Dr. plainer, than that Dr. Wheelock, from the recitals of this Wheelock to be the founder, in express terms. It also charter, was the founder of this institution. It is true, that recites facts, which would show him to be the founder, others contributed; but it is to be remembered, that they and on which the law would invest him with that contributed to Dr. Wheelock, and to the funds while character, if the charter itself had not declared him so. under his private administration and control, and before But if all this were otherwise, it would not help the the idea of a charter had been suggested. These defendant's argument. The foundation was still [***136] contributions were obtained on his solicitation, and private; and whether Dr. Wheelock, or Lord Dartmouth, confided to his trust. or any other person, possessed the greatest share of merit in establishing the college, the result is the same, so far as 74 2 Ves. 78. it bears on the present question. Whoever was founder, If we have satisfied the Court that this charter must be the visitatorial power was assigned to the trustees, by the regarded as a contract, and such a contract as is protected charter; and it, therefore, is of no importance whether the by the constitution of the United States, it will hardly be founder was one individual or another. It is narrowing seriously denied, that the acts of the legislature of the ground of our argument to suppose, that we rest it on New-Hampshire impair this contract. They impair the the particular fact of Dr. Wheelock's being founder; rights of the corporation as an aggregate body, and the although the fact is fully established by the charter itself. rights and privileges of individual members. New duties Our argument is, that this is a private corporation; that the are imposed on the corporation; the funds are directed to founder of the charity, before the charter, had a right of new purposes; a controlling power over all the visiting and governing it, a right growing out of the proceedings of the trustees, is vested in a board of property of the endowment; that by the charter, this overseers unknown to the charter. Nine new trustees are visitatorial power is vested in the trustees, as assignees of added to the original number, in direct hostility with the the founder; and that it is a privilege, right, and provision of the charter. There are radical and essential immunity, originally springing from property, and which alterations, which go to alter [***139] the whole the law regards and protects, as much as it regards and organization and frame of the corporation. protects property and privileges of any other description. By the charter, all proper powers of government are given If we are right in the view which we have taken of this to the trustees, and this makes them visitors; [***137] case, the result is, that before, and at the time of, the and from the time of the acceptance of the charter, no granting of this charter, Dr. Wheelock had a legal interest visitatorial power remained in the founder or his heirs. in the funds with which the institution was founded; that This is the clear doctrine of the case of Green v. he made a contract with the then existing government of Rutherforth, which has been cited, and which is the State, in relation to that interest, by which he devoted, supported by all the other cases. Indeed we need not stop to uses beneficial to the public, the funds which he had here in the argument. We might go farther, and collected, in consideration of the stipulations and countend, that if there were no private founder, the covenants, on the part of the government, contained in trustees would possess the visitatorial power. Where the charter; and that these stipulations are violated, and there are charters, vesting the usual and proper powers of the contract impaired, by the acts of the legislature of government in the trustees, they thereby become the New-Hampshire. visitors, and the founder retains no visitatorial power, although that founder be the king. 74 Even then, if this OPINION BY: MARSHALL college had originated with the government, and had been founded by it; still, if the government had given a charter OPINION to trustes, and conferred on them the powers of visitation, and control, which this charter contains, it would by no [*624] [**656] The opinion of the Court was means follow, that the government might revoke the delivered by Mr. Chief Justice MARSHALL. grant, merely because it had itself established the Page 36 17 U.S. 518, *624; 4 L. Ed. 629, **656; 1819 U.S. LEXIS 330, ***139; 4 Wheat. 518 This is an action of trover, brought by the Trustees of may be created in their own body. Dartmouth College against William H. Woodward, in the State Court of New Hampshire, for the book of records, The defendant claims under three acts of the corporate seal, and other corporate property, to whcih the legislature of New-Hampshire, the most material of plaintiffs allege themselves to be entitled. which was passed on the 27th of June, 1816, and is entitled, "an act to amend the charter, [***142] and A special verdict, after setting out the rights of the enlarge and improve the corporation of Dartmouth parties, finds for the defendant, if certain acts of the College." Among other alterations in the charter, this act legislature [***140] of New-Hampshire, passed on the increases the number of trustees to twenty-one, gives the 27th of June, and on the 18th of December, 1816, be appointment of the additional members to the executive valid, and binding on the trustees without their assent, of the State, and creates a board of overseers, with power and not repugnant to the constitution of the United States; to inspect and control the most important acts of the otherwise, it finds for the plaintiffs. trustees. This board consists of twenty-five persons. The president of the senate, the speaker of the house of [*625] The Superior Court of Judicature of representatives, of New-Hampshire, and the governor and New-Hampshire rendered a judgment upon this verdict lieutenant governor of Vermont, for the time being, are to for the defendant, which judgment has been brought be members ex officio. The board is to be completed by before this Court by writ of error. The single question the governor and council of New-Hampshire, who are now to be considered is, do the acts to which the verdict also empowered to fill all vacancies which may occur. refers violate the constitution of the United States? The acts of the 18th and 26th of December are supplemental to that of the 27th of June, and are This Court can be insensible neither to the magnitude principally intended to carry that act into effect. nor delicacy of this question. The validity of a legislative act is to be examined; and the opinion of the highest law The majority of the trustees of the college have tribunal of a State is to be revised: an opinion which refused to accept this amended charter, and have [*627] carries with it intrinsic evidence of the diligence, of the brought this suit for the corporate property, which is in ability, and the integrity, with which it was formed. On possession of a person holding by virtue of the acts which more than one occasion, this Court has expressed the have been stated. cautious circumspection with which it approaches the consideration of such questions; and has declared, that, in It can require no argument to prove, that the no doubtful case, would it pronounce a legislative act to circumstances of this case constitute [***143] a contract. be contrary to the constitution. But the American people An application is made to the crown for a charter to have said, [***141] in the constitution of the United incorporate a religious and literary institution. In the States, that "no State shall pass any bill of attainder, ex application, it is stated that large contributions have been post facto law, or law impairing the obligation of made for the object, which will be conferred on the contracts." In the same instrument they have also said, corporation, as soon as it shall be created. The charter is "that the judicial power shall extend to all cases in law granted, and on its faith the property is conveyed. and equity arising under the constitution." On the judges [**657] Surely in this transaction every ingredient of a of this Court, then, is imposed the high and solemn duty complete and legitimate contract is to be found. of protecting, from even legislative violation, those contracts which the constitution of our country has placed The points for consideration are, beyond legislative control; and, however irksome the task 1. Is this contract protected by the constitution of the may be, this is a duty from which we dare not shrink. United States? [*626] The title of the plaintiffs originates in a 2. Is it impaired by the acts under which the charter dated the 13th day December, in the year 1769, defendant holds? incorporating twelve persons therein mentioned, by the name of "The Trustees of Dartmouth College," granting 1. On the first point it has been argued, that the word to them and their successors the usual corporate "contract," in its broadest sense, would comprehend the privileges and powers, and authorizing the trustees, who political relations between the government and its are to govern the college, to fill up all vacancies which Page 37 17 U.S. 518, *627; 4 L. Ed. 629, **657; 1819 U.S. LEXIS 330, ***143; 4 Wheat. 518 citizens, would extend to offices held within a State for in a court of justice. It never has been understood to State purposes, and to many of those laws concerning restrict the general right of the legislature to legislate on civil institutions, which must change with circumstances, the subject of divorces. Those acts enable some tribunal, and be modified by ordinary legislation; which deeply [***146] not to impair a marriage contract, but to concern the public, and which, to preserve good liberate one of the parties because it has been broken by government, the public judgment must control. That the other. When any State legislature shall pass an act even marriage is a contract, and its obligations are annulling all marriage contracts, or allowing either party effected by the laws respecting [***144] divorces. That to annul it without the consent of the other, it will be time the clause in the constitution, if construed in its greatest enough to inquire, whether such an act be constitutional. latitude, [*628] would prohibit these laws. Taken in its broad unlimited sense, the clause would be an The parties in this case differ less on general unprofitable and vexatious interference with the internal principles, less on the true construction of the constitution concerns of a State, would unnecessarily and unwisely in the abstract, than on the application of those principles embarrass its legislation, and render immutable those to this case, and on the true construction of the charter of civil institutions, which are established for purposes of 1769. This is the point on which the cause essentially internal government, and which, to subserve those depends. If the act of incorporation be a grant of political purposes, ought to vary with varying circumstances. That power, if it create a civil institution to be employed in the as the framers of the constitution could never have administration of the government, or if the funds of the intended to insert in that instrument a provision so college be [*630] public property, or if the State of unnecessary, so mischievous, and so repugnant to its New-Hampshire, as a government, be alone interested in general spirit, the term "contract" must be understood as its transactions, the subject is one in which the legislature intended to guard against a power of at least doubtful of the State may act according to its own judgment, utility, the abuse of which had been extensively felt; and unrestrained by any limitation of its power imposed by to restrain the legislature in future from violating the right the constitution of the United States. to property. That anterior to the formation of the But if this be a private eleemosynary institution, constitution, a course of legislation had prevailed in endowed with a capacity [***147] to take property for many, if not in all, of the States, which weakened the objects unconnected with government, whose funds are confidence of man in man, and embarrassed all bestowed by individuals on the faith of the charter; if the transactions between individuals, by dispensing with a donors have stipulated for the future disposition and faithful performance of engagements. [***145] To management of those funds in the manner prescribed by correct this mischief, by restraining the power which themselves; there may be more difficulty in the case, produced it, the State legislatures were forbidden "to pass although neither the persons who have made these any law impairing the obligation of contracts," that is, of stipulations, nor those for whose benefit they were made, contracts respecting property, under which some should be parties to the cause. Those who are no longer individual could claim a right to something beneficial to himsel; and that since the clause in the constitution must interested in the property, may yet retain such an interest in the preservation of their own arrangements, as to have in construction receive some limitation, it may be a right to insist, that those arrangements shall be held confined, and ought to be confined, to cases of this sacred. Or, if they have themselves disappeared, it [*629] description; to cases within the mischief it was becomes a subject of serious and anxious inquiry, intended to remedy. whether those whom they have legally empowered to The general correctness of these observations cannot represent them forever, may not assert all the rights be controverted. That the framers of the constitution did which they possessed, while in being; whether, if they be not intend to retrain the States in the regulation of their without personal representatives who may feel injured by civil institutions, adopted for internal government, and a violation of the compact, the trustees be not so that the instrument they have given us, is not to be so completely their representatives in the eye of the law, as construed, may be admitted. The provision of the to stand in their place, not only as respects the constitution never has been understood to embrace other government of the college, but also as respects the contracts, than those which respect property, or some maintenance of the college charter. object of value, and confer rights which may be asserted Page 38 17 U.S. 518, *630; 4 L. Ed. 629, **657; 1819 U.S. LEXIS 330, ***147; 4 Wheat. 518 [***148] It becomes then the duty of the Court orders, ordinances, and laws, for the government of the most [*631] seriously to examine this charter, and to college, the same not being repugnant to the laws of ascertain its true character. Great Britain, or of New-Hampshire, and not excluding any person on account of his speculative sentiments in From the instrument itself, it appears, that about the religion, or his being of a religious profession different year 1754, the Rev. Eleazer Wheelock established at his from that of the trustees. own expense, and on his own estate, a charity school for the instruction of Indians in the christian religion. The This charter was accepted, and the property both real success of this institution inspired him with the design of and personal, which had been contributed for the benefit soliciting contributions in England for carrying on, and of the college, was conveyed to, and vested in, the extending, his undertaking.In this pious work he corporate body. employed the Rev. Nathaniel Whitaker, who, by virtue of a power of attorney from Dr. Wheelock, appointed the From this brief review of the most essential parts of Earl of Dartmouth and others, trustees of the money, the charter, it is apparent, that the funds of the college which had been, and should be, contributed; which consisted entirely of private donations. It is, perhaps, not appointment Dr. Wheelock confirmed by a deed of trust very important, who were the donors. The probability is, authorizing the trustees to [**658] fix on a site for the that the Earl of Dartmouth, and the other trustees in college.They determined to establish the school on England, were, in fact, the largest [*633] contributors. Connecticut river, in the western part of New-Hampshire; Yet the legal conclusion, from the facts recited in the that situation being supposed favourable for carrying on charter, would probably be, that Dr. Wheelock was the the original design among the Indians, and the also for founder of the college. promoting learning among the English; and the The origin of the institution was, undoubtedly, the proprietors in the neighbourhood having made large [***151] Indian charity school, established by Dr. offers of land, on condition, that [***149] the college Wheelock, at his own expense. It was at his instance, and should there be placed. Dr. Wheelock then applied to the to enlarge this school, that contributions were solicited in crown for an act of incorporation; and represented the England. The person soliciting these contributions was expediency of appointing those whom he had, by his last his agent; and the trustees, who received the money, were will, named as trustees in America, to be members of the appointed by, and act under, his authority. It is not too proposed corporation. "In consideration of the premises," much to say, that the funds were obtained by him, in "for the education and instruction of the youth of the trust, to be applied by him to the purposes of his enlarged Indian tribes," &c. "and also of English youth, and any school. The charter of incorporation was granted at his other," the charter was granted, and the trustees of instance. The persons named by him in his last will, as Dartmouth College were by that name created a body the trustees of his charity school, compose a part of the [*632] corporate, with power, for the use of the said corporation, and he is declared to be the founder of the college, to acquire real and personal property, and to pay college, and its president for life. Were the inquiry the president, tutors, and other officers of the college, material, we should feel some hesitation in saying, that such salaries as they shall allow. Dr. Wheelock was not, in law, to be considered as the The charter proceeds to appoint Eleazer Wheelock, founder, 75 of this institution, and as possessing all the "the founder of said college," president thereof, with rights appertaining to that character. But be this as it power by his last will to appoint a successor, who is to may, Dartmouth College is really endowed by private continue in office until disapproved by the trustees. In individuals, who have bestowed their funds for the case of vacancy, the trustees may appoint a president, and propagation of the christian religion among the Indians, in case of the ceasing of a president, the senior professor and for the promotion of piety and learning generally. or tutor, being one of the trustees, shall exercise the From these funds the salaries [***152] of the tutors are office, until an appointment shall be made. The trustees drawn; and these salaries lessen the expense of education have power to appoint and [***150] displace professors, to the students. It [*634] is then an eleemosynary, 76 tutors, and other officers, and to supply any vacancies and, as far as respects its funds, a private corporation. which may be created in their own body, by death, 75 1 Bl. Com. 481. resignation, removal, or disability; and also to make 76 1 Bl. Com. 471. Page 39 17 U.S. 518, *634; 4 L. Ed. 629, **658; 1819 U.S. LEXIS 330, ***152; 4 Wheat. 518 Do its objects stamp on it a different character? Are Dartmouth College has become a public institution, and the trustees and professors public officers, invested with its trustees public officers, exercising powers conferred any portion of political power, partaking in any degree in by the public for public objects? Not from the source the administration of civil government, and performing whence its funds were drawn; for its foundation is purely duties which flow from the sovereign authority? private and eleemosynary -- Not from the application of those funds; for money may be given for education, and That education is an object of national concern, and a the persons receiving it do not, by being employed in the proper subject of legislation, all admit. That there may be education of youth, become members of the civil an institution founded by government, and placed entirely government. Is it from [*636] the act of incorporation? under its immediate control, the officers of which would Let this subject be considered. be public officers, amenable exclusively to government, none will deny. But is Dartmouth College such an [HN1] A corporation is an artificial being, invisible, institution? Is education altogether in the hands of intangible, and existing only in contemplation of law. government? Does every teacher of youth become a Being the mere creature of law, it possesses only those public officer, and do donations for the purpose of properties which the charter of its creation confers upon education necessarily become public property, so far that it, either expressly, or as incidental to its very existence. the will of the legislature, not the will of the donor, These are such as are supposed [***155] best calculated becomes the law of the donation? These questions are of to effect the object for which it was created. Among the serious moment to [***153] society, and deserve to be most important are immortality, and, if the expression well considered. may be allowed, individuality; properties, by which a perpetual succession of many persons are considered as Doctor Wheelock, as the keeper of his charity the same, and may act as a single individual. They school, instructing the Indians in the art of reading, and in enable a corporation to manage its own affairs, and to our holy religion; sustaining them at his own expense, hold property without the perplexing intricacies, the and on the voluntary contributions of the charitable, hazardous and endless necessity, of perpetual could scarcely be considered as a public officer, conveyances for the purpose of transmitting it from hand exercising any portion of those duties which belong to to hand. It is chiefly for the purpose of clothing bodies of government; nor could the legislature have [*635] men, in succession, with these qualities and capacities, supposed, that his private funds, or those given by others, that corporations were invented, and are in use. By these were subject to legislative management, because they means, a perpetual succession of individuals are capable were applied to the purposes of education. When, of acting for the promotion of the particular object, like afterwards, his school was enlarged, and the liberal one immortal being. But this being does not share in the contributions made in England, and in America, enabled civil government of the country, unless that be the him to extend his cares to the education of the youth of purpose for which it was created. Its immortality no his own country, no change was wrought in his own more confers on it political power, or a political character, or in the nature of his duties. Had he employed character, than immortality would confer such power or assistant tutors with the funds contributed by others, or character on a natural person. It is no more a State had the trustees in England established a school with Dr. instrument, than a natural person exercising the same Wheelock at its head, and paid salaries to him and his powers would be. If, then, [***156] a natural person, assistants, they would still have been private tutors; and employed [*637] by individuals in the education of the fact, that they were employed in the education of youth, or for the government of a seminary in which youth, could not have converted them into public officers, youth is educated, would not become a public officer, or [***154] concerned in the administration of public be considered as a member of the civil government, how duties, or have given the legislature a right to interfere in is it, that this artificial being, created by law, for the the management [**659] of the fund. The trustees, in purpose of being employed by the same individuals for whose care that fund was placed by the contributors, the same purposes, should become a part of the civil would have been permitted to execute their trust government of the country? Is it because its existence, its uncontrolled by legislative authority. capacities, its powers, are given by law? Because the government has given it the power to take and to hold Whence, then, can be derived the idea, that property in a particular from, and for particular purposes, Page 40 17 U.S. 518, *637; 4 L. Ed. 629, **659; 1819 U.S. LEXIS 330, ***156; 4 Wheat. 518 has the government a consequent right substantially to incorporating act [*639] change the character of a change that form, or to vary the purposes to which the private eleemosynary institution. property is to be applied? This principle has never been asserted or recognized, and is supported by no We are next led to the inquiry, for whose benefit the authority.Can it derive aid from reason? property given to Dartmouth College was secured? The counsel for the defendant have insisted, that the The objects for which a corporation is created are beneficial interest is in the people of New-Hampshire. universally such as the government wishes to promote. The charter, after reciting the preliminary measures They are deemed beneficial to the country; and this which had been taken, and the [***159] application for benefit constitutes the consideration, and, in most cases, an act of incorporation, proceeds thus: "Know ye, the sole consideration of the grant. In most eleemosynary therefore, that we, considering the premises, and being institutions, the object would be [***157] difficult, willing to encourage the laudable and charitable design of perhaps unattainable, without the aid of a charter of spreading christian knowledge among the savages of our incorporation. Charitable, or public spirited individuals, American wilderness, and, also, that the best means of desirous of making permanent appropriations for education be established, in our province of charitable or other useful purposes, find it impossible to New-Hampshire, for the benefit of said province, do, of effect their design securely, and certainly, without an our special grace," &c. Do these expressions bestow on incorporating act. They apply to the government, state New-Hampshire any exclusive right to the property of the their beneficent object, and offer to advance the money college, any exclusive interest in the labours of the necessary for its accomplishment, [*638] provided the professors? Or do they merely indicate a willingness that government will confer on the instrument which is to New-Hampshire should enjoy those advantages which execute their designs the capacity to execute them. The result to all from the establishment of a seminary of proposition is considered and approved. The benefit to learning in the [**660] neighbourhood? On this point the public is considered as an ample compensation for the we think it impossible to entertain a serious doubt. The faculty it confers, and the corporation is created. If the words themselves, unexplained by the context, indicate, advantages to the public constitute a full compensation that the "benefit intended for the province" is that which for the faculty it gives, there can be no reason for is derived from "establishing the best means of education exacting a further compensation, by claiming a right to therein;" that is, from establishing in the province exercise over this artificial being a power which changes Dartmouth College, as constituted by the charter. But, if its nature, and touches the fund, for the security and these words, considered alone, could admit of doubt, that application of which it was created. [HN2] There can be [*640] doubt is [***160] completely removed by an no reason for implying in a charter, given for a valuable inspection of the entire instrument. consideration, a power which is not only not expressed, but is in direct [***158] contradiction to its express The particular interests of New-Hampshire never stipulations. entered into the mind of the donors, never constituted a motive for their donation. The propagation of the From the fact, them, that a charter of incorporation christian religion among the savages, and the has been granted, nothing can be inferred which changes dissemination of useful knowledge among the youth of the character of the institution, or transfers to the the country, were the avowed and the sole objects of their government any new power over it. The character of contributions. In these, New-Hampshire would civil institutions does not grow out of their incorporation, participate; but nothing particular or exclusive was but out of the manner in which they are formed, and the intended for her. Even the site of the college was objects for which they are created. The right to change selected, not for the sake of New-Hampshire, but because them is not founded on their being incorporated, but on it was "most subservient to the great ends in view," and their being the instruments of government, created for its because liberal donations of land were offered by the purposes. The same institutions, created for the same proprietors, on condition that the institution should be objects, though not incorporated, would be public there established. The real advantages from the location institutions, and, of course, be controllable by the of the college, are, perhaps, not less considerable to those legislature. The incorporating act neither gives now on the west, than to those on the east side of Connecticut prevents this control. Neither, in reason, can the river. The clause which constitutes the incorporation, and Page 41 17 U.S. 518, *640; 4 L. Ed. 629, **660; 1819 U.S. LEXIS 330, ***160; 4 Wheat. 518 expresses the objects for which it was made, declares for this charter, as the instrument which should enable those objects to be the instruction of the Indians, "and him, and them, to perpetuate [***163] their beneficent also of English youth, and any others." So that the objects intention. It was granted. An artificial, immortal being, of the contributors, and the incorporating [***161] act, was created by the crown, capable of receiving and were the same; the promotion of christianity, and of distributing forever, according to the will of the donors, education generally, not the interests of New-Hampshire the donations which should be made to it. On this being, particularly. the contributions which had been collected were immediately bestowed. These gifts were made, not From this review of the charter, it appears, that indeed to make a profit for the donors, or their posterity, Dartmouth College is an eleemosynary institution, but for something in their opinion of inestimable value; incorporated for the purpose of perpetuating the for something which they deemed a full equivalent for application of the bounty of the donors, to the specified the money with which it was purchased. The objects of that bounty; that its trustees or governors consideration for which they stipulated, is the perpetual [*641] were originally named by the founder, and application of the found to its object, in the mode invested with the power of perpetuating themselves; that prescribed by themselves. Their descendants may take they are not public officers, nor is it a civil institution, no interest in the preservation of this consideration. But participating in the administration of government; but a in this respect their descendants are not their charity school, or a seminary of education, incorporated representatives. They are represented by the corporation. for the preservation of its property, and the perpetual The corporation is the assignee of their rights, stands in application of that property to the objects of its creation. their place, and distributes their bounty, as they would themselves have distributed it, had they been immortal. Yet a question remains to be considered, of more real So with respect to the students who are to derive learning difficulty, on which more doubt has been entertained than from this source. The corporation is a trustee for them on all that have been discussed. The founders of the also. Their potential [***164] rights, which, taken college, at least those whose contributions were in distributively, [*643] are imperceptible, amount money, have parted with the property bestowed upon it, collectively to a most important interest. These are, in and their representatives have no interest in that the aggregate, to be exercised, asserted, and protected, by property.The donors of land are equally without interest, the corporation. They were as completely out of the so long as the corporation [***162] shall exist. Could donors, at the instant of their being vested in the they be found, they are unaffected by any alteration in its corporation, and as incapable of being asserted by the constitution, and probably regardless of its form, or even students, as at present. of its existence. The students are fluctuating, and no individual among our youth has a vested interest in the According to the theory to the British constitution, institution, which can be asserted in a Court of justice. their parliament is omnipotent. To annual corporate Neither the founders of the college, nor the youth for rights might give a shock to public opinion, which that whose benefit it was founded, complain of the alteration government has chosen to avoid; but its power is not made in its charter, or think themselves injured by it. The questioned. Had parliament, immediately after the trustees alone complain, and the trustees have no emanation of this charter, and the execution of those beneficial interest to be protected. Can this be such a conveyances which followed it, annulled the instrument, contract, as the constitution intended to withdraw from so that the living donows would have witnessed the the power of State legislation? [HN3] Contracts, the disappointment of their hopes, the perfidy of the parties to which have a vested beneficial interest, and transaction would have been universally acknowledged. those only, it has been said, are the objects about [*642] Yet then, as now, the donors would have had no interest which the constitution is solicitous, and to which its in the property; then, as now, those who might be protection is extended. students would have had no rights to be violated; then, as now, it might be said, that the trustees, in whom the The Court has bestowed on this argument the most rights of all were combined, possessed no private, diliberate consideration, and the result will be stated. Dr. individual, beneficial [***165] interest in the property Wheelock, acting for himself, and for those who, at his confided to their protection. Yet the contract [**661] solicitation, had made contributions to his school, applied would at that time have been deemed sacred by all. What Page 42 17 U.S. 518, *643; 4 L. Ed. 629, **661; 1819 U.S. LEXIS 330, ***165; 4 Wheat. 518 has since occurred to strip it of its contemporaneous expounders, which would justify us in inviolability?Circumstances have not changed it. In making it. In the absence of all authority of this kind, is reason, in justice, and in law, it is now what it was in there, in the nature and reason of the case itself, that 1769. which would sustain a construction of the constitution, not warranted by its words? Are contracts of this This is plainly a contract to which the donors, the description of a character to excite so little interest, that trustees, and the crown, (to whose rights and obligations we must exclude them from the provisions of the New-Hampshire succeeds,) were the original [*644] constitution, as being unworthy of the attention of those parties. It is a contract made on a valuable consideration. who framed the instrument? Or does public policy so It is a contract for the security and disposition of imperiously demand their remaining exposed to property. It is a contract, on the faith of which, real and legislative alteration, as to compel us, or rather permit us personal estate has been conveyed to the corporation. It to say, that these words, which were introduced to give is then a contract within the letter of the constitution, and stability to contracts, and which in their plain import within its spirit also, unless the fact, that the property is comprehend this contract, must yet be so construed, as to invested by the donors in trustees for the promotion of exclude it? religion and education, for the benefit of persons who are perpetually changing, though the objects remain the [HN4] Almost all eleemosynary corporations, those same, shall create a particular exception, taking this case which are created for the promotion of religion, of out of the prohibition contained in the constitution. charity, or of education, are of the same character. The law of this case is the law of all. In every literary It is more than possible, that the preservation of [***168] or charitable institution, unless the objects of rights of this description was not particularly [***166] in the bounty be themselves incorporated, the whole legal the view of the framers of the constitution, when the interest is in trustees, and can be asserted only by them. clause under consideration was introduced into that The donors, or claimants of the bounty, if [*646] they instrument. It is probable, that interferences of more can appear in Court at all, can appear only to complain of frequent recurrence, to which the temptation was the trustees. In all other situations, they are identified stronger, and of which the mischief was more extensive, with, and personated by, the trustees; and their rights are constituted the great motive for imposing this restriction to be defended and maintained by them. Religion, on the State legislatures. But although a particular and a Charity, and Education, are, in the law of England, rare case may not, in itself, be of sufficient magnitude to legatees or donees, capable of receiving bequests or induce a rule, yet it must be governed by the rule, when donations in this form. They appear in Court, and claim established, unless some plain and strong reason for or defend by the corporation. Are they of so little excluding it can be given. It is not enough to say, that estimation in the United States, that contracts for their this particular case was not in the mind of the benefit must be excluded from the protection of words, Convention, when the article was framed, nor of the which in their natural import include them? Or do such American people, when it was adopted. It is necessary to contracts so necessarily require new modelling by the go farther, and to say that, had this particular case been authority of the legislature, that the ordinary rules of suggested, the language would have been so varied, as to construction must be disregarded in order to leave them exclude it, or it would have been made a special exposed to legislative alteration? exception. The [*645] case being within the words of the rule, must be within its operation likewise, unless All feel, that these objects are not deemed there be something in the literal construction so unimportant in the United States. The interest which this obviously absurd, or mischievous, or repugnant to the case has excited, proves that they are not. The framers general spirit of the instrument, as to justify [***167] [***169] of the constitution did not deem them those who expound the constitution in making it an unworthy of its care and protection. They have, though exception. in a different mode, manifested their respect for science, by reserving to the government of the Union the power On what safe and intelligible ground can this "to promote the progress of science and useful arts, by exception stand. There is no expression in the securing for limited times, to authors and inventors, the constitution, no sentiment delivered by its exclusive right to their respective writings and Page 43 17 U.S. 518, *646; 4 L. Ed. 629, **661; 1819 U.S. LEXIS 330, ***169; 4 Wheat. 518 discoveries." They have so far withdrawn science, and government, and the presumption, that, if allowed to the useful arts, from the action of the State governments. continue themselves, they now are, and must remain Why then should they be supposed so regardless of forever, what they originally were. Hence is inferred the contracts made for the advancement of literature, as to necessity of applying to this corporation, and to other intend to exclude them from provisions, made for the similar corporations, the correcting and improving hand security [*647] of ordinary contracts between man and of the legislature. man? No reason for making this supposition is perceived. It has been urged repeatedly, and certainly with a degree of earnestness which attracted attention, that the If the insignificance of the object does not require trustees deriving their power from a regal source, must, that we should exclude contracts respecting it from the necessarily, partake of the spirit of their origin; and that protection of the constitution; neither, as we conceive, is their first principles, unimproved by that resplendent light the policy of leaving them subject to legislative alteration which has been shed around them, must [***172] so apparent, as to require a forced construction of that continue to govern the college, and to guide the students. instrument in order to effect it. These eleemosynary Before we inquire into the influence which this argument institutions do not fill the place, which would otherwise ought to have on the constitutional question, it may not be occupied by government, but that which [***170] be amiss to examine the fact on which it rests. The first would otherwise remain vacant.They are complete trustees were undoubtedly named in the charter by the acquisitions to literature. They are donations to crown; but at whose suggestion were they named? By education; donations, which any government must be whom were they [*649] selected? The charter informs disposed rather to encourage than to discountenance. It us. Dr. Wheelock had represented, "that, for many requires no very critical examination of the human mind weighty reasons, it would be expedient, that the to enable us to determine, that one great inducement to gentlemen whom he had already nominated, in his last these gifts is the conviction felt by the giver, that the will, to be trustees in America, should be of the disposition he makes of them is immutable. It is corporation now proposed." When, afterwards, the probable, that no man ever was, and that no man ever will trustees are named in the charter, can it be doubted that be, the founder of a college, believing at the time, that an the persons mentioned by Dr. Wheelock in his will were act of incorporation constitutes no security for the appointed? Some were probably added by the crown, institution; believing, that it is immediately to be deemed with the approbation of Dr. Wheelock. Among these is a public institution, whose funds are to be governed and the Doctor himself. If any others were appointed at the applied, not by the will of the donor, but by the will of instance of the crown, they are the governor, three the legislature. All such [**662] gifts are made in the members of the council, and the speaker of the house of pleasing, perhaps delusive hope, that the charity will flow representatives, of the colony of New-Hampshire. The forever in the channel which the givers have marked out stations filled by these persons ought to rescue them from for it. If every man finds in his own bosom strong any other imputation than too great a dependence on the evidence of the universality of this sentiment, there can [***173] crown. If in the revolution that followed, they be but little reason to imagine, that the framers of our acted under the influence of this sentiment, they must constitution were [*648] strangers to it, and that, feeling have ceased to be trustees; if they took part with their the necessity and [***171] policy of giving permanence countrymen, the imputation, which suspicion might and security to contracts, of withdrawing them from the excite, would no longer attach to them.The original influence of legislative bodies, whose fluctuating policy, trustees, then, or most of them, were named by Dr. and repeated interferences, produced the most perplexing Wheelock, and those who were added to his nomination, and injurious embarrassments, they still deemed it most probably with his approbation, were among the necessary to leave these contracts subject to those most eminent and respectable individuals in interferences. The motives for such an exception must be New-Hampshire. very powerful, to justify the construction which makes it. The only evidence which we possess of the character The motives suggested at the bar grow out of the of Dr. Wheelock is furnished by this charter. The original appointment of the trustees, which is supposed to judicious means employed for the accomplishment of his have been in a spirit hostile to the genius of our object, and the success which attended his endeavours, Page 44 17 U.S. 518, *649; 4 L. Ed. 629, **662; 1819 U.S. LEXIS 330, ***173; 4 Wheat. 518 would lead to the opinion, that he united a sound comprehended the transcendent power of parliament, as understanding to that humanity and [*650] benevolence well as that of the executive department. It is too clear to which suggested his undertaking. It surely cannot be require the support of argument, that all contracts, and assumed, that his trustees were selected without rights respecting property, remained unchanged by the judgment. With as little probability can it be assumed, revolution. The obligations then, which were created by that, while the light of science, and of liberal principles, the charter to Dartmouth College, were the same in the pervades the whole community, these originally new, that they had been in the old government. The benighted trustees remain in utter darkness, incapable of power of the government was also the same. A repeal of participating in the general improvement; that, while the this charter [***176] at any time prior to the adoption of human race is rapidly [***174] advancing, they are the present constitution of the United States, would have stationary. Reasoning a priori, we should believe, that been an extraordinary [**663] and unprecedented act of learned and intelligent men, selected by its patrons for the power, but one which could have been contested only by government of a literary institution, would select learned the restrictions upon the legislature, to be found in the and intelligent men for their successors; men as well constitution of the State. But the constitution of the fitted for the government of a college as those who might United States has imposed this additional limitation, be chosen by other means. Should this reasoning ever [*652] that [HN5] the legislature of a State shall pass no prove erroneous in a particular case, public opinion, as act "impairing the obligation of contracts." has been stated at the bar, would correct the institution. The mere possibility of the contrary would not justify a It has been already stated, that the act "to amend the construction of the constitution, which should exclude charter, and enlarge and improve the corporation of these contracts from the protection of a provision whose Dartmouth College," increase the number of trustees to terms comprehend them. twenty-one, gives the appointment of the additional members to the executive of the State, and creates a The opinion of the Court, after mature deliberation, board of overseers, to consist of twenty-five persons, of is, that this is a contract, the obligation of which cannot whom twenty-one are also appointed by the executive of be impaired, without violating the constitution of the New-Hampshire, who have power to inspect and control United States. This opinion appears to us to be equally the most important acts of the trustees. supported by reason, and by the former decisions of this Court. On the effect of this law, two opinions cannot be entertained.Between acting directly, and acting through 2. We next proceed to the inquiry, whether its the agency of trustees and overseers, no essential obligation has been impaired by those acts of the difference is perceived. The whole power of governing legislature of New-Hampshire, to which the special the college is transferred from [***177] trustees verdict refers. appointed according to the will of the founder, expressed in the charter, to the executive of New-Hampshire. The [*651] From the review of this charter, which has management and application of the funds of this been taken, it appears, [***175] that the whole power of eleemosynary institution, which are placed by the donors governing the college, of appointing and removing tutors, in the hands of trustees named in the charter, and of fixing their salaries, of directing the course of study to empowered to perpetuate themselves, are placed by this be pursued by the students, and of filling up vacancies act under the control of the government of the State. The created in their own body, was vested in the trustees. On will of the State is substituted for the will of the donors, the part of the crown it was expressly stipulated, that this in every essential operation of the college.This is not an corporation, thus constituted, should continue forever; immaterial change. The founders of the college and that the number of trustees should forever consist of contracted, not merely for the perpetual application of the twelve, and no more. By this contract the crown was funds which they gave, to the objects for which those bound, and could have made no violent alteration in its funds were given; they contracted also, to secure that essential terms, without impairing its obligation. application by the constitution of the corporation. [*653] They contracted for a system, which should, as far as By the revolution, the duties, as well as the powers, human foresight can provide, retain forever the of government devolved on the people of government of the literary institution they had formed, in New-Hampshire. It is admitted, that among the latter was Page 45 17 U.S. 518, *653; 4 L. Ed. 629, **663; 1819 U.S. LEXIS 330, ***177; 4 Wheat. 518 the hands of persons approved by themselves. This legislature of New-Hampshire, which are stated in the system is totally changed. The charter of 1769 exists no special verdict found in this cause, are repugnant to the longer. It is reorganized; and reorganized in such a constitution [***180] of the United States; and that the manner, as to convert a literary institution, moulded judgment on this special verdict ought to have been for according to the will of its [***178] founders, and the plaintiffs. The judgment of the State Court must, placed under the control of private literary men, into a therefore, be reversed. machine entirely subservient to the will of government. This may be for the advantage of this college in CONCUR BY: WASHINGTON; STORY particular, and may be for the advantage of literature in general; but it is not according to the will of the donors, CONCUR and is subversive of that contract, on the faith of which their property was given. Mr. Justice WASHINGTON. -- This cause turns upon the validity of certain laws of the State of In the view which has been taken of this interesting New-Hampshire, which have been stated in the case, and case, the Court has confined itself to the rights possessed which, it is contended by the counsel for the plaintiffs by the trustees, as the assignees and representatives of the [*655] in error, are void, being repugnant to the donors and founders, for the benefit of religion and constitution of that State, and also to the constitution of literature. Yet it is not clear, that the trustees ought to be the United States. Whether the first objection to these considered as destitute of such beneficial interest in laws be well founded or not, is a question with which this themselves, as the law may respect. In addition to their Court, in this case, has nothing to do: because it has no being the legal owners of the property, and to their jurisdication, as an appellate Court, over the decisions of having a freehold right in the powers confided to them, a State Court, except in cases where is drawn in question the charter itself countenances the idea, that trustees may the validity of a treaty, or statute of, or an authority also be tutors with salaries. The first president was one exercised under, the United States, and the decision is of the original trustees; and the charter provides, that in against their validity; or where is drawn in question the case of vacancy in that office, "the senior professor or validity of a statute of, or an authority exercised under, tutor, being one of the trustees, shall exercise the office of any State, on the ground of their being repugnant to the president, [***179] until the trustees shall make choice constitution, treaties, or laws of the United States, and the [*654] of, and appoint a president." According to the decision is in favour of their validity; [***181] or where tenor of the charter, then, the trustees might, without is drawn in question the construction of any clause of the impropriety, appoint a president and other professors constitution, or of a treaty, or statute of, or commission from their own body. This is a power not entirely held under, the United States, and the decision is against unconnected with an interest. Even if the proposition of the title, right, privilege, or exemption specially set up or the counsel for the defendant were sustained; if it were claimed by either party, under such clause of the said admitted, that those contracts only are protected by the constitution, treaty, statute, or commission. constitution, a beneficial interest in which is vested in the party, who appears in Court to assert that interest; yet it is The clause in the constitution of the United States by no means clear, that the trustees of Dartmouth College which was drawn in question in the Court from which have no beneficial interest in themselves. this transcript has been sent, is that part of the tenth section of the first article, which declares, that "no State But the Court has deemed it unnecessary to shall pass any bill of attainder, ex post facto law, or any investigate this particular point, being of opinion, on law impairing the obligation of contracts." The decision general principles, that [HN6] in these private of the State Court is against the title specially claimed by eleemosynary institutions, the body corporate, as the plaintiffs in error, under the above clause, because possessing the whole legal and equitable interest, and they contend, [**664] that the laws of New-Hampshire, completely representing the donors, for the purpose of above referred to, [*656] impair the obligation of a executing the trust, has rights which are protected by the contract, and are, consequently, repugnant to the above constitution. clause of the constitution of the United States, and void. It results from this opinion, that the acts of the There are, then, two questions for this court to decide: Page 46 17 U.S. 518, *656; 4 L. Ed. 629, **664; 1819 U.S. LEXIS 330, ***181; 4 Wheat. 518 1st. Is the charter granted to Dartmouth College on This [***184] franchise, like other franchises, is an the 13th of December, 1769, to be considered as a incorporeal hereditament, issuing out of something real or [***182] contract? If it be, then, 2dly. Do the laws in personal, or concerning or annexed to, and exercisable question impair its obligation? within a thing corporate. To this grant, or this franchise, the parties are, the king, and the persons for whose 1. What is a contract? It may be defined to be a benefit it is created, or trustees for them.The assent of transaction between two or more persons, in which each both is necessary. [*658] The subjects of the grant are party comes under an obligation to the other, and each not only privileges and immunities, but property, or, reciprocally acquires a right to whatever is promised by which is the same thing, a capacity to acquire and to hold the other. 77 Under this definition, says Mr. Powell, it is property in perpetuity. Certain obligations are created obvious, that every feoffment, gift, grant, agreement, binding both on the grantor and the grantees. On the part promise, &c. may be included, because in all there is a of the former, it amounts to an extinguishment of the mutual consent of the minds of the parties concerned in king's prerogative to bestow the same identical franchise them, upon an agreement between them respecting some on another corporate body, because it would prejudice his property or right that is the object of the stipulation. He prior grant. 80 It implies, therefore, a contract not to adds, that the ingredients requisite to form a contract, are, reassert the right to grant the franchise to another, or to parties, consent, and an obligation to be created or impair it. There is also an implied contract, that the dissolved: these must all concur, because the regular founder of a private charity, or his heirs, or other persons effect of all contracts is on one side to acquire, and on the appointed by him for that purpose, shall have the right to other to part with, some property or rights; or to abridge, visit, and to govern the corporation, of which he is the or to restrain natural liberty, by binding the parties to do, acknowledged founder and patron, and also, that in case or restraining them from doing, something which before of its [***185] dissolution, the reversionary right of the they might have done, or omitted. If a doubt could exist founder to the property, with which he had endowed it, that a grant is a contract, the point was decided in the should be preserved inviolate. case of Flectcher v. Peck, 78 [*657] [***183] in which it was laid down, that a contract is either executory or 79 2 Bl. Com. 37. executed; by the former, a party binds himself to do or 80 2 Bl. Com. 37. not to do a particular thing; the latter is one in which the object of the contract is performed, and this differs in The rights acquired by the other contracting party are nothing from a grant; but whether executed or executory, those of having perpetual succession, of suing and being they both contain obligations binding on the parties, and sued, of purchasing lands for the benefit of themselves both are equally within the provisions of the constitution and their succssors, and of having a common seal, and of of the United States, which forbids the State governments making bye-laws. The obligation imposed upon them, to pass laws impairing the obligation of contracts. and which forms the consideration of the grant, is that of acting up to the end or design for which they were 77 Powell on Contr. 6. created by their founder. Mr. Justice Buller, in the case of 78 6 Cranch, 87. the King v. Passmore, 81 says, that the grant of incorporation is a compact between the crown and a If, then, a grant be a contract, within the meaning of number of persons, the latter of whom undertake, in the constitution of the United States, the next inquiry is, consideration [*659] of the privileges bestowed, to exert whether the creation of a corporation by charter, be such themselves for the goods government of the place. If a grant, as includes an obligation of the nature of a they fail to perform their part of it, there is an end of the contract, which no State legislature can pass laws to compact. The charter of a corporation, says Mr. Justice impair? Blackstone, 82 may be forfeited through negligence, or abuse of its franchises, in which case the law judges, that A corporation is defined by Mr. Justice Blackstone the body politic has broken the condition that the body 79 to be a franchise. It is, says he, "a franchise for a politic has broken [***186] the condition upon which it number of persons, to be incorporated and exist as a body was incorporated, and thereupon the corporation is void. politic, with a power to maintain perpetual succession, and to do corporate acts, and each individual of such 81 3 T.R. 246. corporation is also said to have a franchise, or freedom." Page 47 17 U.S. 518, *659; 4 L. Ed. 629, **664; 1819 U.S. LEXIS 330, ***186; 4 Wheat. 518 82 2 Bl. Com. 484. their existence and subjection to public control. The one is the mere creature of public institution, created It appears to me, upon the whole, that these exclusively for the public advantage, without other principles and authorities prove, incontrovertibly, that a endowments than such as the king or government may charter of incorporation is a contract. bestow upon it, and having no other founder or visitor than the king or government, the Fundator incipiens. 2. The next question is, do the acts of the legislature [*661] The validity and justice of its laws and of New-Hampshire of the 27th of June, and 18th and 26th constitution are examinable by the Courts having of December, 1816, impair this contract, within the true jurisdiction over them; and they are subject to the general intent and meaning of the constitution of the United law of the land. It would seem reasonable, that such a States? corporation may be controlled, and its constitution altered and amended by the government, in such manner as the Previous to the examination of this question, it will public interest may require. Such legislative be proper clearly to mark the distinction between the interferences cannot be said to impair the contract by different kinds of lay aggregate corporations, in order to which the corporation was formed, because there is in prevent any implied decision by this Court of any other reality but one party to it, the trustees or governors of the case, than the one immediately before it. corporation being merely the trustees for the public, the We are informed, by the case of Philips v. Bury, 1 cestui que trust of the foundation. These trustees or Ld. Raym. 5; s.c. 2 T.R. 346, which contains all the governors have no interest, no privileges or immunities, doctrine of corporations connected with this point, that which are violated by such interference, and can have no there are two kinds of corporations aggregate, viz. such more [***189] right to complain of them, than an as are for public government, and such as are for private ordinary trustee, who is called upon in a Court of Equity charity. The first are those for the government of a town, to execute the trust. They accepted the charter for the city, or the like; and being for public advantage, are public benefit alone, and there would seem to be no [*660] to be governed according to the law [**665] of reason why the government, under proper limitations, the [***187] land. The validity and justice of the their should not alter or modify such a grant at pleasure. But private laws and constitutions are examinable in the the case of a private corporation is entirely different. king's Courts. Of these there are no particular founders, That is the creature of private benefaction for a charity or and consequently no particular visitor. There are no private purpose. It is endowed and founded by private patrons of these corporations. But private and particular persons, and subject to their control, laws, and visitation, corporations for charity, founded and endowed by private and not to the general control of the government; and all persons, are subject to the private government of those these powers, rights and privileges, flow from the who erect them, and are to be visited by them or their property of the founder in the funds assigned for the heirs, or such other persons as they may appoint. The support of the charity.Although the king, by the grant of only rules for the government of these private the charter, is in some sense the founder of all corporations are the laws and constitutions assigned by eleemosynary corporations, because without his grant the founder. This right of government and visitation they cannot exist; yet the patron or endower is the arises from the property which the founder had in the perficient founder, to whom belongs, as of [*662] right, lands assigned to support the charity; and, as he is the all the powers and privilege, which have been described. author of the charity, the law invests him with the With such a corporation, it is not competent for the necessary power of inspecting and regulating it. The legislature to interfere. It is a franchise, or incorporeal authorities are full to prove, that a college is a private hereditament, founded upon private property, [***190] charity, as well as a hospital, and that there is, in reality, devoted by its patron to a private charity of a peculiar no difference between them, except in degree; but they kind, the offspring of his own will and pleasure, to be are within the same reason, and both eleemosynary. managed and visited by persons of his own appointment, according to such laws and regulations as he, or the These corporations, civil and eleemosynary, which persons so selected, may ordain. differ from each other so especially in their nature [***188] and constitution, may very well differ in It has been shown, that the charter is a contract on matters which concern their rights and privileges, and the part of the government, that the property with which Page 48 17 U.S. 518, *662; 4 L. Ed. 629, **665; 1819 U.S. LEXIS 330, ***190; 4 Wheat. 518 the charity is endowed, shall be for ever vested in a securing, however, the property for the use of those for certain number of persons, and their successors, to whom, and at whose expense, it was purchased. [**666] subserve the particular purposes designated by the But it is denied, that it has power to repeal [*664] founder, and to be managed in a particular way. If a law statutes creating private corporations, or confirming to increases or diminishes the number of the trustees, they them property already acquired under the faith of are not the persons which the grantor agreed should be previous laws; and that it can, by such repeal, vest the the managers of the fund. If it appropriate the fund property of such corporations in the State, or dispose of intended for the support of a particular charity to that of the same to such purposes as it may please, without the some other charity, or to an entirely different charity, the consent or default of the corporators. Such a law, it is grant is in effect set aside, and a new contract substituted declared, would be repugnant both to the spirit and the in its place; thus disappointing completely the intentions letter of the constitution of the United States. of the founder, by changing the objects of his bounty. And can it be seriously contended, that a law, which 86 9 Cranch, 43. changes so materially the terms of a contract, does not If these principles, before laid down, be correct, it impair it? In short, does not every alteration [***191] of cannot be denied, that the obligations [***193] of the a contract, however, unimportant, even though it be charter to Dartmouth College are impaired by the laws manifestly for the interest of the party objecting to it, under consideration. The name of the corporation, its impair its obligation? If the assent of all the parties to be constitution and government, and the objects of the bound by a contract be of its essence, how [*663] is it founder, and of the grantor of the charter, are totally possible that a new contract, substituted for, or engrafted changed. By the charter, the property of this founder was on another, without such assent, should not violate the vested in twelve trustees, and no more, to be disposed of old charter? by them, or a majority, for the support of a college, for This course of reasoning, which appears to be the education and instruction of the Indians, and also of perfectly manifest, is not without authority to support it. English youth, and others. Under the late acts, the Mr. Justice Blackstone lays it down, 84 that the same trustees and visitors are different; and the property and identical franchise, that has been before granted to one, franchises of the college are transferred to different and cannot be bestowed on another; and the reason assigned new uses, not contemplated by the founder. In short, it is is, that it would prejudice the former grant. In the King most obvious, that the effect of these laws is to abolish v. Passmore, 85 Lord Kenyon says, that an existing the old corporation, and to create a new one in its stead. corporation cannot have another charter obtruded upon it The laws of Virginia, referred to in the case of Terrett v. by the crown. It may reject it, or accept the whole, or any Taylor, authorized the overseers of the poor to sell the part of the new charter. The reason is obvious. A charter glebes belonging to the Protestant Episcopal Church, and is a contract, to the validity of which the consent of both to appropriate the proceeds to other uses. The laws in parties is essential, and, therefore, it cannot be altered or question devest the trustees of Dartmouth College of the added to without such consent. property vested in them [*665] by the founder, and vest it in other trustees, for the support of a different [***194] 84 Bl. Com. 37. institution, called Dartmouth University. In what 85 3 T.R. 246. respects do they differ? Would the difference have been greater in principle, if the law had appropriated the funds But the case of Terrett v. Taylor, 86 fully supports the of the college to the making of turnpike roads, or to any distinction above [***192] stated, between civil and other purpose of a public nature? In all respects, in which private corporations, and is entirely in point. It was the contract has been altered without the assent of the decided in that case, that a private corporation, created by corporation, its obligations have been impaired; and the the legislature, may lose its franchises by misuser, or degree can make no difference in the construction of the non-user, and may be resumed by the government under a above provision of the constitution. judicial judgment of forfeiture. In respect to public corporations which exist only for public purposes, such It has been insisted in the argument at the bar, that as towns, cities, &c. the legislature may, under proper Dartmouth College was a mere civil corporation, created limitations, change, modify, enlarge, or restrain them, for a public purpose, the public being deeply interested in Page 49 17 U.S. 518, *665; 4 L. Ed. 629, **666; 1819 U.S. LEXIS 330, ***194; 4 Wheat. 518 the education of its youth; and that, consequently, the [*667] 1. Whether the original charter of Dartmouth charter was as much under the control of the government College is a contract within the prohibitory clause of the of New-Hampshire, as if the corporation had concerned constitution of the United States, which declares, that no the government of a town or city. But it has been shown, State shall pass any "law impairing the obligation of that the authorities are all the other way. There is not a contracts." 2. If so, whether the legislative acts of case to be found which contradicts the doctrine laid down New-Hampshire of the 27th of June, and of the 18th and in the case of Philips v. Bury, viz. that a college founded 27th of December, 1816, or any of them, impair the by an individual, or individuals, is a private charity, obligations of that charter. subject to the government and visitation of the founder, and not to the unlimited [***195] control of the It will be nacessary, however, before we proceed to government. discuss these questions, to institute an inquiry into the nature, rights, and duties of aggregate corporations at It is objected, in this case, that Dr. Wheelock is not common law; that we may apply the principles, [***197] the founder of Dartmouth College. Admit he is not. drawn from this source, to the exposition of this charter, How would this alter the case? Neither the king, nor the which was granted emphatically with reference to that province of New-Hampshire was the founder; and if the law. contributions made by the governor of New-Hampshire, by those persons who [*666] granted lands for the An aggregate corporation at common law is a college, in order to induce its location in a particular part collection of individuals united into one collective body, of the State, by the other liberal contributors in England under a special name, and possessing certain immunities, and America, bestow upon them claims equal with Dr. privileges, and capacities in its collective character, Wheelock, still it would not alter the nature of the which do not belong to the natural persons composing it. corporation, and convert it into one for public Among other things it possesses the capacity of perpetual government. It would still be a private eleemosynary succession, and of acting by the collected vote or will of corporation, a private charity endowed by a number of its component members, and of suing and being sued in persons, instead of a single individual. But the fact is, all things touching its corporate rights and duties. It is, in that whoever may mediately have contributed to swell the short, an artificial person, existing in contemplation of funds of this charity, they were bestowed at the law, and endowed with certain powers and franchises solicitation of Dr. Wheelock, and vested in persons which, though they must be exercised through the appointed by him, for the use of a charity, of which he medium of its natural members, are yet considered as was the immediate founder, and is so styled in the subsisting in the corporation itself, as distinctly as if it charter. were a real personage. Hence, such a corporation may sue and be sued by its own members; and [*668] Upon the whole, I am of opinion, that the above acts [**667] may contract with them in the same manner as of New-Hampshire, not having received the assent of the with any strangers. 87 A great variety of these corporate body of Dartmouth [***196] College, are not corporations exist in every country governed by the binding on them, and, consequently, that the judgment of common law; in some of which the corporate [***198] the State Court ought to be reversed. existence is perpetuated by new elections, made from time to time; and in others by a continual accession of Mr. Justice JOHNSON concurred, for the reasons new members, without any corporate act. Some of these stated by the Chief Justice. corporations are, from the particular purposes to which they are devoted, denominated spiritual, and some law; Mr. Justice LIVINGSTON concurred, for the reasons and the latter are again divided into civil and stated by the Chief Justice, and Justices WASHINGTON eleemosynary corporations. It is unnecessary, in this and STORY. place, to enter into any examination of civil corporations. Eleemosynary corporations are such as are constituted for Mr. Justice STORY. This is a cause of great the perpetual distribution of the free alms and bounty of importance, and as the very learned discussions, as well the founder, in such manner as he has directed; and in this here, as in the State Court, show, of no inconsiderable class are ranked hospitals for the relief of poor and difficulty. There are two questions, to which the impotent persons, and colleges for the promotion of appellate jurisdiction of this Court properly applies. Page 50 17 U.S. 518, *668; 4 L. Ed. 629, **667; 1819 U.S. LEXIS 330, ***198; 4 Wheat. 518 learning and piety, and the support of persons engaged in law. 89 literary pursuits. 88 89 Phillips v. Bury, 1 Ld. Ray. 5. 9. S.C. 2 T.R. 87 1 Bl. Com. 469. 475. 1 Kyd Corp. 13. 69. 346. 189. 1 Woodes. 471. &c. &c. 88 1 Bl. Com. 469. 470. 471. 482. 1 Kyd Corp. It was indeed supposed at the argument, that if the 25. 1 Woodes. 474. Attorney General v. uses of an eleemosynary corporation be for general Whorwood, 1 Ves. 534. St John's College v. charity, this alone would constitute it a public Todington, 1 Bl. Rep. 84. S.C. 1 Bur. 200. corporation. But the law is certainly not so. To be sure, Phillips v. Bury, 1 Ld. Raym. 5. S.C. 2 T.R. 346. in a certain sense, every charity, which is extensive in its Porter's Case, 1 Co. 22. b. 23. reach, may be called a public charity, in contradistinction to a charity embracing but a few definite objects. In this Another division of corporations is into public and sense [***201] the language was unquestionably used by private.Public [***199] corporations are generally Lord Hardwicke in the case cited at the argument; 90 and, esteemed such as exist for public political purposes only, in this sense, a private corporation may well enough be such as towns, cities, parishes, and counties; and in many denominated a public charity. So it would be, if the respects they are so, although they involve some private endowment, instead of being vested in a corporation, interests; but strictly speaking, public corporations were assigned to a private trustee; yet in such a case no [*669] are such only as are founded by the government one would imagine that the trust ceased to be private, or for public purposes, where the whole interests belong the funds became public property. That the mere act of also to the government. If, therefore, the foundation be incorporation will not change the charity from a private private, though under the charter of the government, the to a public one, is most distinctly asserted in the corporation is private, however extensive the uses may be authorities. Lord Hardwicke, in the case already alluded to which it is devoted, either by the bounty of the to, says, "the charter of the crown cannot make a charity founder, or the nature and objects of the institution. For more or less public, but only more permanent than it instance, a bank created by the government for its own would otherwise be; but it is the extensiveness, which uses, whose stock is exclusively owned by the will constitute it a public one. A devise to the poor of the government, is, in the strictest sense, a public parish is a public charity. Where testators leave it to the corporation. So a hospital created and endowed by the discretion of a trustee to choose out the objects, though government for general charity. But a bank, whose stock each particular [*671] object may be said to be private, is owned by private persons, is a private corporation, yet in the extensiveness of the benefit accruing from although it is erected by the government, and its objects them, they may properly be called public charities. A sum and operations partake of a public nature.The same to be disposed of by A. B. and his executors, at their doctrine may be affirmed of insurance, canal, bridge, and discretion, among poor [***202] house-keepers, is of turnpike companies. In all these cases, the uses may, in a this kind." The charity, then, may, in this sense, be certain [***200] sense, be called public, but the public, although it may be administered by private corporations are private; as much so, indeed, as if the trustees; and, for the same reason, it may thus be public, franchises were vested in a single person. though administered by a private corporation. The fact, then, that the charity is public, affords no proof that the This reasoning applies in its full force to corporation is also public; and, consequently, the eleemosynary corporations. A hospital founded by a argument, so far as it is built on this foundation, falls to private benefactor is, in point of law, a private the ground. If, indeed, the argument were correct, it corporation, although dedicated by its charter to general would follow, that almost every hospital and college charity. So a college, founded and endowed in the same would be a public corporation; a doctrine utterly manner, although, being for the promotion of learning irreconcilable with the whole current of decisions since and piety, it may extend its charity to scholars from every the time of Lord Coke. 91 class in the community, and thus acquire the character of a public institution. This is the unequivocal doctrine of 90 Attorney General v. Pearse, 2 Atk. 87. 1 Bac. the authorities; and cannot be [*670] shaken but by Abr. tit Charitable Uses, E. 589. undermining the most solid foundations of the common 91 The case of Sutton's Hospital, 10 Co. 23. Page 51 17 U.S. 518, *671; 4 L. Ed. 629, **667; 1819 U.S. LEXIS 330, ***202; 4 Wheat. 518 When, then, the argument assumes, that because the all corporations (says Sir William Blackstone,) in the charity is public, the corporation is public, it manifestly strictest and original sense, is the king alone, for he only confounds the popular, with the strictly legal sense of the can incorporate a society; and in civil corporations, such terms. And if it stopped here, it would not be very as mayor, commonalty, &c. where there are no material to correct the error. But it is on this foundation, possessions or endowments [***205] given to the body, that a superstructure is erected, which is to compel a ther is no other founder but the king; but in eleemosynary surrender of the cause. When the corporation is said at foundations, such as colleges and hospitals, where there the bar to [***203] be public, it is not merely meant, that is an endowment of lands, the law distinguishes and maks the whole community may be the proper objects of the two species of foundation, the one fundatio incipiens, or bounty, but that the government have the sole right, as the incorporation, in which sense the king is the general trustees of the public interests, to regulate, control, and founder of all colleges and hospitals; the other fundatio direct the public interests, to regulate, control, and direct perficiens, or the dotation of it, in which sense the first the corporation, and its funds and its franchises, at its gift of the revenues is the foundation, and he who gives own good will and pleasure. Now, such [*672] an them is, in the law, the founder; and it is in this last sense authority does not exist in the government, except we generally call a man the founder of a college or [**668] where the corporation is in the strictest sense hospital." 93 public; that is, where its whole interests and franchises are the exclusive property and domain of the government 93 1 Bl. Com. 480. 10 Co. 33. itself. If it had been otherwise, Courts of law would have To all eleemosynary corporations a visitatorial power been spared many laborious adjudications in respect to attaches, as a necessary incident; for these corporations eleemosynary corporations, and the visitatorial powers being composed of individuals, subject to human over them, from the time of Lord Holt down to the infirmities, are liable, as well as private persons, to present day. 92 Nay, more, private trustees for charitable deviate from the end of their institution. The law, purposes would have been liable to have the property therefore, has provided, that there shall somewhere exist confided to their care taken away from them without any a power to visit, inquire into, and correct all irregularities assent or default on their part, and the administration and abuses in such corporations, and to compel the submitted, not to the control of law and equity, but to the original purposes of the charity to be faithfully fulfilled. arbitrary discretion of the government. Yet, who ever 94 The nature and extent of this visitatorial [***206] thought before, that the munificent [***204] gifts of power has been expounded [*674] with admirable private donors for general charity became instantaneously fulness and accuracy by Lord Holt in one of his most the property of the government; and that the trustees celebrated judgments. 95 And of common right by the appointed by the donors, whether corporate or dotation the founder and his heirs are the legal visitors, unincorporated, might be compelled to yield up their unless the founder has appointed and assigned another rights to whomsoever the government might appoint to person to be visitor. For the founder may, if he please, at administer them? If we were to establish such a principle, it would extinguish all future eleemosynary the time of the endowment, part with his visitatorial power, and the person to whom it is assigned will, in that endowments; and we should find as little of public case, possess it in exclusion of the founder's heirs. 96 This policy, as we now find of law to sustain it. visitatorial power is, therefore, an hereditament founded 92 Rex v. Bury, 1 Ld. Ray. 5. S.C. Comb. 265. in property, and valuable in intendment of law; and Holt, 715. 1 Show. 360. 4 Mod. 106. Skin. 447. stands upon the maxim, that he who gives his property, and Ld. Holt's opinion from his own MS. in 2 has a right to regulate it in future. It includes also the T.R. 346. legal right of patronage, for as Lord Holt justly observes, "patronage and visitation are necessary consequents one An eleemosynary corporation, then, upon a private upon another." No technical terms are necessary to assign foundation, being a private corporation, it is next to be or vest the visitatorial power; it is sufficient if, from the considered, what is deemed a foundation, [*673] and nature of the duties to be performed by particular persons who is the founder. This cannot be stated with more under the charter, it can be inferred, that the founder brevity and exactness than in the language of the elegant meant to part with it in their favour; and he may divide it commentator upon the laws of England: "The founder of among various persons, or subject it to any modifications Page 52 17 U.S. 518, *674; 4 L. Ed. 629, **668; 1819 U.S. LEXIS 330, ***207; 4 Wheat. 518 [***207] or control, by the fundamental statutes of the officers, correct abuses, and generally superintend the corporation. But where the appointment is given in management of the trusts. Where indeed [***209] the general terms, the whole power vests in the appointee. 97 visitatorial power is vested in the trustees of the charity in In the construction [*675] of charters too, it is a general virtue of their incorporation, there can be no amotion of rule, that if the objects of the charity are incorporated, as them from their corporate capacity. But they are not, for instance, the master and fellows of a college, or the therefore, placed beyond the reach of the law. As master and poor of a hospital, the visitatorial power, in managers of the revenues of the corporation, they are the absence of any special appointment, silently vests in subject to the general superintending power of the Court the founder and his heirs. But where trustees or of Chancery, not as itself possessing a visitatorial power, governors are incorporated to manage the charity, the or a right to control the charity, but as possessing a visitatorial power is deemed to belong to them in their general jurisdiction in all cases of an abuse of trusts to corporate character. 98 redress grievances, and suppress frauds. 100 And where a corporation is a mere trustee of a charity, a Court of 94 1 Bl. Com. 480. equity will go yet farther; and though it cannot appoint or 95 Phillips v. Bury, 1 Ld. Ray. 5. S.C. 2 T.R. remove a corporator, it will yet, in a case of [*677] 346. gross fraud, or abuse of trust, take away the trust from the 96 1 Bl. Com. 482. corporation, and vest it in other hands. 101 97 Eden v. Foster, 2 P.W. 325. Attorney General v. Middleton, 2 Ves. 327. St. Johns College v. 100 2 Fonb. Eq. B. 2. pt. 2. ch. 1. s. 1. note (a.) Todington, 1 Bl. Rep. 84. S.C. 2 Bur. 200. Coop. Eq. Pl. 292. 2 Kyd Corp. 195. Green v. Attorney General v. Clare College, 3 Atk. 662. Rutherforth, 1 Ves. 462. Attorney General v. S.C. 1 Ves. 78. Foundling Hospital, 4 Bro. Ch. 165. S.C. 2 Ves. 98 Phillips v. Bury, 1 Ld. Ray. 5. S.C. 2 T.R. jun. 42. Eden v. Foster, 2 P.W. 325. 1 Woodes. 346. Green v. Rutherforth, 1 Ves. 472. Attorney 476. Attorney General v. Price, 3 Atk. 108. General v. Middleton, 2 Ves. 327. Case of Sutton Attorney General v. Lock, 3 Atk. 164. Attorney Hospital, 10 Co. 23. 31. General v. Dixie, 13 Ves. 519. Ex parte Kirkby Ravensworth Hospital, 15 Ves. 304. 314. When a private eleemosynary corporation is thus Attorney General v. Earl of Clarendon, 17 Ves. created by the charter of the crown, [***208] it is 491. 499. Berkhamstead Free School, 2 Ves. & subject to no other control on the part of the crown, than Beames, 134. Attorney Geenral v. Corporation of what is expressly or implicitly reserved by the charter Carmarthen, Coop. Rep. 30. Mayor, &c. of itself. Unless a power be reserved for this purpose, the Colchester v. Lowten, 1 Ves. & Beames, 226. Rex crown cannot, in virtue of its prerogative, without the v. Watson, 2 T.R. 199. Attorney General v. Utica consent of the corporation, alter or amend the charter, or Ins. Co. 2 Johns. Ch. R. 371. Attorney General v. devest the corporation of any of its franchises, or add to Middleton, 2 Ves. 327. them, or add to, or diminish, the number of the trustees, 101 Mayor, &c. of Coventry v. Attorney or remove any of the members, or change, or control the General, 7 Bro. Parl. Cases, 235. Attorney administration of the charity, or compel the corporation General v. Earl of Clarendon, 17 Ves. 491. 499. to receive a new charter. This is the uniform language of the authorities, and forms one of the most stubborn, and [***210] Thus much it has been thought proper to well settled doctrines of the common law. 99 premise respecting the nature, rights, and duties of eleemosynary corporations, growing out of the common 99 See Rex v. Passmore, 3 T.R. 199. and the law. We may now proceed to an examination of the case there cited. original charter of Dartmouth College. But an eleemosynary, like every other corporation, is It begins by a recital, among other things, that the subject to the general law of the land.It may forfeit its Rev. Eleazer Wheelock, of Lebanon, in Connecticut, corporate franchises, by misuser or nonuser [*676] of about the year 1754, at his own expense, on his own them. It is subject to the controling authority of its legal estate, set on foot an Indian charity school; and by the visitor, who, unless restrained by the terms of the charter, assistance of other persons, educated a number of the may amend and repeal its statutes, remove [**669] its Page 53 17 U.S. 518, *677; 4 L. Ed. 629, **669; 1819 U.S. LEXIS 330, ***210; 4 Wheat. 518 children of the Indians, and employed them as erected in New-Hampshire, by the name of Dartmouth missionaries and schoolmaters among the savage tribes; College, for the education and instruction of youth of the that the design became reputable among the Indians, so Indian tribes, and also of English youth and others; that that more desired the education of their children at the the trustees of said college shall be a corporation forever, school, than the contributions in the American colonies by the name of the trustees of Dartmouth College: that would support; that the said Wheelock thought it the then governor of New-Hampshire, the said Wheelock, expedient to endeavour to procure contributions in and ten other persons, [***213] specially named in the England, and requested the Rev. Nathaniel Whitaker to charter, shall be trustees of the said college, and that the go to England as his attorney, to solicit contribution, and whole number of trustees shall forever thereafter consist also solicited the Earl of Dartmouth, and others, to of tweleve, and no more; that the said corporation shall receive the contributions and become trustees thereof, have power to sue and to be sued by their corporate which they cheerfully agreed to, and he constituted them name, and to acquire and hold for the use of the said trustees accordingly by a power of attorney, and [***211] Dartmouth College, lands, tenements, hereditaments, and they testified their acceptance by a sealed instrument; franchises; to receive, purchase, and build any houses for That the said Wheelock also authorized the trustees to fix the use of said college, in such town in the western part and determine [*678] upon the place for the said school; of New-Hampshire, as the trustees, or a major part of and, to enable them understandingly to give the them, shall be a written instrument agree on; and to preference, laid before them, the several offers of the receive, accept, and dispose of any lands, goods, chattels, governments in America, inviting the settlement of the rents, gifts, legacies, &c. &c. not exceeding the yearly school among them; that a large number of the value of 6,000l. It further declares, that the trustees, or a proprietors of lands, in the western parts of major part of them, regularly convened, (for which New-Hampshire, to aid the design; and considering that purpose seven shall form a quorum,) shall have authority the same school might be enlarged and improved to to appoint and remove the professors, tutors, and other promote learning among the English, and to supply the officers of the college, and to pay them, and also such churches there with an orthodox ministry, promised large missionaries and schoolmasters as shall be employed by tracts of land for the uses aforesaid, provided the school the trustees for instructing the Indians, salaries and should be settled in the western part of said province; that [*680] allowances, as well as other corporate expenses, the trustees thereupon gave a preference to the western out of the corporate funds. It further declares, [***214] part of said province, lying on Connecticut river, as a that, the said trustees, as often as one or more of the situation most convenient for said school: That the said trustees shall die, or, by removal or otherwise, shall, Wheelock further represented the necessity for a legal according to their judgment, become unfit [**670] or incorporation, in order to the safety and well-being of incapable to serve the interests of the college, shall have said seminary, and its being capable of the tenure and power to elect and appoint other trustees in their stead, so diposal of lands and bequests for the use of the same; that that when the whole number shall be complete of twelve in the infancy of said institution, certain [***212] trustees, eight shall be resident freeholders of gentlemen whom he had already nominated in his last New-Hampshire, and seven of the whole number, will (which he had transmitted to the trustees in England) laymen. It further declares that the trustees shll have to be trustees in America, should be the corporation now power from time to time to make and establish rules, proposed; and lastly, that there were already large ordinaances, and laws for the government of the college contributions for said school in the hands of the trustees not repugnant to the laws of the land, and to confer in England, and further success might be expected; for collegiate degrees. It further appoints the said Wheelock, which reason the said Wheelock desired they might be whom it denominates "the FOUNDER of the college," to invested with all that power therein, which could consist be president of the college, with authority to appoint his with their distance from the same. The charter, after successor, who shall be president until disapproved of by these recitals, declares, that the king, considering the the trustees. It then concludes with a direction, that it premises, and being willing to [*679] encourage the shall be the duty of the president to transmit to the charitable design, and that the best means of education trustees in England, so long as they should perpetuate might be established in New-Hampshire for the benefit their board, and as there should be Indian natives thereof, does, of his special grace, certain knowledge, and remaining to be proper objects of the bounty, an annual mere motion, ordain and grant, that there be a college account of all the disbursements from [***215] the Page 54 17 U.S. 518, *680; 4 L. Ed. 629, **670; 1819 U.S. LEXIS 330, ***215; 4 Wheat. 518 donations in England, and of the general plans and Court laid down its exposition of the word "contract" in prosperity of the institution. this clause, in the following manner: "A contract is a compact between two or more persons, and is either Such are the most material clauses of the charter. It is executory or executed. An executory contract is one, in observable, in the first place, that no endowment which a party binds himself to do or not to do a particular whatever is given by the crown; and no power is reserved thing. A contract executed is one in which the object of to the crown or government in any manner to alter, the contract is performed; and this, says Blackstone, amend, or control the charter. It is also apparent, [*681] differs in nothing from a grant. A contract executed, as from the very terms of the charter, that Dr. Wheelock is well as one that is executory, contains obligations binding recognized as the founder of the college, and that the on the parties. A grant in its own nature amounts to an charter is granted upon his application, and that the extinguishment of the right of the grantor, and implies a trustees were in fact nominated by him. In the next place contract not to reassert that right. A party is always it is apparent, that the objects of the institution are purely estopped by his own grant," This language is perfectly charitable, for the distribution of the private contributions unambiguous, and was used in reference to a grant of of private benefactors. The charity was, in the sense land by the Governor of a State under a legislative act. It already expalined, a public charity, that is, for the general determines, in the most unequivocal manner, that the promotion of learning and peity; but in this respect it was grant of a State is a contract within the clause of [*683] just as much public before, as after the incorporation. The the constitution now in question, and that it implies only effect of the charter was to give permanency to the [***218] a contract not to reassume the rights granted. design, by enlarging the sphere of its action, and granting A fortiori, the doctrine applies to a charter or grant from a perpetuity of corporate powers and franchises the better the king. to secure the administration of the benevolent donations. As founder, [***216] too, Dr. Wheelock and his heirs 102 6 Cranch, 87. 136. would have been completely clothed with the visitatorial power; but the whole government and control, as well of But it is objected, that the charter of Dartmouth the officers as of the revenues of the college, being with College is not a contract contemplated by the his consent assigned to the trustees in their corporate constitution, because no valuable consideration passed to character, the visitatorial power, which is included in this the king as an equivalent for the grant, it purporting to be authority, rightfully devolved on the trustees. As granted ex mero motu, and further, that no contracts managers of the property and revenues of the corporation, merely voluntary are within the prohibitory clause. It they were amenable to the jurisdiction of the judicial must be admitted, that mere executory contracts cannot tribunals of the State; but as visitors, their discretion or be enforced at law, unless there be a valuable control, the charter, and liable to no supervision or consideration to sustain them; and the constitution control, at least, unless it was fraudulently misapplied. certainly did not mean to create any new obligations, or give any new efficacy to nude pacts. But it must, on the From this summary examination it follows, that other hand, be also admitted, that the constitution did Dartmouth College was, under its original charter, a intend to preserve all the obligatory force of contracts, private eleemosynary corporation, endowed with [*682] which they have by the general principles of law. Now, the usual privileges and franchises of such corporations, when a contract has once passed, bona, fide, into grant, and, among others, with a legal perpetuity, and was neither the king nor any private person, who may be the exclusively under the government and control of twelve grantor, can recal the grant of the property, although the trustees, who were to be elected and appointed, from time conveyance may have been purely voluntary. A gift, to time, by the existing board, as vacancies or removals completely executed, is irrevocable. The property should occur. conveyed by it [***219] becomes, as against the donor, the absolute property of the donee; and no subsequent We are now led to the consideration of the first change of intention of the donor can change the rights of question in the cause, whether this charter [***217] is a the donee. 103 And a gift by the crown of incorporeal contract, within the clause of the constitution prohibiting hereditaments, such as corporate franchises, when the States from passing any law impairing the obligation executed, comes completely [*684] within the principle, of contracts. In the case of Fletcher v. Peck, 102 this and is, in the strictest sense of the terms, a grant. 104 Was Page 55 17 U.S. 518, *684; 4 L. Ed. 629, **670; 1819 U.S. LEXIS 330, ***219; 4 Wheat. 518 it ever imagined that land, voluntarily granted to any consideration of the premises in the introductory recitals. person by a State, was liable to be resumed at its own Now, among these recitals it appears, that Dr. Wheelock good pleasure" Such a pretension would, under any had founded a charity school at his own expense, on his circumstances, be truly alarming; but in a country like own estate; that divers contributions had been made in ours, where thousands of land titles had their origin in the colonies, by others, for its support; that new gratuitous grants of the States, it would go far to shake contributions had been made, and were making, in the foundations of the best settled [**671] estates. And England for this purpose, and were in the hands of a grant of franchises is not, in point of principle, trustees appointed by Dr. Wheelock to act in his behalf; distinguishable from a grant of any other property. If, that Dr. Wheelock had consented to have the school therefore, this charter were a pure donation, when the established at such other place as the trustees should grant was complete, and accepted by the grantees, it select; that offers had been made by several of the involved a contract, that the grantees should hold, and the governments in America, inviting the [*686] grantor should not reassume the grant, as much as if it establishment of the school among them; that offers of had been founded on the most valuable consideration. land had also been made by divers proprietors of lands in the western parts of New-Hampshire, [***222] if the 103 2 Bl. Com. 441. Jenk. Cent. 104. school should be established there; that the trustees had 104 2 Bl Com. 317. 346. Shep. Touch. ch. 12. p. finally consented to established it in New-Hampshire; 227. and that Dr. Wheelock represented that, to effectuate the purposes of all parties, an incorporation was necessary. [***220] But it is not admitted that this charter was Can it be truly said that these recitals contain no legal not granted for what the law deems a valuable consideration of benefit to the crown, or of forbearance of consideration. For this purpose it matters not how trifling benefit on the other side? Is there not an implied contract the consideration may be; a pepper corn is as good as a by Dr. Wheelock, if a charter is granted, that the school thousand dollars. Nor is it necessary that the shall be removed from his estate to New-Hampshire? consideration should be a benefit to the grantor. It is and that he will relinquish all his control over the funds sufficient if it import damage or loss, or forbearanc of collected, and to be collected, in England, under his benefit, or any act done, or to be done, on the part of the auspices, and subject to his authority? that he will yield grantee. It is unnecessary to state cases; they are familiar up the management of his charity school to the trustees of to the mind of every lawyer. 105 the college?that he will relinquish all the offers made by other American governments, and devote his patronage to 105 Pillans v. Van Mierop. per Yates, J. 3 Burr. this institution? It will scarcely be denied, that he gave 1663. Forth v. Statunton, 2 Saund. Rep. 211. up the right any longer to maintain the charity school Williams' note 2, and the cases there cited. already established on his own estate; and that the funds With these principles in view, let us now examine collected for its use, and subject to his management, were [*685] the terms of this charter.It purports, indeed, on its yielded up by him as an endowment of the college. The face, to be granted "of the special grace, certain very language of the charter supposes him to [***223] knowledge, and mere motion" of the king; but these be the legal owner of the funds of the charity school, and, words were introduced for a very different purpose from in virtue of this endowment, declares him the founder of that now contended for. It is a general rule of the the college. It matters not whether the funds were great common law, (the reverse of that applied in ordinary or small; Dr. Wheelock had procured them by his own cases,) that a grant of the king, at the suit of the grantee, influence, and they were under his control, to be applied is to be construed most beneficially for the king, and to the [*687] support of his charity school; and when he most strictly against the grantee. [***221] Wherefore, it relinquished this control he relinquished a right founded is usual to insert in the king's grants a clause, that they are in property acquired by his labours. Besides; Dr. made, not a the suit of the grantee, but of the special Wheelock impliedly agreed to devote his future services grace, certain knowledge, and mere motion of the king; to the colleg, when erected, by coming president thereof and then they receive a more liberal construction. This is at a period when sacrifices must necessarily be made to the true object of the clause in question, as we are accomplish the great design in view. If, indeed, a pepper informed by the most accurate authorities. 106 But the corn be, in the eye of the law, of sufficient value to found charter also, on its face, purports to be granted in a contract, as upon a valuable consideration, are these Page 56 17 U.S. 518, *687; 4 L. Ed. 629, **671; 1819 U.S. LEXIS 330, ***223; 4 Wheat. 518 implied agreements, and these relinquishments of right exclusively for the benefit of others, for public charity, and benefit, to be deemed wholly worthless? It has never can it be reasonably argued, that these services are less been doubted, that an agreement not to exercise a trade in valuable to the government, than if performed for the a particular place was a sufficient consideration to sustain private emolument of [*689] the trustees themselves? a contract for the payment of money. A fortiori, the In [***226] respect then to the trustees also, there was a relinquishment of property which a person holds, or valuable consideration for the charter, the consideration controls the use of, as a trust, is a sufficient consideration; of services agreed to be rendered by them in execution of [***224] for it is parting with a legal right. Even a right a charity, from which they could receive no private of patronage (jus patronatus) is of great value in remuneration. intendment of law.Nobody doubts, that an advowson is a valuable hereditament; and yet, in fact, it is but a mere 108 Rex v. Passmore, 3 T.R. 199. 239. 246 trust, or right of nomination to a benefice, which cannot There is yet another view of this part of the case, be legally sold to the intended incumbent. 107 which deserves the most weighy consideration. The 106 2 Bl. Com. 347. Finch's Law, 100. 10 Rep. corporation was expressly created for the purpose of 112. 1 Shep. Abridg. 136. Bull, N.P. 136. distributing in perpetuity the charitable donations of 107 2 Bl. Com. 22. note by Christian. private benefactors. By the terms of the charter, the trustees, and their successors, in their corporate capacity, In respect to Dr. Wheelock, then, if a consideration were to receive, hold, and exclusively manage, all the be necessary to support the charter as a contract, it is to funds so contributed. The crown, then, upon the face of be found in the implied stipulations on his prt in the the charter, pledged its faith that the donations of private charter itself. He relinquished valuable rights, and benefactors should be perpetually devoted to their undertook a laborious office in consideration of the grant original purposes, without any interference on its own of the incorporation. part, and should be forever administered by the trustees of the corporation, unless its corporate franchises should [*688] This is not all. A charter may be granted be taken away by due process of law. From the very upon an executory, as well as an executed or present nature of the case, therefore, there was an implied consideration. When it is granted to persons who have contract on the part of the crown with every benefactor, not made application for it, until their acceptance thereof, that if he would give his money, it should [***227] be the grant is yet in fieri. Upon the acceptance there is an deemed a charity protected by the charter, and be implied contract on the part of the grantees, in administered by the corporation according to the general consideration of the charter, that they will perform the law of the land. As soon, then, as a donation was made to duties, and exericse the authorities conferred [***225] the corporation, there was an implied contract springing by it. This was the doctrine asserted by the late learned up, and founded on a valuable consideration, that the Mr. Justice Buller, in a modern case. 108 He there said, "I crown would not revoke, or alter the charter, or change its do not know how to reason on this point better [**672] administration, without the consent of the corporation. than in the manner urged by one of the relator's counsel, There was also an implied contract between the who considered the grant of incorporation to be a corporaton itself, and every benefactor [*690] upon a compact between the crown, and a certain number of the like consideration, that it would administer his bounty subjects, the latter of whom undertake, in consideration according to the terms, and for the objects stipulated in of the privileges which are bestowed, to exert themselves the charter. for the good government of the place," (i.e. the place incorporated.) It will not be pretended, that if a charter be In every view of the case, if a consideration were granted for a bank, and the stockholders pay in their own necessary (which I utterly deny) to make the charter a funds, the charter is to be deemed a grant without valid contract, a valuable consideration did exist, as to the consideration, and, therefore, revocable at the pleasure of founder, the trustees and the benefactors. And upon the the grantor. Yet here, the funds are to be managed, and soundest legal principles, the charter may be properly the services performed exclusively for the use and benefit deemed, according to the various aspects, in which it is of the stockholders themselves.And where the grantees viewed, as a several, contract with each of these parties, are mere trustees to perform services without reward, in virtue of the foundation, or the endowment of the Page 57 17 U.S. 518, *690; 4 L. Ed. 629, **672; 1819 U.S. LEXIS 330, ***227; 4 Wheat. 518 college, or the acceptance of the charter, or the donations of being deemed a contract on that account, to consider, to the charity. whether they do not at the same time establish, that the grant itself is a nullity for precisely the same reason. Yet And here we might pause: but there is yet remaining such a doctrine would strike us all as pregnant with [***228] another view of the subject, which cannot absurdity, since it would prove that an act of consistently be passed over without notice. It seems to be incorporation could never confer any authorities, or assumed by the argument of the defendant's counsel, that rights, or property, on the corporation it created. It may there is no contract whatsoever, in virtue of the charter, be admitted, that two parties are necessary to form a between the crown and the corporation itself.But it perfect contract; [**673] but it is denied that it is deserves consideration, whether this assumption can be necessary, that the assent of both parties must be at the sustained upon a solid foundation. same time. If the legislature were voluntarily to grant land in fee to the first child of A. to be hereafter born; as If this had been a new charter granted to an existing soon as such child should be born, the estate would vest corporation, or a grant of lands to an existing corporation, in it. Would it be contended, that such grant, when it there could not have been a doubt, that the grant would took effect, was revocable, and not an executed contract, have been an executed contract with the corporation; as upon the acceptance of the estate? The same question much so, as if it had been to any private person. But it is might be asked in a case of a gratuitous grant by the king supposed, that as this corporation was not then in or the ligislature to A. for life, and afterwards to the heirs existence, but was created and its franchises bestowed, of B., who is then living. Take the case of a bank, uno flatu, the charter cannot be construed a contract, incorporated for a limited period, [***231] upon the because there was no person in rerum natura, with whom express condition that it shall pay out of its corporate it might be made. Is this, however, a just and legal view funds a certain sum, as the consideration for the charter, of the [*691] subject? If the corporation had no and after the corporation is organized a payment duly existence so as to become a contracting party, neither had made of the sum out of the corporate funds; will it be it for the purpose of receiving a grant of the franchises. contended, that there is not a subsisting contract between The truth is, that there may be a priority of operation of the government and the corporation, by the matters thus things in the same grant; and the law distinguishes arising ex post facto, that the charter shall not be revoked [***229] and gives such priority, wherever it is during the stipulated period? Suppose an act declaring necessary to effectuate the objects of the grant. 109 From that all persons, who should thereafter pay into the public the nature of things, the artificial person called a treasury a stipulated sum, should be tenants in common corporation, must be created before it can be capable of of certain [*693] lands belonging to the State in certain taking any thing. When, therefore, a charter is granted, proportions; if a person afterwards born, pays the and it brings the corporation into existence without any stipulated sum into the treasury, is it less a contract with act of the natural persons who compose it, and gives such him, than it would be with a person in esse at the time the corporation any privileges, franchises, or property, the act passed? We must admit that there may be future law deems the corporation to be first brought into springing contracts in respect to persons not now in esse, existence, and then clothes it with the granted liberties or we shall involve ourselves in inextricable difficulties. and property. When, on the other hand, the corporation is And if there may be in respect to natural persons, why not to be brought into existence by some future acts of the also in respect to artificial persons, created by the law, for corporators, the franchises remain in abeyance, until such the very purpose of being clothed with corporate powers? acts are done, and when the corporation is brought into I am unable to distinguish between [***232] the case of life, the franchises instantaneously attach to it. There a grant of land or of franchises to an existing corporation, may be, in intendment of law, a priority of time, even in and a like grant to a corporation brought into life for the an instant, for this purpose. 110 And if the corporation very purpose of receiving the grant. As soon as it is in have an existence before the grant of its other franchises esse, and the franchises and property become vested and attaches, what more difficulty is there in deeming the executed in it, the grant is just as much an executed grant of these franchises a contract with it, than if granted contract, as if its prior existence had been established for by another instrument at a subsequent period? It a century. behooves those also, [***230] who hold, that a grant to a corporation, not then in existence, is incapable [*692] 109 Case of Sutton's Hospital, 10 Co. 23. Page 58 17 U.S. 518, *693; 4 L. Ed. 629, **673; 1819 U.S. LEXIS 330, ***232; 4 Wheat. 518 Buckland v. Fowcher, cited 10 Co. 27, 28.; and charitable uses (as many municipal corporations [*695] recognized in Attorney General v. Bowyer, 3 Ves. are,) does the legislature, under our forms of limited jun. 714. 726. 727. S. P. Highmore on Mortm. government, possess the authority to seize upon those 200, &c. funds, and appropriate them to other uses, at its own 110 Ib. arbitrary pleasure, against the will of the donors and donees? From the very nature of our governments, the Supposing, however, that in either of the views public faith is pledged the other way; and that pledge which have been suggested, the charter of Dartmouth constitutes a valid compact; and that compact is subject College is to be deemed a contract, we are yet met with only to judicial inquiry, construction, and abrogation. several objections of another nature. This Court have already had occiasion, in other causes, to express their opinion on this subject; and the there is not It is, in the first place, contended, that it is not a the slightest inclination to retract it. 111 contract within the prohibitory clause of the constitution, because that clause was never intended to apply to mere 111 Terret v. Taylor, 9 Cranch, 43. Town of contracts of civil institution, such as the contract of Pawlet v. Clark, 9 Cranch, 292. marriage, or to grants of power to State officers, or to contracts relative to their offices, or to grants of trust to [***235] As to the case of the contract of marriage, be exercised for purposes merely public, where the which the argument supposes not to be within the reach grantees take no beneficial [***233] interest. of the prohibitory clause, because it is matter of civil institution, I profess not to feel the weight of the reason It is admitted, that the State legislatures have [*694] assigned for the exception. In a legal sense, all contracts, power to enlarge, repeal, and limit the authorities of recognized as valid in any country, may be properly said public officers in their official capacities, in all cases, to be matters of civil institution, since they obtain their where the constitutions of the States respectively do not obligation and construction jure loci contractus. Titles to prohibit them; and this, among others, for the very land, constituting part of the public domain, acquired by reason, that there is no express or implied contract, that grants under the provisions of existing laws by private they shall always, during their continuance in office, persons, are certainly contracts of civil institution. Yet exercise such authorities. They are to exercise them only no one ever supposed, that when acquired bona fide, they during the good pleasure of the legislature. But when the were not beyond the reach of legislative revocation. And legislature makes a contract with a public officer, as in so, certainly, is the established doctrine of this Court. 112 the case of a stipulated salary for his services, during a A general law regulating divorces from the contract of limited period, this, during the limited period, is just as marriage, like a law regulating [*696] remedies in other much a contract, within the purview of the constitutional cases of breaches of contracts, is not necessarily a law prohibition, as a like contract would be between two impairing the obligation of such a contract. 113 It may be private citizens. Will it be contended, that the legislature the only effectual mode of enforcing the obligations of of a State can diminish the salary of a judge holding his the contract on both sides. A law punishing a breach of a office during good behaviour? Such an authority has contract, by imposing a forfeiture of the rights [***236] never yet been asserted to our knowledge. It may also be acquired under it, or dissolving it because the mutual admitted, that corporations for mere public government, obligations were no longer observed, is in no correct such as towns, cities and counties, may in many respects sense a law impairing [**674] the obligations of the be subject to legislative control. But [***234] it will contract. Could a law, compelling a specific hardly be contended, that even in respect to such performance, by giving a new remedy, be justly deemed corporations, the legislative power is so transcendant, that an excess of legislative power? Thus far the contract of it may at its will take away the private property of the marriage has been considered with reference to general corporation, or change the uses of its private funds laws regulating divorces upon breaches of that contract. acquired under the public faith.Can the legislature But if the argument means to assert, that the legislative confiscate to its own use the private funds which a power to dissolve such a contract, without any breach on municipal corporation holds under its charter, without either side, against the wishes of the parties, and without any default or consent of the corporators? If a municipal any judicial inquiry to ascertain a breach, I certainly am corporation be capable of holding devises and legacies to not prepared to admit such a power, or that its exercise Page 59 17 U.S. 518, *696; 4 L. Ed. 629, **674; 1819 U.S. LEXIS 330, ***236; 4 Wheat. 518 would not entrench upon the prohibition of the if the uses are charitable, to secure their regular constitution. If under the faith of existing laws a contract administration through the means of equitable tribunals, of marriage be duly solemnized, or a marriage settlement in cases where there would otherwise be a failure of be made, (and marriage is always in law a valuable justice. consideration for a contract,) it is not easy to perceive why a dissolution of its obligations, without any default 114 2 Bl. Com. 21. or assent of the parties, may not as well fall within the Another objection [***239] growing out of, and prohibition, as any other contract for a valuable connected with that which we have been considering, is, consideration. A man has just as [***237] good a right to that no grants are within the constitutional prohibition, his wife, as to the property acquired under a marriage except such as respect property in the strict sense of the [*697] contract. He has a legal right to her society and term; that is to say, beneficial interests in lands, her fortune; and to devest such right without his default, tenements, and hereditaments, &c. &c. which may be and against his will, would be as flagrant a violation of sold by the grantees for their own benefit: and that grants the principles of justice, as the confiscation of his own of franchises, immunities, and authorities not valuable to estate. I leave this case, however, to be settled, when it the parties, as property, are excluded from its purview. shall arise. I have gone into it, because it was urged with No authority has been cited to sustain this distinction, and great earnestness upon us, and required a reply. It is no reason is perceived to justify its adoption. There are sufficient now to say, that as at present advised, the many rights, franchises, and authorities which are argument, derived from this source, does not press my valuable in contemplation of law, where no beneficial mind with any new and insurmountable difficulty. interest can accrue to the possessor. A grant of the next 112 Ib. presentation to a church, limited to the grantee alone, has 113 See Holmes v. Lansing, 3 Johns. Cas. 73. been already mentioned. A power of appointment, reserved in a marriage settlement, either to a party or a In respect also to grants and contracts, it would be far stranger, to appoint uses in favour of third persons, too narrow a construction of the constitution, to limit the without compensation, is another instance. [*699] A prohibitory clause to such only where the parties take for grant of lands to a trustee to raise portions or pay debts, their own private benefit. A grant to a private trustee for is, in law, a valuable grant, and conveys a legal estate. the benefit of a particular cestui que trust, or for any Even a power given by will to executors to sell [***240] special, private or public charity, cannot be the less a an estate for payment of debts is, by the better opinions contract because the trustee takes nothing for his own and authority, coupled with a trust, and capable of benefit. A grant of the next presentation to a church is survivorship. 115 Many dignities and offices, existing at still a contract, although it [***238] limit the grantee to a common law, are merely honorary, and without profit, mere right of nomination or partrongage. 114 The fallacy and sometimes are onerous. Yet a grant of them has of the argument consists in assuming the very ground in never been supposed the less a contract on that account. controversy. It is not admitted, that a contract with a In respect to franchises, whether corporate or-not, which trustee is in its own nature revocable, whether it be for include a pernancy of profits, such as a right of fishery, or special or general purposes, for public charity or to hold a ferry, a market, or a fair, or to erect a turnpike, particular beneficence. A private donation, vested in a bank, or bridge, there is no pretence to say that grants of trustee for objects of a general nature, does not thereby them are not within the constitution.Yet they may, in become a public trust, which the government may, at its point of fact, be of no exchangeable value to the owners. pleasure, take from the trustee, and administer [*698] in They may be worthless in the market. The truth, its own way. The truth is, that the government has no however, is, that all incorporeal hereditaments, whether power to revoke a grant, even of its own funds, whne they be immunities, dignities, offices, or franchises, or given to a private person, or a corporation for special other rights, are deemed valuable in law. The owners uses. It cannot recal its own endowments granted to any have a legal estate and property in them, and legal hospital, or college, or city, or town, for the use of such remedies to support and recover them, is case of any corporations. The only authority remaining to the injury, obstruction or disseizin of them. Whenever they government is judicial, to ascertain the validity of the are the subjects of a contract or grant, they are just as grant, to enforce its proper uses, to suppress frauds, and, much within the reach of the constitution as any other Page 60 17 U.S. 518, *699; 4 L. Ed. 629, **674; 1819 U.S. LEXIS 330, ***240; 4 Wheat. 518 grant. [*700] [***241] Nor is there any solid reason power is touched by removing them [***243] from the why a contract for the exercise of a mere authority should trust; and then to hold the corporation itself a mere ideal not be just as much guarded as a contract for the use and being, capable indeed of holding property or franchises, dominion of property. Mere naked powers, which are to but having no interest in them which can be the subject of be exercised for the exclusive benefit of the grantor, are contract. Neither of these positions is admissible. The revocable by him for that very reason. But it is otherwise former has been already sufficiently considered, and the where a power is to be exercised in aid of a right vested latter may be disposed of in a few words. The in the grantee. We all know that a power of attorney, corporators are not mere agents, but have vested rights in forming a part of a security upon the assignment of a their character, as corporators. The right to be a freeman chose in action, is not revocable by the grantor. For it of a corporation is a valuable temporal right. It is a right then [**675] sounds in contract, and is coupled with an of voting and acting in the corporate concerns, which the interest. 116 So if an estate be conveyed in trust for the law recognizes and enforces, and for a violation of which grantor, the estate is irrevocable in the grantee, although it provides a remedy. It is founded on the same basis as he can take no beneficial interest for himself. Many of the right of voting in public elections; it is as sacred a the best settled estates stand upon conveyances of this right; and whatever might have been the prevalence of nature; and there can be no doubt that such grants are former doubts, since the time of Lord Holt, such a right contracts within the prohibition in question. has always been deemed a valuable franchise or privilege. 118 115 Co. Lit. 113. a. Harg. and Butler's note 2. Sugden on Powers, 140. Jackson v. Jansen, 6 117 2 Bl. Com. 37. 1 Kyd on Corp. 14. 16. Johns. Rep. 73. Franklin v. Osgood, 2 Johns. Cas. 118 Ashby v. White, 2 Ld. Raym. 938. 1 Kyd on 1. S.C. 14 Johns. Rep. 527. Zebach v. Smith, 3 Corp. 16. Binn. Rep. 69. Lessee of Moody v. Vandyke, 4 Binn. 7. 31. Attorney General v. Gleg, 1 Atk. [*702] This reasoning, which has been thus far 356. 1 Bac. Abr. 586. (Gwillim edit.) urged, applis with full force to the case of Dartmouth 116 Walsh v. Whitcomb, 2 Esp. 565. Bergen v. College. The franchises granted by the charter were Bennett, 1 Caines' Cases in Error, 1. 15. [***244] vested in the trustees in their corporate Raymond v. Squire, 11 Johns. Rep. 47. character. The lands and other property, subsequently acquired, were held by them in the same manner. They [***242] In respect to corporate franchises, they were the private demenses of the corporation, held by it, are, properly speaking, legal estates vested in the not, as the argument supposes, for the use and benefit of corporation itself as soon as it is in esse. They are not the people of New-Hampshire, but, as the charter itself mere naked powers granted to the corporation; but declares, "for the use of Dartmouth College." There were powers coupled with an interest. The property of the not, and in the nature of things could not be, any other corporation vests upon the possession of its franchises; cestui que use entitled to claim those funds. They were and whatever may be thought as to the corporators, it indeed to be devoted to the promotion of piety and cannot be denied, that the corporation itself has a legal learning, not at large, but in that college, and the interest in them. It may sue and be sued for them. Nay, establishments connected with it; and the mode in which more, this very right is one of its ordinary [*701] the charity was to be applied, and the objects of it, were franchises. "It is likewise a franchise," says Mr. Justice left solely to the trustees, who were the legal governors Blackstone, "for a number of persons to be incorporated and administrators of it. No particular person in and subsist as a body politic, with power to maintain New-Hampshire possessed a vested right in the bounty; perpetual succession, and do other corporate acts; and nor could he force himself upon the trustees as a proper each individual member of such corporation is also said object. The legislature itself could not deprive the to have a franchise or freedom." 117 In order to get rid of trustees of the corporate funds, or annul their discretion in the legal difficulty of these franchises being considered as the application of them, or distribute them among its own valuable hereditaments or property, the counsel for the favourites. Could the legislature of New-Hampshire have defendant are driven to contend, that the corporators or seized the land given by the State of [***245] Vermont trustees are mere agents of the corporation, in whom no to the corporation, and appropriated it to uses distinct beneficial interest subsists; and so nothing but a naked from those intended by the charity, against the will of the Page 61 17 U.S. 518, *702; 4 L. Ed. 629, **675; 1819 U.S. LEXIS 330, ***245; 4 Wheat. 518 trustees? This question cannot be answered in the It is attempted, however, to establish, that the affirmative, until it is established, that the legislature may trustees have no interest in the corporate franchises, lawfully take the property of A, and give it to B.; and if it because it is said, that they may be witnesses in a suit [*703] could not take away or restrain the corporate brought agaisnt the corporation. The case cited at the bar funds, upon what pretence can it take away or restrain the certainly goes the length of asserting, that in a suit corporate franchises? Without the franchises, the funds brought agaisnt a charitable corporation for a recompence could not be used for corporate purposes; but without the for services performed for the corporation, the governors, funds, the possession of the franchises might still be of constituting the corporation, (but whether entrusted with inestimable value to the college and to the cause of its funds or not by the act of incorporation does not religion and learning. appear) are competent witnesses against the plaintiff. 121 But assuming this case to have been rightly decided, (as Thus far, the rights of the corporation itself, in to which upon the authorities there may be room to respect to its property and franchises, have been more doubt,) the corporators [*705] being technically parties immediately considered. But there are other rights and to the record, 122 it does not establish, that in a suit for privileges belonging to the trustees collectively, and the corporate property vested in the trustees in their severally, which are deserving of notice. They are corporate capacity, the trustees are competent [***248] entrusted with the exclusive power to manage the funds, witnesses. At all events, it does not establish, that in a to choose the officers, and to regulate the corporate suit for the corporate franchises to be exercised by the concerns, according to their own discretion. The jus trustees, or to enforce their visitatorial power, the trustees patronatus is vested in them. The visitatorial power, in would be competent witnesses. On a mandamus to its most enlarged extent, also belongs to [***246] them. restore a trustee to his corporate or visitatorial power, it When this power devolves upon the founder of a charity, will not be contended, that the trustee is himself a it is an hereditament, descendible in perpetuity to his competent witness to establish his own rights, or the heirs, and in default of heirs, it escheats to the corporate rights. Yet why not, if the law deems that a government. 119 It is a valuable right founded in property, trustee has no interest in the franchise? The test of as much so as the right of patronage in any other case. It interest assumed in the argument proves nothing in this is a right which partakes of a judicial nature. May not the case. It is not enough to establish, that the trustees are founder as justly contract for the possession of this right sometimes competent witnesses; it is necessary to show, in return for his endowment, as for any other equivalent? that they are always so in respect to the corporate and, if instead of holding it as an hereditament, he assigns franchises, and their own. It will not be pretended, that in it in perpetuity to the trustees of the corporation, is it less a suit for demages for obstruction in the exercise of his a valuable hereditament in their hands? The right is not official powers, a trustee is a disinterested witness. Such merely a collective right in all the trustees; [*704] each an obstruction is not a damnum absque injuria. Each of them also has a franchise in it. Lord Holt says, "it is trustee has a vested right, and legal interest in his office, agreeable to reason, and the rules of law, that a franchise and it cannot be devested but by due course of law. The should be vested in the corporation aggregate, and yet the illustration, therefore, lends no new force to the benefit redound to the particular members, and be argument, for it does not establish, that when their own enjoyed by them in their private capacities. Where the rights [*706] [***249] are in controversy, the trustees privilege of election is used by particular persons, it is a have no legal interest in their offices. particular right vested in each particular man." 120 Each of the trustees had a right to vote in all elections. If 121 Weller v. The Governor of the Foundling obstructed in the exercise [***247] of it, the law Hospital, Peake's N.P. Rep. 153. furnished him with an adequate recompense in [**676] 122 Attorney General v. City of London, &c. 3 damages. If ousted unlawfully from his office, the law Bro. Ch. c. 171. S.C. 1 Ves. jun. 243. Burton v. would, by a mandamus, compel a restoration. Hinde, 5 T.R. 174. Nason v. Thatcher, 7 Mass. R. 398. Phillips on Evid. 42. 52. 57. and notes. 1 119 Rex v. St. Catherine's Hall, 4 T.R. 233. Kyd on Corp. 304. &c. Highmore on Mortm. 120 Ashby v. White, 2 Ld. Raym. 938. 952. 514. Attorney General v. Dixie, 13 Ves. 519. The principal objections having been thus answered Page 62 17 U.S. 518, *706; 4 L. Ed. 629, **676; 1819 U.S. LEXIS 330, ***249; 4 Wheat. 518 satisfactorily, at least to my own mind, it remains only to them, impair the obligations of the charter of Drtmouth declare, that my opinion, after the most mature College. The attempt certainly is to force upon the deliberation is, that the charter of Dartmouth College, corporation a new charter against the will of the granted, in 1769, is a contract within the purview of the corporators. Nothing seems better settled at the common constitutional prohibition. law, than the doctrine, that the crown cannot force upon a private corporation a new charter; or compel the old I might now proceed to the discussion of the second members to give-up their own franchises, or to admit new question; but it is necessary previously to dispose of a members into the corporation. 126 Neither can the crown doctrine which has been very seriously urged at the bar, compel a man [*708] to become a member of such viz. that the charter of Dartmouth College was dissolved corporation against his will. 127 As little has it been at the revolution, and is, therefore, a mere nullity. A case supposed, that under our limited governments, the before Lord Thurlow has been cited in support of this legislature possessed such transcendant authority. On doctrine. 123 The principal question in that case was, one occasion, a very [***252] able Court held, that the whether the corporation of William & Mary's College in State legislature had no authority to compel a person to Virginia, (which had received its charter from [***250] become a member of a mere private corporation created King William, and Queen Mary,) should still be for the promotion of a private enterprise, because every permitted to administer the charity under Mr. Boyle's man had a right to refuse a grant. 128 On another will, no interest having passed to the college under the occasion, the same learned Court declared, that they were will, but it acting as an agent or trustee under a decree in all satisfied, that the rights legally vested in a corporation, chancery, or whether a new scheme for the administration cannot be controled or destroyed by any subsequent of the charity should be laid before the Court. Lord statute, unless a power for that purpose be reserved to the Thurlow directed a new scheme, because the college legislature in the act of incorporation. 129 These belonging to an independent government, was no longer principles are so consonant with justice, sould policy, and within the reach of the Court. And he very unnecessarily legal reasoning, that it is difficult to resist the impression added, that he could not now consider the college as a of their perfect [**677] correctness. The application of corporation, or as another report 124 states, [*707] that them, however, does not, from our limited authority, he could not take notice of it as a corporation, it not properly belong to the appellate jurisdiction of this Court having proved its existence as a corporation at all. If, by in this case. this, Lord Thurlow meant to declare, that all charters acquired in Amierca from the crown, were destroyed by 126 Rex v. Vice Chancellor of Cambridge, 3 the revolution, his doctrine is not law; and if it had been Bur. 1656. Rex v. Passmore, 3 T.R. 240. 1 Kyd true, it would equally apply to all other grants from the on Corp. 65. Rex v. Larwood, Comb. 316. crown, which would be monstrous. It is a principle of the 127 Rex. v. Dr. Askew, 4 Bur. 2200. common law, which has been recognized as well in this, 128 Ellis v. Marshall, 2 Mass. Rep. 269. as in other Courts, that the division of an empire, works 129 Wales v. Stetson, 2 Mass. Rep. 143. 146. no forfeiture of previously vested rights of property. And this maxim is [***251] equally consonant with the A very summary examination of the acts of common sense of mankind, and the maxims of eternal New-Hampshire will abundantly show, that in many justice. 125 This objection, therefore, may be safely materal [***253] respects they change the charter of dismissed without further comment. Dartmouth College. The act of the 27th of June, 1816, declares that the corporation known by the name of the 123 Attorney General v. City of London, 3 Bro. Trustees of Dartmouth College shall be called the Ch. C. 171. S.C.1 Ves. jun. 243. Trustees of Dartmouth University. That the whole 124 1 Ves. jun. 243. number of trustees shall be twenty-one, a majority 125 Terrett v. Taylor, 9 Cranch, 43. 50. Kelly v. [*709] of whom shall form a quorum; that they and their Harrison, 2 Johns. Cas. 29. Jackson v. Lunn, 3 successors shall hold, use, and enjoy forever, all the Johns. Cas. 109. Calvin's case, 7 Co. 27. powers, authorities, rights, property, liberties, privileges, and immunities, heretofore held, &c. by the trustees of The remaining inquiry is, whether the acts of the Dartmouth College, except where the act other wise legislature of New-Hampshire now in question, or any of provides; that they shall also have power to determine the Page 63 17 U.S. 518, *709; 4 L. Ed. 629, **677; 1819 U.S. LEXIS 330, ***253; 4 Wheat. 518 times and places of their meetings and manner of new board, too, have the power to suspend or remove any notifying the same; to organize colleges in the university; member, so that a minority of the old board, co-operating to establish an institute, and elect fellows and members with the new trustees, possess the unlimited power to thereof; to appoint and displace officers, and determine remove the majority of the old board. The powers, too, their duties and compensation; to delegate the power of of the corporation are varied. It has authority to organize supplying vacancies in any of the offices of the university [***256] new colleges in [*711] "the university, and to for a limited term; to pass ordinances for the government establish an institute, and elect fellows and members of the students; to prescribe the course of education; and thereof." A board of overseers is created, (a board utterly to arrange, invest, and employ the funds of the university. unknown to the old charter,) and is invested with a The act then provides for the appointment [***254] of a general supervision and negative upon all the most board of twenty-five overseers, fifteen of whom shall important acts and proceedings of the trustees. And to form a quorum, of whom five are to be such ex officio, give complete effect to this new authority, instead of the and the residue of the overseers, as well as the new right to appoint, the trustees are in future only to trustees, are to be appointed by the governor and council. nominate, and the overseers are to approve, the president The board of overseers are, among other things, to have and professors of the university. power, "to inspect and confirm, or disapprove and negative, such votes and proveedings of the board of If these are not essential changes, impairing the trustees as shall relate to the appointment and removal of rights and authorities of the trustees, and vitally affecting president, professors and other permanent officers of the the interests and organization of Dartmouth College university, and determine their salaries; to the under its old charter, it is difficult to conceive what acts, establishment of colleges and professorships, and the short of an unconditional repeal of the charter, could have erection of new college buildings." The act then provides, that effect. If a grant of land or franchises be made to A., that the president and professors shall be nominated by in trust for special purposes, can the grant be revoked, the trustees, and appointed by the overseers, [*710] and and a new grant thereof be made to A., B., and C., in trust shall be liable to be suspended and removed in the same for the same purposes, without violating the obligation of manner; and that each of the two boards of trustees and the first grant? If property be vested by grant in A. and overseers shall have power to suspend and remove any B., for the use of a college, or a hospital, of private member of their respective boards. The supplementary foundation, is not the obligation [***257] of that grant act of the 18th of December, 1816, declares that nine impaired when the estate is taken from their exclusive trustees shall form a quorum, and that six votes at least management, and vested in them in common with ten shall be necessary for the passage of any act or other persons? If a power of appointment be given to A. resolution. The act of the 26th of December, [***255] and B., is it no violation of their right to annul the 1816, contains other provisions, not very material to the appointment, unless it be assented to by five other question before us. persons, and then confirmed by a distinct body? If a bank, or insurance company, by the terms of its charter, From this short analysis it is apparent, that, in be under the management of directors, elected by the substance, a new corporation is created including the old stockholders, would not the [*712] rights acquired by corporators, with new powers, and subject to a new the charter be impaired if the legislature should take the control; or that the old corporation is newly organized right of election from the stockholders, and appoint and enlarged, and placed under an authority hitherto directors unconnected with the corporation? These unknown to it. The board of trustees are increased from questions carry their own answers along with them. The twelve to twenty-one. The college becomes a university. common sense of mankind will teach us, that all these The property vested in the old trustees is transferred to cases would be direct infringements of the legal the new board of trustees in their corporate capacities. obligations of the grants to which they refer; and yet they The quorum is no longer seven, but nine. The old trustees are, with no essential distinction, the same as the case have no longer the sole right to perpetuate their now at the bar. succession by electing other trustes, but the nine new trustees are in the first instance to be appointed by the In my judgment it is perfectly clear, that any act of a governor and council, and the new board are then to elect legislature which takes away any powers or franchises other trustees from time to time as vacancies occur. The vested by its charter in a private corporation or its Page 64 17 U.S. 518, *712; 4 L. Ed. 629, **677; 1819 U.S. LEXIS 330, ***257; 4 Wheat. 518 corporate officers, or which restrains or controls the its establishment, that if the charter had regularly legitimate exercise [***258] of them, or transfers them issued according to the forms of the French law, it to other persons, without its assent, is a violation of the was irrevocable, unless forfeited for non-user or obligations of that charter. If the legislature mean to misuser. The advocates, (M. M. LACRETELLE claim such an authority, it must be reserved in the grant. and BLONDE,) who were consulted by the The charter of Dartmouth College contains no such merchants of the kingdom opposed to the reservation; and I am, therefore, bound to declare, that the establishment of the Company, denied its legal [**678] acts of the legislature of New-Hampshire, now existence, on the ground that the king had been in question, do impair the obligations of that charter, and surprised in his grant; that it was not yet perfected are, consequently, unconstitutional and void. by the issuing of letters patent, nor duly registered by the parliaments; and that it both might and In pronouncing this judgment, it has not for one ought to be suppressed, as an illegal grant of moment escaped me how delicate, difficult, and exclusive privileges, contrary to the true ungracious is the task devolved upon us. The principles of commercial philosophy. predicament in which this Court stands in relation to the nation at large, is full of perplexities and embarrassments. On the other hand it was contended by the It is called to decide on causes between citizens of Company that their grant was irrevocable; that it different States, between a State and its citizens, and was but a renewal and confirmation of the charter between different States. It stands, therefore, in the midst of the old Company which had been suspended in of [*713] jealousies and rivalries of conflicting parties, 1769, in consequence of the immense losses of with the most momentous interests confided to its care. capital sustained in the calamitous war of 1756, Under such circumstances, it never can have a motive to (but which suspension was at the time solemnly do more than its duty; and, I trust, it will always be found protested against by the parliament of Paris as to possess firmness enough to do that. illegal;) that their new grant might still be perfected by letters patent, which the faith of the Under these [***259] impressions I have pondered king was pledged to issue; and that the privileges on the case before us with the most anxious deliberation. thus granted to them were irrevocably vested as a I entertain great respect for the legislature, whose acts are right of property, of which they could not be in question. I entertain no less respect for the enlightened deprived by any authority in the kingdom. "En tribunal whose decision we are called upon to review. In effect, quand le roi accorde un privilege exclusif, the examination, I have endeavoured to keep my steps ce privilege est le prix d'une mise de fonds, dans super antiques vias of the law, under the guidance of un commerce hazardeux, dont l'entreprise est authority and principle. It is not for judges to listen to the jugee avantageuse a l'etat. Dela nait par voice of persuasive eloquence or popular appeal. We consequent un contrat synallagmatique, qui se have nothing to do but to pronounce the law as we find it; forme entre le souverain et les actionnaries. Dela and having done this, our justification must be left to the nait un droit de propriete qui devient inebranlable impartial judgment of our country. pour le sourverain lui-meme." And of this opinion were the advocates (M. M. HARDOIN, DISSENT BY: DUVALL GERBIER, and DE BONNIERES,) consulted by the company. See a Collection of Tracts on the DISSENT French East Company, Paris, 1788, in the Library of Congress. Mr. Justice DUVALL dissented. 130 [***260] [*714] Upon the suggestion of the 130 In the discussions which arose in France in plaintiff's counsel, that the defendant had died since the 1786, upon the new charter then recently granted last term, the Court ordered the judgment to be entered to the French East India Company, it seems to nunc pro tunc as of that term, as follows: have been taken for granted by the lawyers on both sides, to whom the questions in controversy JUDGMENT. This cause came on to be heard on the were submitted by the Company, and by the transcript of the record, and was argued by counsel. And merchants who considered themselves in jured by Page 65 17 U.S. 518, *714; 4 L. Ed. 629, **678; 1819 U.S. LEXIS 330, ***260; 4 Wheat. 518 thereupon all and singular the premises being seen, and thousand dollars: Whereupon it is considered, ordered, by the Court now here fully understood, and mature and [***261] adjudged by this Court, now here, that the deliberation being thereupon had, [*715] it appears to aforesaid judgment of the said Superior Court of this Court, that the said acts of the legislature of Judicature of the State of New-Hampshire be, and the New-Hampshire, of the twenty-seventh of June and of the same hereby is, reversed and annulled: And this Court eighteenth and twenty-sixth of December, Anno Domini, proceeding to render such judgment in the premises as 1816, in the record mentioned, are repugnant to the the said Superior Court of Judicature ought to have constitution of the United States, and so not valid; and, rendered, it is further considered by this Court, now here, therefore, that the said Superior Court of Judicature of the that the said trustees of Dartmough College do recover State of New-Hampshire erred in rendering judgment on against the said William Woodward the aforesaid sum of the said special verdict in favour of the said plaintiffs; twenty thousand dollars, with costs of suit; and it is by and that the said Court ought to have rendered judgment this Court, now here, further ordered, that a special thereon, that the said trustees recover against the said mandate do go from this Court to the said Superior Court Woodward, the amount of damages found and assessed, of Judicature to carry this judgment into execution. in and by the verdict aforesaid, viz. the sum of twenty Page 1 ENERGY RESERVES GROUP, INC. v. KANSAS POWER & LIGHT CO. No. 81-1370 SUPREME COURT OF THE UNITED STATES 459 U.S. 400; 103 S. Ct. 697; 74 L. Ed. 2d 569; 1983 U.S. LEXIS 16; 51 U.S.L.W. 4106; 50 P.U.R.4th 489; 76 Oil & Gas Rep. 593 November 9, 1982, Argued January 24, 1983, Decided PRIOR HISTORY: APPEAL FROM THE that the Kansas Act violated the Contract Clause of the SUPREME COURT OF KANSAS. U.S. Constitution. The Court found that the Kansas Act did not violate the Contract Clause because the natural DISPOSITION: 230 Kan. 176, 630 P. 2d 1142, gas industry was highly regulated in order to protect affirmed. consumers and the Kansas Act was rationally related to that goal of protection. CASE SUMMARY: OUTCOME: The Court affirmed the judgment. PROCEDURAL POSTURE: Petitioner oil company CORE TERMS: intrastate, escalator clause, natural gas, challenged a finding by the Supreme Court of Kansas that Kansas Act, redetermination, gas prices, interstate, the Kansas Natural Gas Protection Act, Kan. Stat. Ann. § ceiling, indefinite, contractual, ceiling price, lawful, 55-1401 et seq., did not violate the Contracts Clause of contract price, pass-through, terminate, regulated, the U.S. Constitution. maximum, price increase, consumers, trigger, contractual right, price ceilings, interstate commerce, substantial OVERVIEW: A public utility entered into a contract impairment, escalation, emergency, impaired, energy, with an oil company to purchase gas at a set price. There state law, public purpose were two price escalators in the contract. First, if a government fixed a price higher than that in the contract, LexisNexis(R) Headnotes the price would rise to that level. Also, the oil company could determine a new price every two years based upon market fluctuations. Then, Congress passed the Natural Gas Policy Act of 1978 (Act), 15 U.S.C.S. § 3301 et seq., which allowed for computation of prices at the lower of Constitutional Law > Congressional Duties & Powers > those set in existing contracts or at a price fixed by the Contracts Clause > General Overview Act. Kansas then adopted the Kansas Natural Gas Governments > Legislation > Effect & Operation > Protection Act (Kansas Act), Kan. Stat. Ann. § 55-1401 Retrospective Operation et seq., which permitted increases under escalator clauses. Governments > State & Territorial Governments > The oil company sought to terminate the contracts, but Police Power the utility refused. Thus, the oil company filed suit [HN1] Although the language of the Contract Clause is seeking declaratory relief. The oil company complained facially absolute, its prohibition must be accommodated Page 2 459 U.S. 400, *; 103 S. Ct. 697, **; 74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16 to the inherent police power of the state to safeguard the SUMMARY: vital interests of its people. A Kansas public utility entered into two intrastate natural gas supply contracts with an energy company in Constitutional Law > Congressional Duties & Powers > 1975. Each contract contained a governmental price Contracts Clause > General Overview escalator clause, which provided that if a governmental [HN2] The threshold inquiry is whether the state law has, authority fixed a price for any natural gas that was higher in fact, operated as a substantial impairment of a than the price specified in the contract, the contract price contractual relationship. The severity of the impairment is was to be increased to that level. Each contract also said to increase the level of scrutiny to which the contained a price redetermination clause, which gave the legislation will be subjected. Total destruction of energy company the option to have the contract price contractual expectations is not necessary for a finding of redetermined no more than once every 2 years. If the substantial impairment. On the other hand, state price were increased pursuant to either of these clauses, regulation that restricts a party to gains it reasonably each contract required the utility to seek approval from expected from the contract does not necessarily constitute the Kansas Corporation Commission to pass the increase a substantial impairment. In determining the extent of the through to consumers. On December 1, 1978, the Natural impairment, we are to consider whether the industry the Gas Policy Act of 1978 (15 USCS 3301 et seq.) replaced complaining party has entered has been regulated in the earlier federal price controls, extended federal price past. regulation to the intrastate gas market, and permitted states to establish maximum prices for the first sale of natural gas produced in a state. In direct response to the Constitutional Law > Congressional Duties & Powers > Act, the Kansas Legislature imposed price controls on the Contracts Clause > General Overview intrastate gas market. The state statute, which applied [HN3] If the state regulation constitutes a substantial only to contracts executed before 1977, prohibited impairment, the State, in justification, must have a consideration either of ceiling prices set by federal significant and legitimate public purpose behind the authorities or of prices paid in Kansas under other regulation, such as the remedying of a broad and general contracts in the application of governmental price social or economic problem. Furthermore, the Court has escalator clauses and price redetermination clauses. The indicated that the public purpose need not be addressed to state statute, however, permitted indefinite price escalator an emergency or temporary situation. clauses to operate after March 1, 1979, to raise the price of old intrastate gas up to the ceiling price set by 109 of Constitutional Law > Congressional Duties & Powers > the federal Act (15 USCS 3319). The energy company Contracts Clause > General Overview and other gas suppliers notified the public utility that gas [HN4] Once a legitimate public purpose has been prices would be escalated to the ceiling price set for identified, the next inquiry is whether the adjustment of newly discovered or newly produced natural gas under the rights and responsibilities of contracting parties is 102 of the Act (15 USCS 3312) on December 1, 1978, based upon reasonable conditions and is of a character pursuant to the governmental price escalator clause. appropriate to the public purpose justifying the When the public utility never elected to pay the higher legislation's adoption. Unless the State itself is a price, the energy company notified the utility that it contracting party, as is customary in reviewing economic would terminate the contracts because the utility had and social regulation, courts properly defer to legislative failed to apply to the Kansas Corporation Commission judgment as to the necessity and reasonableness of a for pass-through authority within 5 days as required by particular measure. the contract, had failed to obtain approval by the Commission, and had failed to pay the increased price. DECISION: The energy company filed an action in a state District Court, praying for a declaratory judgment that it had the Kansas statute regulating price of natural gas, held to contractual right to terminate the contracts. The utility not impair energy company's contracts with public utility later rejected the energy company's request under the in violation of contract clause. price redetermination clause for a price increase to the 102 ceiling price for newly discovered or newly produced Page 3 459 U.S. 400, *; 103 S. Ct. 697, **; 74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16 natural gas, contending that the state statute had clause in the contract was designed to guarantee price extinguished the utility's obligation to comply with that increases consistent with anticipated increases in the clause. The energy company then filed an amended value of the energy company's gas, which meant that the complaint, alleging that it was entitled to terminate the energy company did not expect to receive deregulated contracts because of the utility's refusal to redetermine prices, and where the contracts expressly recognized the the price. The utility counterclaimed for a declaratory existence of extensive regulation by providing that any judgment that the contracts were still in effect. On the contractual terms are subject to relevant present and parties' cross-motions for summary judgment, the state future state and federal law, suggesting that the energy trial court held that the federal Act's imposition of price company knew its contractual rights were subject to ceilings on intrastate gas did not trigger the governmental alteration by state price regulation; indefinite price escalator clause. The trial court also found that the state escalator clauses in natural gas contracts cannot exempt statute did not violate the contract clause of the Federal an energy company from all regulatory limitation of Constitution (Art I, 10, cl 1). The Supreme Court of prices; therefore, the price may be escalated only to the Kansas affirmed (230 Kan 176, 630 P2d 1142). ceiling price prescribed by 109 of the Natural Gas Policy Act (15 USCS 3319) and not to the ceiling price for new On appeal, the United States Supreme Court natural gas prescribed by 102 of the Act (15 USCS 3312). affirmed. In an opinion by Blackmun, J., joined by Brennan, White, Marshall, Stevens, and O'Connor, JJ., and joined in part (all but holding 2 below) by Burger, LAW §202 ; Ch. J., and Powell and Rehnquist, JJ., it was held that (1) contract clause -- natural gas -- price control -- state the state statute regulating the price of natural gas did not statute -- ; impair the energy company's contracts with the public utility; (2) the state statute did not violate the contract Headnote:[2A][2B][2C] clause of the Federal Constitution (Art I, 10, cl 1) even if it did impair the energy company's contractual interests; A state statute regulating the price of natural gas and (3) 105 of the Natural Gas Policy Act (15 USCS does not violate the contract clause of the Federal 3315) did not trigger governmental price escalator Constitution (Art I, 10, cl 1), even if the statute did clauses automatically. impair an energy company's contracts with a public utility, where the statute rests on and is prompted by Powell, joined by Burger, Ch. J., and Rehnquist, J., significant and legitimate state interests in protecting concurred, expressing the view that it was unnecessary consumers from the escalation of natural gas prices for the Supreme Court to address the question of whether, caused by deregulation and in correcting the imbalance if there were an impairment of contractual rights, it would between the interstate and intrastate markets by constitute a violation of the contract clause. permitting intrastate prices to rise only to the ceiling price provided by 109 of the Natural Gas Policy Act (15 USCS LAWYERS' EDITION HEADNOTES: 3319) and where the means chosen to implement these purposes are not deficient, particularly in light of the LAW §257 ; deference to which the state legislature's judgment is entitled; the state statute, which is a temporary measure impairment of contract -- natural gas supply contract that expires when federal price regulation of certain -- price control -- state statute -- ; categories of gas terminates, is consistent with the national policy toward gas regulation. Headnote:[1A][1B] A state statute regulating the price of natural gas ENERGY §35 ; does not impair an energy company's contractual rights with a public utility or the energy company's reasonable Natural Gas Policy Act -- price control -- expectations where the parties are operating in a heavily governmental price escalator clause -- ; regulated industry, where the parties included a statement of intent in their contracts making clear that the escalator Headnote:[3A][3B] Page 4 459 U.S. 400, *; 103 S. Ct. 697, **; 74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16 Section 105 of the Natural Gas Policy Act (15 USCS contractual relationship; the severity of the impairment 3315), which regulates the ceiling price for sales of increases the level of scrutiny to which the legislation natural gas under existing intrastate contracts, does not will be subjected; total destruction of contractual automatically trigger governmental price escalator expectations is not necessary for a finding of substantial clauses, which provide that the contract price is to be impairment; on the other hand, state regulation that increased if a governmental authority fixes a price for any restricts a party to gains it reasonably expected from the natural gas that is higher than the price specified in the contract does not necessarily constitute a substantial contract, in existing contracts between an energy impairment; in determining the extent of the impairment, company and a public utility; 105 sets a ceiling for the the court is to consider whether the industry the operation of contractual provisions and it does not complaining party has entered has been regulated in the prescribe a price; the energy company is therefore not past. entitled to a price increase on December 1, 1978, and it can rely only on a price redetermination clause, which LAW §128 ; gives the energy company the option to have the contract price redetermined no more than once every 2 years, for contract clause -- justification of state -- legitimate any increase. public purpose -- ; Headnote:[7] STATUTES §107 ; If a state regulation constitutes a substantial construction -- avoiding constitutional question -- ; impairment of a contract, the state, in justification, must Headnote:[4A][4B] have a significant and legitimate public purpose behind the regulation such as the remedying of a broad and The United States Supreme Court will construe a general social or economic problem; the public purpose statute, if fairly possible, so as to avoid a constitutional need not be addressed to an emergency or temporary question. situation; one legitimate state interest is the elimination of unforeseen windfall profits; the requirement of a legitimate public purpose guarantees that the state is LAW §128 ; exercising its police power, rather than providing a benefit to special interests; once a legitimate public contract clause -- state police power -- ; purpose has been identified, the next inquiry in Headnote:[5] determining whether there is a violation of the contract clause of the Federal Constitution (Art I, 10, cl 1) is Although the language of the contract clause of the whether the adjustment of the rights and responsibilities Federal Constitution (Art I, 10, cl 1) is facially absolute, of contracting parties is based upon reasonable conditions its prohibition must be accommodated to the inherent and is of a character appropriate to the public purpose police power of the state to safeguard the vital interests of justifying the legislation's adoption; unless the state itself its people. is a contracting party, courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure. LAW §207 ; contract clause -- threshold inquiry -- severity of LAW §142 ; impairment -- ; contract clause -- state as party to contract -- ; Headnote:[6] Headnote:[8A][8B] The threshold inquiry in determining whether a state statute violates the contract clause of the Federal When a state itself enters into a contract, it cannot Constitution (Art I, 10, cl 1) is whether the state law has simply walk away from its financial obligations; when in fact operated as a substantial impairment of a the state is a party to the contract, complete deference to a Page 5 459 U.S. 400, *; 103 S. Ct. 697, **; 74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16 legislative assessment of reasonableness and necessity is to have the contract price redetermined no more than not appropriate in determining whether a state law once every two years by averaging the prices being paid violates the contract clause of the Federal Constitution under three other gas contracts chosen by the parties. If (Art I, 10, cl 1), because the state's self-interest is at the price is increased pursuant to either clause, each stake. contract requires appellee, within specified time periods, to seek from the Kansas Corporation Commission (Commission) approval to pass the increase through to ENERGY §31 ; consumers. If pass-through approval is refused and appellee elects not to pay the increase, appellant has the natural gas -- price control -- state statute -- ; option to terminate the agreement. Pursuant to the price Headnote:[9A][9B] redetermination clauses, the parties agreed on a higher price to be effective November 27, 1977, the Commission A state statute regulating the price of natural gas has approved the pass-through of the increase to consumers, a legitimate public purpose and is not special interest and appellee paid the new price through 1978. Effective legislation designed to benefit a public utility where, December 1, 1978, the Natural Gas Policy Act of 1978 given the nature of the industry, with sales to public replaced earlier federal price controls for interstate utilities, it is impossible for any regulation not to have a natural gas with gradually increasing price ceilings, major effect on a small number of participants, where including a ceiling for newly discovered or newly there is no indication that the political process has broken produced gas (§ 102) and a lower ceiling for categories of down, and where the public utility will not benefit gas not otherwise covered by the Act (§ 109). The Act significantly from the statute due to the automatic price also extended federal price regulation to the intrastate gas pass-through adjustment, which requires the utility to market, providing in § 105(b)(1) that the ceiling price for seek approval from a state commission to pass the intrastate gas shall be the lower of the § 102 price and increase through to consumers. "the price under the terms of the existing contract, to which such natural gas was subject on [November 9, 1978]." As authorized by the federal Act, the Kansas ERROR §727 ; Natural Gas Price Protection Act was enacted in May 1979, imposing price controls on the intrastate gas market natural gas supply contract -- interpretation of state with regard to contracts executed before April 20, 1977, law -- deference by United States Supreme Court -- ; and prohibiting consideration either of ceiling prices set Headnote:[10] by federal authorities or of prices paid in Kansas under other contracts in the application of governmental price A state Supreme Court's holding that particular escalator and price redetermination clauses. However, governmental price escalator clauses in natural gas the Kansas Act permits indefinite price escalator clauses supply contracts between an energy company and a to operate after March 1, 1979, to raise the price of "old" public utility were insufficient to escalate the gas price is intrastate gas up to the federal Act's § 109 ceiling price. an interpretation of state law to which the United States In November 1978 appellant notified appellee that gas Supreme Court defers. prices would be escalated to the § 102 price pursuant to the governmental price escalator clauses, but appellee, SYLLABUS after failing to obtain pass-through approval because of its failure to file a timely application with the In 1975, appellee public utility entered into two Commission, elected not to pay the higher price and intrastate contracts with appellant's appellant then sought to terminate the contracts. When predecessor-in-interest to purchase wellhead and residue appellee contended that the governmental price escalator gas from a certain gas field. Each contract contains a clauses were not triggered by the federal Act and that the "governmental price escalator clause," which provides Kansas Act prohibited their activation, appellant filed suit that if any governmental authority fixes a price for any in a Kansas state court, seeking a declaratory judgment natural gas that is higher than the contract price, the that it had the contractual right to terminate the contracts. contract price shall be increased to that level, and a "price Appellee later rejected appellant's request under the price redetermination clause," which gives appellant the option redetermination clauses for a price increase, to be Page 6 459 U.S. 400, *; 103 S. Ct. 697, **; 74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16 effective in November 1979, contending that the Kansas (c) To the extent, if any, the Kansas Act impairs Act had extinguished appellee's obligation to comply appellant's contractual interests, it rests on significant with those clauses. Appellant then filed an amended state interests in protecting consumers from the complaint, alleging that it was entitled to terminate the escalation of natural gas prices caused by deregulation contracts because of appellee's refusal to redetermine the and in correcting the imbalance between the interstate price. Appellee counterclaimed for a declaratory and intrastate markets by permitting the intrastate prices judgment that the contracts were still in effect. The trial to rise only to the § 109 level. Nor are the means chosen court entered summary judgment for appellee, holding to implement these purposes deficient, particularly in that the federal Act's imposition of price ceilings on light of the deference to which the Kansas Legislature's intrastate gas did not trigger the governmental price judgment is entitled. Pp. 416-419. escalator clauses, and that the Kansas Act did not violate the Contract Clause of the Federal Constitution. The 2. The Kansas Supreme Court did not err in holding Kansas Supreme Court affirmed. that the enactment of § 105 of the federal Act did not trigger the governmental price escalator clauses in these Held: contracts so as to entitle appellant to a price increase on December 1, 1978. As a matter of federal statutory 1. The Kansas Act does not impair appellant's interpretation, the federal Act does not trigger such contracts with appellee in violation of the Contract clauses automatically. By the language of § 105(b)(1), Clause, and thus the contract price may be escalated Congress set a ceiling for the operation of contractual under either escalator clause only to the ceiling under § provisions; it did not prescribe a price. And the Kansas 109 of the federal Act, not to the § 102 ceiling. Pp. Supreme Court's holding that the particular governmental 409-419. price escalator clauses involved here were insufficient to escalate the gas price is an interpretation of state law to (a) The Contract Clause's prohibition of any state law which this Court defers. Pp. 419-420. impairing the obligation of contracts must be accommodated to the State's inherent police power to COUNSEL: Gary W. Davis argued the cause for safeguard the vital interests of its people. The threshold appellant. With him on the briefs were Martin W. Bauer, inquiry is "whether the state law has, in fact, operated as Clark Mandigo, Edwin W. Parker II, I. Michael a substantial impairment of a contractual relationship." Greenberger, and Nancy J. Bregstein. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244. If a substantial impairment is found, the State, in Basil W. Kelsey argued the cause for appellee. With him justification, must have a significant and legitimate on the brief were Jerome T. Wolf, Terry W. Schackmann, public purpose behind the regulation. Once such a and David S. Black. * purpose has been identified, the adjustment of the contracting parties' rights and responsibilities must be * Briefs of amici curiae urging affirmance were based upon reasonable conditions and must be of a filed by Brian J. Moline, Special Assistant character appropriate to the public purpose justifying the Attorney General of Kansas, for the State legislation's adoption. Pp. 410-413. Corporation Commission of the State of Kansas; by William E. Metcalf and Patrick H. Donahue (b) Here, the Kansas Act has not impaired for Kansas Legal Services, Inc.; by Jan Eric substantially appellant's contractual rights. The parties Cartwright, Attorney General of Oklahoma, are operating in a heavily regulated industry, and the Robert D. Stewart, Jr., and Eddie M. Pope for the statement of intent in their contracts made clear that the Oklahoma Corporation Commission; and by escalator clauses were designed to guarantee price Dennis G. Lyons, Mark J. Spooner, John L. increases consistent with anticipated regulated increases Arrington, Jr., Curtis M. Long, Jay M. Galt, and in the value of appellant's gas, not that appellant expected Harry W. Birdwell for Oklahoma Natural Gas Co. to receive deregulated prices. Moreover, the contract et al. provision making any contractual term subject to relevant present and future state and federal law suggests that JUDGES: BLACKMUN, J., delivered the opinion of the appellant knew its contractual rights were subject to Court, in which BRENNAN, WHITE, MARSHALL, alteration by state price regulation. Pp. 413-416. STEVENS, and O'CONNOR, JJ., joined, and in all but Page 7 459 U.S. 400, *; 103 S. Ct. 697, **; 74 L. Ed. 2d 569, ***; 1983 U.S. LEXIS 16 Part II-C of which BURGER, C. J., and POWELL and states: REHNQUIST, JJ., joined. POWELL, J., filed an opinion concurring in part, in which BURGER, C. J., and "If any federal or Kansas regulatory or REHNQUIST, J., joined, post, p. 421. governmental authority having jurisdiction in the premises shall at any time hereafter fix a price per OPINION BY: BLACKMUN MCF applicable to any natural gas of any vintage produced in Kansas, higher than the contract price OPINION then in effect under this gas contract, the price to be paid for gas thereafter shall be increased to [*403] [***575] [**700] JUSTICE equal such regulated price. In that event, the BLACKMUN delivered the opinion of the Court. increased price shall be effective as of the date of action of the governmental or regulatory authority This case concerns the regulation by the State of establishing the regulated price, or its effective Kansas of the price of natural gas sold at wellhead in the date, whichever is later . . . ." App. to Juris. intrastate market. It presents a federal Contract Clause Statement 66a. issue and a statutory issue. 2 The price redetermination provision states in relevant part: I "SELLER shall have the option to cause the On September 27, 1975, The Kansas Power & Light price being paid for its gas by BUYER to be Company (KPL), a public utility and appellee here, redetermined every two years, beginning in 1977. entered into two intrastate natural gas supply contracts The request for a price redetermination shall be with Clinton Oil Company, the predecessor-in-interest of given in writing by SELLER to BUYER not later appellant Energy Reserves Group, Inc. (ERG). Under the than 120 days prior to the beginning of the first contract, KPL agrees to purchase gas directly at the Contract Year for which the price redetermination wellhead on the Spivey-Grabs Field in Kingman and is requested. . . . Harper Counties in southern Kansas. The second contract obligates KPL to purchase from the same field ". . . Within the same one hundred twenty residue gas, that is, gas remaining after certain recovery (120) days following SELLER'S request for a and processing steps are completed. The original price redetermination, the parties shall mutually contract price was $ 1.50 per thousand cubic feet (Mcf) redetermine the price by considering three (3) of gas. The contracts continue in effect for the life of the contracts under which the highest prices are field or for the life of the processing plants associated actually being paid for flowing gas ninety (90) with the field. days prior to the date the redetermined price is to be effective. The contracts to be considered shall, A (a) have a primary term of one (1) or more years, Each contract contains two clauses known (b) be for gas produced in Kansas, (c) be for gas generically as indefinite price escalators. The first is a purchased by an interstate or intrastate company governmental price escalator clause; this provides that if selling or using an average daily volume of 5,000 a governmental authority fixes a price for any natural gas MCF or more of gas for the twelve (12) months that is higher than the price specified in the contract, the period ending ninety (90) days prior to the date contract price shall be increased to that level. 1 The the redetermined price is to be effective, (d) not second is a price redetermination [*404] [***576] be for the purchase of Spivey-Grabs Field gas by clause; this gives ERG the option to have the contract BUYER under contracts dated in 1975, (e) not price redetermined no more than once every two years. 2 include more than one contract of any one The new price is then [**701] set by averaging the purchaser in any one field, and (f) not be for a prices being paid under three other gas contracts chosen price then subject to regulatory suspense or by the parties. refunds. . . . 1 The governmental price escalator provision "After the BUYER and SELLER have decided on the three contracts and appropriate Page 8 459 U.S. 400, *404; 103 S. Ct. 697, **701; 74 L. Ed. 2d 569, ***576; 1983 U.S. LEXIS 16 prices to be used from each one for this federal price controls that had been established under the redetermination, the weighted average price per Natural Gas Act, ch. 556, 52 Stat. 821, with price ceilings MCF being paid under the three contracts shall be that rise monthly based on "an inflation adjustment calculated. This price shall become the factor" and other considerations. Different ceilings are redetermined price to be paid by BUYER to set for different types of gas. Section 102 of the Act, 15 SELLER." Id., at 67a-68a. U. S. C. § 3312 (1976 ed., Supp. V), sets a gradually increasing ceiling price for newly discovered or newly When the price is increased pursuant to either of produced natural gas. The December 1978 ceiling price these clauses, each contract requires KPL to seek from under § 102 was [*406] $ 2.078 per million British the Kansas Corporation Commission (Commission) thermal units. Section 104 sets ceiling prices for "old" approval to pass the increase through to consumers. App. interstate gas, that is, gas from already discovered and to Juris. Statement 69a. The application for approval is to producing wells. Section 109 sets another ceiling price be submitted within 5 days after a price increase resulting for categories of natural gas not covered by the other from governmental action, [*405] or no fewer than 60 sections of the Act. As of December 1978, the § 109 days before a price redetermination increase is to become ceiling price was $ 1.63 per million Btu's. effective. Ibid. If the Commission refuses to permit the pass-through and KPL elects not to pay the increase, In another departure from the 1938 Natural Gas Act, ERG has the option to terminate the agreement on 30 the new Act extended federal price regulation to the days' written notice. intrastate gas market. See S. Conf. Rep. No. 95-1126, pp. 67-68 [**702] (1978); H. R. Conf. Rep. No. 95-1752, Each contract states that the purpose of the price pp. 67-68 (1978). Section 105 of the Act establishes the escalator clauses is "solely" to compensate ERG for rule for applying price ceilings to intrastate gas, described "anticipated" increases in its operating costs and in the as gas not committed to interstate commerce on value of its gas. Id., at 70a. Each contract also provides: November 8, 1978. 4 It provides, in its subsection (b)(1), "Neither party shall be held in default for failure to that the maximum lawful price of such gas "shall be the perform hereunder if such failure is due to compliance lower of . . . the price under the terms of the existing with," ibid., any "relevant present and future state and contract, to which such natural gas was subject on federal laws." Id., at 69a. [November 9, 1978], . . . or . . . the maximum lawful price . . . computed for such month under section 102 In 1977, ERG invoked the price redetermination (relating to new natural gas)." 5 The parties agree that § clause, and the parties agreed on a price of $ 1.77 per 105(b)(1) governs these contracts. Mcf, effective November 27 of that year. The Commission approved the pass-through of this increase 4 In pertinent part, § 105 provides: to consumers. KPL paid the new price through 1978. 3 "(a) Application. -- The maximum lawful 3 On June 9, 1978, the Commission gave KPL price computed under subsection (b) shall apply permission to implement a purchased-gas price to any first sale of natural gas delivered during adjustment. This authorized an automatic any month in the case of natural gas, sold under pass-through to consumers of wholesale gas cost any existing contract or any successor to an increases upon written notice to the Commission. existing contract, which was not committed or The Commission retained authority to review and dedicated to interstate commerce on the day revoke any pass-through under its normal before the enactment of this Act. standards for reviewing rate increases. "(b) Maximum lawful price. -- B "(1) General rule. -- Subject to paragraphs (2) [***577] On December 1, 1978, the Natural Gas and (3), the maximum lawful price under this Policy Act of 1978 (Act), Pub. L. 95-621, 92 Stat. 3350, section shall be the lower of -- 15 U. S. C. § 3301 et seq. (1976 ed., Supp. V), designed in principal part to encourage increased natural gas "(A) the price under the terms of the existing production, became effective. The Act replaced the contract, to which such natural gas was subject on Page 9 459 U.S. 400, *406; 103 S. Ct. 697, **702; 74 L. Ed. 2d 569, ***577; 1983 U.S. LEXIS 16 the date of the enactment of this Act [November Although KPL purchases a sizable portion of the 9, 1978], as such contract was in effect on such gas affected by the Kansas Act, there are other date; or purchasers as well. Moreover, as indicated in n. 3, supra, KPL already had obtained from the "(B) the maximum lawful price, per million Commission a purchased-gas price adjustment Btu's, computed for such month under section 102 that allowed it to pass through to its customers (relating to new natural gas)." any gas cost increase. 5 Section 105(b)(2) applies to contracts under 7 Section 55-1404 provides, with certain which the price of gas on November 9, 1978, exceptions, that "on or after December 1, 1978, exceeded the § 102 price. the price allowed to be paid pursuant to federal legislation or any regulation by an agency The Act, by § 602(a), also permits a State "to implementing such legislation, or the price paid or establish or enforce any maximum lawful price for the to be paid for any sale of natural gas in the state of first sale of natural [*407] gas produced in such State Kansas shall not be taken into account in applying which does not exceed the applicable maximum lawful any indefinite price escalator clause contained in price, if any, under title I of this Act." any gas purchase contract subject to this act, to the extent that such contract provides for the sale C in the state of Kansas, of gas produced within this In direct response to the Act, the Kansas Legislature state which was not committed or dedicated to promptly imposed [***578] price controls on the interstate commerce on November 8, 1978. This intrastate gas market. In May 1979, the Kansas Natural section shall not require a reduction of any price Gas Price Protection Act (Kansas Act), 1979 Kan. Sess. contained in any gas purchase contract subject to Laws, ch. 171, codified as Kan. Stat. Ann. §§ 55-1401 to this act below the price actually paid prior to the 55-1415 (Supp. 1982), was enacted. 6 The Kansas Act date of enactment of this act." applies only to natural gas contracts executed before D April 20, 1977, § 55-1403, and controls natural gas prices until December 31, 1984, § 55-1411. Section 55-1404 On November 20, 1978, ERG and other gas suppliers prohibits consideration either of ceiling prices set by having similar contracts with [**703] KPL notified KPL federal authorities or of prices paid in Kansas under other that gas prices would be escalated to the § 102 price on contracts in the application of governmental price December 1, pursuant to the governmental price escalator escalator clauses and price redetermination clauses. 7 clause. KPL sought pass-through approval from the Section [*408] 55-1405 of the Kansas Act, however, Commission for this increase by an application filed permits indefinite price escalator clauses to operate after December 7, one day too late to satisfy the 5-day March 1, 1979, to raise the price of old intrastate gas up contractual requirement. KPL never elected to pay the to the federal Act's § 109 ceiling price. Section § 55-1406 higher price. exempts new gas and gas from stripper wells. On June 5, 1979, ERG notified KPL that it would 6 ERG asserts that the Kansas Act is special terminate the contracts within 30 days because KPL had interest legislation designed to permit KPL to failed to apply to the Commission for pass-through avoid gas price increases and to aid KPL in this authority within five days of December 1, 1978, had and other litigation. ERG notes that KPL failed to obtain Commission approval, and had failed to supported the bill, that the Special Joint pay the increased price ERG contends was required by Committee approved the bill by only a narrow the governmental price escalator clause. KPL's response margin, and that several members of the was that the clause was not triggered by the Act and that Committee's minority believed the bill to be the Kansas Act prohibited its activation. ERG then filed special interest legislation. Brief for Appellant an action in the District Court of Harper County, Kan., 9-12. The bill, however, was supported by the praying for a declaratory judgment that it had the Governor, labor unions, farmers, and municipal contractual right to terminate the contracts. representatives, and was passed by substantial margins in both Houses of the Kansas Legislature. [***579] On July 24, in light of KPL's refusal to Page 10 459 U.S. 400, *408; 103 S. Ct. 697, **703; 74 L. Ed. 2d 569, ***579; 1983 U.S. LEXIS 16 terminate, ERG requested an increase up to the Act's § if § 105's enactment did have that effect, ERG was 102 ceiling price under the price redetermination clause. entitled to a price increase on December 1, 1978. If not, The increase was to be effective in November 1979, the ERG could rely only on the price redetermination clause next redetermination date possible under the contracts. for any increase. That clause could not be exercised until KPL conceded that the price redetermination clause November 1979. The [*410] statutory issue thus permitted such an increase, but contended that § 55-1404 controls the timing of any increase. The constitutional of the Kansas Act had extinguished the utility's obligation issue, on the other hand, affects the price that ERG may to comply with that clause. ERG then filed an amended claim under either clause. If ERG prevails, the price may complaint, alleging that it was entitled to terminate the be escalated to the § 102 ceiling; if ERG does not prevail, contracts because of KPL's refusal to redetermine [*409] the price may be escalated only to the § 109 ceiling. We the price. KPL counterclaimed for a declaratory consider the Contract Clause issue first. 10 judgment that the contracts were still in effect. 9 "No State shall . . . pass any . . . Law impairing On the parties' cross-motions for summary judgment, the Obligation of Contracts . . . ." the state trial court held that the Act's imposition of price ceilings on intrastate gas did not trigger the governmental [***LEdHR4A] [4B] escalator clause. It also found that the Kansas Act did not 10 If fairly possible, we of course construe a violate the Contract Clause, reasoning that Kansas has a statute so as to avoid a constitutional question. legitimate interest in addressing and controlling the Machinists v. Street, 367 U.S. 740, 749-750 serious economic dislocations that the sudden increase in (1961). Because, however, the statutory issue gas prices would cause, and that the Kansas Act affects only the operation of the governmental reasonably furthered that interest. App. to Juris. price escalator clause, its resolution in no way Statement 25a, 42a, 45a. The Supreme Court of Kansas, obviates the need to scrutinize the Kansas Act by unanimous vote, affirmed. 230 Kan. 176, 630 P. 2d under the Contract Clause. 1142 (1981). 8 We noted probable jurisdiction. 456 U.S. 904 (1982). [***580] [**704] A 8 The court held that an emergency situation [***LEdHR5] [5][HN1] Although the language of the existed because the anticipated sudden escalation Contract Clause is facially absolute, its prohibition must of intrastate gas prices threatened to boost be accommodated to the inherent police power of the dramatically both gas and electricity utility rates. State "to safeguard the vital interests of its people." Home The court suggested that because ERG had not Bldg. & Loan Assn. v. Blaisdell, 290 U.S. 398, 434 attempted to exercise the price redetermination (1934).In Blaisdell, the Court approved a Minnesota clause prior to the date of enactment, the Kansas mortgage moratorium statute, even though the statute Act was being applied only prospectively. The retroactively impaired contract rights. The Court court concluded, however, that the State's interest balanced the language of the Contract Clause against the and chosen means could justify a retroactive State's interest in exercising its police power, and application. 230 Kan., at 189-190, 630 P. 2d, at concluded that the statute was justified. 11 1153. 11 The Court listed five factors that were then II deemed to be significant in its analysis: whether [***LEdHR1A] [1A] [***LEdHR2A] [2A] the Act (1) was an emergency measure; (2) was [***LEdHR3A] [3A] [***LEdHR4A] [4A]ERG raises one to protect a basic societal interest, rather than both statutory and constitutional issues in challenging the particular individuals; (3) was tailored ruling of the Kansas Supreme Court. The constitutional appropriately to its purpose; (4) imposed issue is whether the Kansas Act impairs ERG's contracts reasonable conditions; and (5) was limited to the with KPL in violation of the Contract Clause, U.S. duration of the emergency. 290 U.S., at 444-447. Const., Art. I, § 16, cl. 1. 9 The statutory issue is whether The Court in two recent cases has addressed Contract the federal enactment of § 105 triggered the Clause claims. In United States Trust Co. v. New Jersey, governmental price escalator clause. As to the latter issue, Page 11 459 U.S. 400, *410; 103 S. Ct. 697, **704; 74 L. Ed. 2d 569, ***LEdHR5; 1983 U.S. LEXIS 16 431 U.S. 1 (1977), the Court held that New Jersey could public purpose behind the regulation, United [*412] not retroactively alter a statutory bond covenant relied States Trust Co., 431 U.S., at 22, such as the remedying upon by bond purchasers. One year later, in Allied of a broad and general social or economic [**705] Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978), problem. Allied Structural Steel Co., 438 U.S., at 247, the Court invalidated a Minnesota statute that required an 249. Furthermore, since Blaisdell, the Court has indicated employer who closed its office in the State to pay a that the public purpose need not be addressed to an "pension funding charge" if its [*411] pension fund at emergency or temporary situation. United States Trust the time was insufficient to provide full benefits for all Co., 431 U.S., at 22, n. 19; Veix v. Sixth Ward Bldg. & employees with at least 10 years' seniority. 12 Although Loan Assn., 310 U.S., at 39-40. One legitimate state the legal issues and facts in these two cases differ in interest is the elimination of unforeseen windfall profits. certain ways, they clarify the appropriate Contract Clause United States Trust Co., 431 U.S., at 31, n. 30. The standard. requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than 12 See also Malone v. White Motor Corp., 444 providing a benefit to special interests. 13 U.S. 911 (1979), summarily aff'g 599 F.2d 283 (CA8). 13 In Allied Structural Steel Co. v. Spannaus, the Court held that the Minnesota pension law severely impaired established contractual relations between employers and employees. The State had [***LEdHR6] [6][HN2] The threshold inquiry is not acted to meet an important general social "whether the state law has, in fact, operated as a problem. The pension statute had a very narrow substantial impairment of a contractual relationship." focus: it was aimed at specific employers. Indeed, Allied Structural Steel Co., 438 U.S., at 244.See United it even may have been directed at one particular States Trust Co., 431 U.S., at 17. The severity of the employer planning to terminate its pension plan impairment is said to increase the level of scrutiny to when its collective-bargaining agreement expired. which the legislation will be subjected. Allied Structural See 438 U.S., at 247-248, and n. 20. Steel Co., 438 U.S., at 245. Total destruction of contractual expectations is not necessary for a finding of substantial impairment. United States Trust Co., 431 U.S., at 26-27. On the other hand, state regulation that [***LEdHR8A] [8A][HN4] Once a legitimate public restricts a party to gains it reasonably expected from the purpose has been identified, the next inquiry is whether contract does not necessarily constitute a substantial the adjustment of "the rights and responsibilities of impairment. Id., at 31, citing El Paso v. Simmons, 379 contracting parties [is based] upon reasonable conditions U.S. 497, 515 (1965). In determining the extent of the and [is] of a character appropriate to the public purpose impairment, we are to consider whether the industry the justifying [the legislation's] adoption." United States complaining party has entered has been regulated in the Trust Co., 431 U.S., at 22. Unless the State itself is a past. Allied Structural Steel Co., 438 U.S., at 242, n. 13, contracting party, see id., at 23, 14 "[as] is customary in citing Veix v. Sixth Ward Bldg. & Loan Assn., 310 U.S. reviewing [*413] economic and social regulation, . . . 32, 38 (1940) ("When he purchased into an enterprise courts properly defer to legislative judgment as to the already regulated in the particular to which he now necessity and reasonableness of a particular measure." objects, he purchased subject to further legislation upon Id., at 22-23. the same topic"). The Court long ago observed: "One whose rights, such as they are, [***581] are subject to [***LEdHR8A] [8B] state restriction, cannot remove them from the power of the State by making a contract about them." Hudson 14 See generally Note, A Process-Oriented Water Co. v. McCarter, 209 U.S. 349, 357 (1908). Approach to the Contract Clause, 89 Yale L. J. 1623, 1647-1648 (1980) (distinguishing public [***LEdHR7] [7][HN3] If the state regulation from private contracts). In United States Trust constitutes a substantial impairment, the State, in Co., but not in Allied Structural Steel Co., the justification, must have a significant and legitimate State was one of the contracting parties. When a Page 12 459 U.S. 400, *413; 103 S. Ct. 697, **705; 74 L. Ed. 2d 569, ***LEdHR8A; 1983 U.S. LEXIS 16 State itself enters into a contract, it cannot simply sale of natural gas in furtherance of conservation walk away from its financial obligations. In goals. See Ohio Oil Co. v. Indiana, 177 U.S. 190, almost every case, the Court has held a 210 (1900); see also 5 E. Kuntz, Law of Oil and governmental unit to its contractual obligations Gas § 70.2, p. 307 (1978); cf. Henderson Co. v. when it enters financial or other markets. See Thompson, 300 U.S. 258, 266 (1937) (state statute United States Trust Co., 431 U.S., at 25-28; W. B. retrospectively regulating the contractual sale of Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935); natural gas containing different amounts of Murray v. Charleston, 96 U.S. 432 (1878). But hydrogen sulfide does not violate Contract Clause see Faitoute Iron & Steel Co. v. City of Asbury of Texas Constitution). On several occasions, the Park, 316 U.S. 502 (1942). When the State is a Court has approved state price regulation of party to the contract, "complete deference to a natural gas that did not interfere with interstate legislative assessment of reasonableness and commerce. See, e. g., Phillips Petroleum Co. v. necessity is not appropriate because the State's Oklahoma, 340 U.S. 190 (1950); Cities Service self-interest is at stake." United States Trust Co., Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179 431 U.S., at 26. In the present case, of course, the (1950); Pennsylvania Gas Co. v. Public Service stricter standard of United States Trust Co. does Comm'n, 252 U.S. 23 (1920); 5 E. Kuntz, supra, § not apply because Kansas has not altered its own 75.2, p. 371. contractual obligations. 17 Kansas in the past has regulated the wellhead price of natural gas. See Cities Service Gas Co. v. B State Corporation Comm'n, 355 U.S. 391 (1958), rev'g 180 Kan. 454, 304 P. 2d 528 (1956). [***LEdHR1A] [1B]The threshold determination is Although this Court struck down the whether the Kansas Act has impaired [***582] Commission's earlier attempt to set a wellhead substantially ERG's contractual rights. Significant here is price, it apparently did so because the price the fact that the parties are operating in a heavily regulation extended to gas in interstate commerce. regulated industry. 15 See Veix v. Sixth Ward Bldg. & See 355 U.S., at 392, citing Phillips Petroleum Loan Assn., 310 U.S., at 38. State authority to regulate Co. v. Wisconsin, 347 U.S. 672 (1954), and natural gas prices is well established. See Cities Service Natural Gas Pipeline Co. v. Panoma Corp., 349 Gas Co. v. Peerless Oil & Gas Co., 340 U.S. 179 (1950). U.S. 44 (1955); see n. 16, supra. The instant case 16 [**706] At the time of the execution of these does not raise a Commerce Clause issue because contracts, Kansas did not regulate natural gas prices the parties agree that the gas is not in interstate specifically, 17 but its supervision [*414] of the industry commerce and because Congress, by § 602, was extensive and intrusive. 18 Moreover, under the authorized the State to regulate its price. See S. authority of § 5(a) of the 1938 Natural Gas Act, the Conf. Rep. No. 95-1126, p. 125 (1978) ("The Federal Power Commission (FPC) set "just and Congress . . . is ceding its authority under the reasonable" rates for prices of gas both at the wellhead commerce clause of the Constitution to regulate and in pipelines. Although prices in the intrastate market prices for such production to affected States"); H. have diverged somewhat from those in the interstate R. Conf. Rep. No. 95-1752, p. 125 (1978) (same). [***583] market due to the recent shortage of natural 18 For more than 75 years now, Kansas has gas, 19 the regulation of interstate prices effectively limits regulated the production, transportation, intrastate price increases. 20 distribution, and sale of natural gas. See Cities Service Gas Co. v. State Corporation Comm'n, 15 In addition to the Kansas and federal 222 Kan. 598, 609-610, 567 P. 2d 1343, 1352 regulations, 38 States regulate various aspects of (1977). gas production and sale. See Interstate Oil 19 Because of the shortage, some gas was Compact Commission, Summary of State Statutes diverted to the intrastate market where consumers and Regulations for Oil and Gas Production were willing to pay higher prices. "As the FPC (1979). price ceiling dropped below market levels 16 For some time, the Court has recognized the prevailing in the intrastate sector, new gas supply validity of state regulation of the production and has increasingly gravitated toward the latter." Page 13 459 U.S. 400, *414; 103 S. Ct. 697, **706; 74 L. Ed. 2d 569, ***583; 1983 U.S. LEXIS 16 Federal Trade Commission, Staff Report of the the price redetermination clause indicates that the Bureau of Economics, J. Mulholland, The contracts were structured against the background of Economic Structure and Behavior in the Natural regulated gas prices. If deregulation had not occurred, Gas Production Industry 10 (1979) (footnote the contracts undoubtedly would have called for a much omitted); see Executive Office of the President, smaller price [**707] increase than that provided by the The National Energy Plan 18 (1977), reprinted in Kansas Act's adoption of the § 109 ceiling. 21 1 National Energy Plan, 95th Congress: Legislative History of the National Energy Acts 21 Absent deregulation, the existing interstate of 1978 (item 5) (1979); Comment, For Gas, price would have continued to act as a brake on Congress Spells Relief N-G-P-A: An Analysis of increases ERG could obtain under the price the Natural Gas Policy Act of 1978, 40 U. Pitt. L. redetermination clause. As has been noted, the Rev. 429, 434 (1979). The Emergency Natural originally specified contract price was $ 1.50 per Gas Act of 1977, § 6(a), Pub. L. 95-2, 91 Stat. 7, Mcf. App. to Juris. Statement 66a. Under the addressed this problem by extending federal price contract, ERG was entitled to an increase of two regulation to the intrastate market during a cents per Mcf each year absent a price Presidentially declared emergency. These redetermination in excess of that amount. Ibid. A emergency provisions were carried forward in § price redetermination occurred in November 302(a) of the 1978 Act. 1977, and by November 1978, the contract price 20 "Even if the gas can be sold intrastate, FPC had risen to $ 1.77 per Mcf. The July 1982 § 109 price ceilings will indirectly affect price levels in price ceiling was $ 2.194 and the § 102 ceiling the unregulated sector over the long term." P. was $ 3.152. 47 Fed. Reg. 17981, 17982 (1982). Starratt, The Natural Gas Shortage and the There is no reason to believe that, by operation of Congress 29 (1974). Determining the actual either escalator clause under the old regulatory effect on the intrastate market of federal structure, ERG's prices ever would have reached regulation of the interstate market is difficult the Act's levels. because state oil and gas agencies have not [*416] Moreover, the contracts expressly recognize collected information on intrastate sales. See the existence of extensive regulation by providing that Schanz & Frank, Natural Gas in the Future any contractual terms are subject to relevant present and National Energy Pattern, in Regulation of the future state and [***584] federal law. 22 This latter Natural Gas Producing Industry 18, 28-30 (K. provision could be interpreted to incorporate all future Brown ed. 1972). state price regulation, and thus dispose of the Contract [*415] It is in this context that the indefinite Clause claim. Regardless of whether this interpretation is escalator clauses at issue here are to be viewed. In correct, 23 the provision does suggest that ERG knew its drafting each of the contracts, the parties included a contractual rights were subject to alteration by state price statement of intent, which made clear that the escalator regulation. Price regulation existed and was foreseeable clause was designed to guarantee price increases as the type of law that would alter contract obligations. consistent with anticipated increases in the value of Reading the Contract Clause as ERG does would mean ERG's gas. App. to Juris. Statement 70a. While it is not that indefinite price escalator clauses could exempt ERG entirely inconceivable that ERG in September 1975 from any regulatory limitation of prices whatsoever. anticipated the deregulation of gas prices introduced by Such a result cannot be permitted. Hudson Water Co. v. the Act in 1978, we think this is highly unlikely, and we McCarter, 209 U.S., at 357. In short, ERG's reasonable read the statement of intent to refer to nothing more than expectations have not been impaired by the Kansas Act. changes in value resulting from changes in the federal See El Paso v. Simmons, 379 U.S., at 515. regulator's "just and reasonable" rates. In exchange for 22 Many gas sale contracts contain similar these anticipated increases, KPL agreed to accept gas provisions. See 4 H. Williams, Oil and Gas Law from the Spivey-Grabs field for the lifetime of that field. § 734, pp. 800-801 (1981). These stem from the Thus, at the time of the execution of the contracts, ERG assumption that the contracts are subject to did not expect to receive deregulated prices. The very governmental price and other regulation. Id., at existence of the governmental price escalator clause and Page 14 459 U.S. 400, *416; 103 S. Ct. 697, **707; 74 L. Ed. 2d 569, ***584; 1983 U.S. LEXIS 16 802. Their purpose is to "provide that the contract There can be little doubt about the legitimate public shall continue in effect though modified to purpose behind the Act. 25 conform to the requirements of such law or regulation." Ibid. 24 Although the Act does place a ceiling on 23 A similar clause has been held implicitly not intrastate gas, it is the highest ceiling under the to incorporate state price regulations that impair law, that is, the § 102 limit for newly discovered interstate commerce. See Natural Gas Pipeline gas. Old interstate gas is subject to the much Co. v. Harrington, 139 F.Supp. 452, 454-455 (ND lower ceilings of § 104, or § 106 in the case of Tex. 1956), vacated and remanded on other rollover contracts. In fact, the § 109 price for July grounds, 246 F.2d 915 (CA5 1957), cert. denied, 1982 of $ 2.194 per Mcf is substantially higher 356 U.S. 957 (1958). Analogously, state price than any of the § 104 or § 106 prices for old regulations pre-empted by FPC price regulation interstate gas from wells drilled before 1974. See have been held not to be incorporated by 47 Fed. Reg. 17981, 17982-17983 (1982). The governmental price escalator clauses. See Pan Spivey-Grabs Field gas wells covered by these American Petroleum Corp. v. Kansas-Nebraska contracts were drilled between 1954 and 1961. Natural Gas Co., 297 F.2d 561, 567-568 (CA8 Brief for Appellee 41, and n. 139 (citing Kansas 1962). Geological Society Library, Drillers' Log (Kansas producers)). C [***LEdHR9A] [9B] [***LEdHR2A] [2B]To the extent, if any, the Kansas Act impairs ERG's contractual interests, the 25 ERG claims that the legislation was designed Kansas Act rests on, and is prompted by, significant and to benefit KPL. See n. 6, supra. Unlike Allied legitimate state interests. Kansas has [*417] exercised Structural Steel Co. v. Spannaus, 438 U.S. 234 its police power to protect consumers from the escalation (1978), there is little or nothing in the record here of natural gas prices caused by deregulation. The State to support the contention that the Kansas Act is reasonably could find that higher gas prices have caused special interest legislation. Given the nature of and will cause hardship among those who use gas heat the industry -- sales to public utilities -- it is but must exist on limited fixed incomes. impossible for any regulation not to have a major effect on a small number of participants. This The differs from the statute under challenge in Allied Structural Steel Co., where a small number of [***LEdHR2A] [2C] [***LEdHR9A] [9A]State employers were singled out from the larger group. also has a legitimate interest in correcting the imbalance The fact that there was a close vote at the between the interstate and intrastate markets by committee stage, and that some of the committee permitting intrastate prices to rise only to the § 109 level. dissenters expressed the view that the Kansas Act By slowly deregulating interstate prices, the Act took the was special interest legislation, bears little if any cap off intrastate prices as well. 24 The Kansas Act resemblance to the circumstantial evidence attempts to coordinate the intrastate and interstate prices present in Allied Structural Steel Co. Nor is there by supplementing the federal Act's regulation of intrastate any indication that the Kansas political process gas. Congress specifically contemplated such action: had broken down. Cf. Note, 89 Yale L. J., at 1645 (provided "legislature is functioning "The conference agreement provides that nothing in properly, selection of a public purpose and this Act shall affect the authority of any State to establish determinations of necessity and appropriateness or [**708] enforce any maximum lawful price for sales should be left to it"). In addition, the automatic of gas in intrastate commerce which does not exceed the price pass-through adjustment indicates that KPL applicable [***585] maximum lawful price, if any, will not benefit significantly from the statute. under Title I of this Act. This authority extends to the Although ERG is correct that the Commission operation of any indefinite price escalator clause." S. could revoke the pass-through, it has given no Conf. Rep. No. 95-1126, pp. 124-125 (1978); H. R. Conf. indication that it will do so. Rep. No. 95-1752, pp. 124-125 (1978). Page 15 459 U.S. 400, *417; 103 S. Ct. 697, **708; 74 L. Ed. 2d 569, ***LEdHR9A; 1983 U.S. LEXIS 16 [*418] Nor are the means chosen to implement Supreme Court acknowledged that the Act could trigger a these purposes deficient, particularly in light of the governmental price escalator clause. 230 Kan., at 184, deference to which the Kansas Legislature's judgment is 630 P. 2d, at 1149. In this case, however, it held that entitled. On the surface, the State's Act seems limited to "[the] [**709] NGPA did not trigger a price increase altering indefinite price escalation clauses of intrastate because the contracts herein did not contain a sufficient contracts that affect less than 10% of the natural gas escalation mechanism." Id., at 185, 630 P. 2d, at 1150. consumed in Kansas. Tr. of Oral Arg. 16. To analyze We agree that, as a matter of federal statutory properly the Kansas Act's effect, however, we must interpretation, the Act does not trigger such clauses consider the entire state and federal gas price regulatory automatically. See 44 Fed. Reg. 16895, 16904 (1979). 26 structure. Only natural gas subject to indefinite price Section 105(b)(1) provides that the ceiling price shall be escalator clauses poses the danger of rapidly increasing the lower of [*420] the § 102 price and "the price under prices in Kansas. Gas under contracts with fixed the terms of the existing contract, to which such natural escalator clauses and interstate gas purchased by the gas was subject on [November 9, 1978], as such contract utilities subject to § 109 would not escalate as would was in effect on such date." By this language, Congress intrastate gas subject to indefinite price escalator clauses. set a ceiling for the operation of contractual provisions; it The Kansas Act simply brings the latter category into line did not prescribe a price: with old interstate gas prices by limiting the operation of the indefinite price escalator clauses. "[The] price under the contract may escalate through the operation of both fixed price escalator clauses and The Kansas Act also rationally exempts the types of indefinite price escalator clauses in existence as of the new gas the production of which Congress sought to date of enactment, but the price may not exceed the new encourage through the higher § 102 prices. Finally, the gas price [provided by § 102]. Act is a temporary measure that expires when federal price regulation of certain categories of gas terminates. .... The Kansas statute [*419] completes the regulation of ". . . The conferees do not intend that the mere the gas market by imposing gradual escalation establishment of the ceiling prices under this Act shall mechanisms on the intrastate market, consistent with the trigger indefinite price escalator clauses in existing new national policy toward gas regulation. intrastate contracts." S. Conf. Rep. No. 95-1126, pp. We thus resolve the constitutional issue against 82-83 (1978); H. R. Conf. Rep. No. 95-1752, pp. 82-83 ERG. (1978). III See Pennzoil Co. v. FERC, 645 F.2d, at 379. [***LEdHR3A] [3B]We turn to ERG's statutory 26 On December 1, 1978, the Federal Energy contention that the Kansas courts misconstrued § 105 as Regulatory Commission issued interim fixing the contract price at the November 9, 1978, level. regulations stating: "The establishment of While, on this point, the opinion of the Kansas Supreme maximum lawful prices under the NGPA shall not Court is not entirely clear to us, it does not appear so to trigger indefinite price escalator clauses in construe § 105. And KPL, in fact, does not contend that existing intrastate or interstate contracts." 43 Fed. it did. Instead, the court recognized [***586] that § 105 Reg. 56448, 56550 (1978). After a comment permits the indefinite price escalator clauses to continue period, the FERC altered the regulation to reserve to operate to raise the contract price up to the lawful to state law the question whether such clauses ceiling. See Pennzoil Co. v. FERC, 645 F.2d 360, 379 operate in intrastate contracts. 44 Fed. Reg. (CA5 1981) ("[The] NGPA does not preclude escalation 16895, 16904 (1979). of area rate clauses [a type of indefinite price escalators] to NGPA prices"), cert. denied, 454 U.S. 1142 (1982). The actual point of dispute is whether the [***LEdHR10] [10]The Kansas Supreme Court relied governmental price escalator clauses in these contracts on its prior decision in Mesa Petroleum Co. v. Kansas were triggered by the enactment of § 105. The Kansas Power & Light Co., 229 Kan. 631, 629 P. 2d 190, Page 16 459 U.S. 400, *420; 103 S. Ct. 697, **709; 74 L. Ed. 2d 569, ***LEdHR10; 1983 U.S. LEXIS 16 clarified, 230 Kan. 166, 630 P. 2d 1129 (1981), cert. by the Kansas Act." Ante, at 416. This conclusion is denied, 455 U.S. 928 (1982), which interpreted the effect dispositive, and it is unnecessary for the Court to address of § 105 on a similar contract provision. In that decision, the question of whether, if there were an impairment of it read § 105 to set the lawful ceiling at the lower price contractual rights, it would constitute a violation of the provided by the contract. In light of our discussion Contract Clause. See Allied Structural [**710] Steel above, we view this reading of the federal statute as Co. v. Spannaus, 438 U.S. 234, 245 (1978). unassailable. The Kansas Supreme Court's further holding in this case that these particular governmental The Court concludes in Part II-C that even if ERG's price escalator clauses were insufficient to escalate the "contractual interests" were impaired, the Act furthers gas price is an interpretation of state law to which, of "significant and legitimate state interests" and is a valid course, we defer. exercise of the State's police power. Ante, at 416-419. I do not necessarily disagree with this conclusion, IV particularly in the context of the pervasive regulation of public utilities. I decline to join Part II-C, however, The regulation of energy production [***587] and because it addresses a substantial question and our use is a matter of national concern. Congress set out on a discussion of the separate issue in Part II-B disposes of new path with the Natural Gas Policy Act of 1978. In this case. pursuing this path, Congress explicitly envisioned that the States would regulate intrastate [*421] markets in REFERENCES accordance with the overall national policy. The Kansas 16A Am Jur 2d, Constitutional Law 701 Natural Gas Price Protection Act is one State's effort to balance the need to provide incentives for the production 15 USCS 3301 et seq.; Constitution, Article I, Section 10, of gas against the need to protect consumers from Clause 1 hardships brought on by deregulation of a traditionally regulated commodity. We see no constitutional or US L Ed Digest, Constitutional Law 128, 202, 207, 257; statutory infirmity in Kansas' attempt. The judgment of Energy 35 the Supreme Court of Kansas is therefore L Ed Index to Annos, Gas; Impairment of Contract Affirmed. Obligations ALR Quick Index, Gas and Oil; Impairment of Contract CONCUR BY: POWELL (In Part) Obligations CONCUR Federal Quick Index, Impairment of Contract JUSTICE POWELL, with whom THE CHIEF Obligations; Oil and Gas; Rates and Charges JUSTICE and JUSTICE REHNQUIST join, concurring Annotation References: in part. State's exercise of police power as constituting I concur in the judgment and all of the Court's impairment of obligation of private contract in violation opinion except Part II-C. The Court concludes in Part of contract clause (Art I, 10, cl 1) of Federal Constitution. II-B that there has been no substantial impairment of 57 L Ed 2d 1279. ERG's contractual rights. The closing sentence states that "ERG's reasonable expectations have not been impaired Page 1 Gaar, Scott & Company v. O. K. Shannon. [NO NUMBER IN ORIGINAL] COURT OF CIVIL APPEALS OF TEXAS 52 Tex. Civ. App. 634; 115 S.W. 361; 1908 Tex. App. LEXIS 434 December 16, 1908, Decided PRIOR HISTORY: [***1] Appeal from the District Moreover, the court ruled that it could not be argued that Court of Travis County. Tried below before Hon. V. L. the demand on the part of the officer that the business Brooks. should pay the tax for doing business within the State was an unlawful demand, because the officer clearly had DISPOSITION: Affirmed. the right to make such a demand. CASE SUMMARY: OUTCOME: The court affirmed the judgment. CORE TERMS: franchise tax, taxation, domestic, PROCEDURAL POSTURE: Appellant business sought protest, property tax, interstate business, forfeiture, review of a judgment by the District Court of Travis franchise, doing business, collected, license, license tax, County (Texas), which sustained the demurrer of appellee demurrer, charter, void, capital stock, full knowledge, Secretary of State, in his individual capacity, to the taxing power, demanded, insisted, invalid, exacted, business's action to recover monies it paid to the duress, former law, license fee, charge imposed, urgent Secretary as a franchise tax. necessity, illegally collected, written protest, obligation of contracts OVERVIEW: The business predicated its action on the ground that the franchise laws under which the tax was LexisNexis(R) Headnotes collected were unconstitutional. It argued that, since it had been given a permit for a 10-year period and had paid those taxes, the Legislature had no authority to impose an additional tax by enacting a subsequent act. The Secretary filed a demurrer, which was sustained. On Business & Corporate Law > Corporations > Finance > appeal, the court affirmed. Notwithstanding the fact that a Franchise Tax > General Overview former permit had been granted, the court held that Criminal Law & Procedure > Criminal Offenses > inherent power remained in the State of Texas to change Miscellaneous Offenses > General Overview or amend the law at any time thereafter, even to the Tax Law > State & Local Taxes > General Overview extent of levying an additional burden for the permission [HN1] Section 1, pp. 21, 22, 23, Texas Acts 29th Leg., granted to foreign corporations to do business within the 1905.) provides for the payment by every foreign State. The Court further held that such a change of the corporation heretofore authorized or thereafter authorized law did not violate the Texas Constitution prohibiting the to do business in Texas a certain franchise tax, based passage of any Act impairing the obligation of contracts. upon the authorized capital stock of such corporation, Page 2 52 Tex. Civ. App. 634, *; 115 S.W. 361, **; 1908 Tex. App. LEXIS 434, ***1 provides the time for its payment and prescribing a Imposition of Tax penalty of 25 percent on the amount of the taxes due for [HN5] It is well settled that a State has the absolute right failure to pay the same, as well as forfeiture of right to do to exclude or permit foreign corporations from doing business in the State, and directs the Secretary of State to business within its boundaries and that it is an act of declare such forfeiture without judicial ascertainment by comity or grace on its part to permit their coming in at all entering the same upon a ledger to be kept in his office and it has the right to impose such conditions as it may relating to such corporations. By an amendment thereto, see proper in granting said permission. The granting of p. 100, sec. 1, Acts of 29th Leg., it is further provided such right or privilege rests entirely within the discretion that it should be a misdemeanor on the part of the officers of the State; and, of course, when granted may be of said corporations subject to the payment of such accompanied with such conditions as its Legislature may franchise tax, to fail to give under oath accurate judge most befitting to its interest and policy. It may information as to the amount of its capital stock, when require, as a condition of the granting of the privilege and demanded by the Secretary of State. also of its continued exercise, that the corporation pay a specified sum to the State each year or month, or a specified portion of its gross receipts or of the profits of Governments > Local Governments > Charters its business, or a sum to be ascertained in any convenient Governments > State & Territorial Governments > mode which it may prescribe. The validity of the tax can Relations With Governments in no way be dependent upon the mode which the State Tax Law > State & Local Taxes > Franchise Tax > may deem fit to adopt in fixing the amount for any year Imposition of Tax which it will exact for the franchise. No constitutional [HN2] See Tex. Rev. Civ. Stat. art. 650. objection lies in the way of a legislative body prescribing any mode of measurement to determine the amount it will Governments > Local Governments > Charters charge for the privileges it bestows. Governments > State & Territorial Governments > Claims By & Against Tax Law > International Taxes > Americans Operating Tax Law > State & Local Taxes > Franchise Tax > Abroad > General Overview General Overview Tax Law > State & Local Taxes > Franchise Tax > [HN3] Even a provision in a charter fixing a specified General Overview sum to be paid as taxes, but not providing that such sum Tax Law > State & Local Taxes > Income Tax > shall be in lieu of other taxes, is not a contract that no Corporations & Unincorporated Associations > General greater tax shall be laid. Overview [HN6] A State may tax any privilege it grants. Such a tax, Business & Corporate Law > Corporations > Formation or rather license fee, is the payment exacted of a foreign > Corporate Existence, Powers & Purpose > Powers > corporation for the privilege of doing business within the General Overview State. Since a foreign corporation may be allowed to do Constitutional Law > Congressional Duties & Powers > business in a State upon conditions, the payment of a sum Contracts Clause > General Overview of money may be made a condition; and this may in form Tax Law > State & Local Taxes > Income Tax > be the payment of a tax greater than or different from that Corporations & Unincorporated Associations > General paid by a domestic corporation. Such a tax is valid. It is Overview not properly an exercise of the power to tax property, but [HN4] Tex. Const. art. 8, § 4 provides that the power to is a license fee paid for the privilege of entering the State tax corporations and corporate property shall not be and its validity is a necessary deduction from the right surrendered or suspended by Act of the Legislature by absolutely to exclude the foreign corporation. any contract or grant to which the State shall be a party. Energy & Utilities Law > Taxation Business & Corporate Law > Foreign Businesses > Tax Law > International Taxes > Americans Operating General Overview Abroad > General Overview Tax Law > State & Local Taxes > Franchise Tax > Tax Law > State & Local Taxes > Franchise Tax > Imposition of Tax Page 3 52 Tex. Civ. App. 634, *; 115 S.W. 361, **; 1908 Tex. App. LEXIS 434, ***1 [HN7] Taxes imposed on a foreign corporation as a HEADNOTES condition of doing business generally in the State of Texas, not connected with the grant of any special Foreign Corporation -- License Tax -- privilege, is a license or privilege tax and not a property Constitutional Law. tax, although the amount of it may be determined by the Though a former permit had been granted a capital stock of the corporation. A foreign corporation corporation of another State to do business in Texas for a can only come into the State and do business there by the term of ten years, on payment of the franchise tax then consent of the State and the charge imposed by the State fixed by law, it was not unconstitutional for the as the condition of that consent is not a tax on property. Legislature to impose a higher tax thereafter and during such term for the same privilege and to provide for Tax Law > State & Local Taxes > Administration & forfeiture of the right to do business on failure to pay it. Proceedings > General Overview [HN8] Where a party pays an illegal demand for taxes Foreign Corporation -- Taxation. with the full knowledge of all the facts which render such The charge imposed by a State on the privilege demand illegal, without an immediate and urgent granted to a foreign corporation to do business therein is necessity therefor or unless to release his person or a license, and not a property tax; and this is so though the property from detention or to prevent an immediate amount required to be paid is a graduated one, based on seizure of his person or property, such payment must be the gross receipts, or the profits of the business, or deemed to be voluntary and can not be recovered back; amount of capital, or such other basis as may be fixed by and the fact that the party at the time of making the the Legislature; and this does not constitute double payment files a written protest does not make the taxation. payment involuntary. Unlawful Taxation -- Voluntary Payment -- Constitutional Law > Equal Protection > Scope of Protest. Protection Payment of an illegal demand, with full knowledge Tax Law > International Taxes > Americans Operating of the facts which render it illegal, must be deemed Abroad > General Overview voluntary, though made under protest, unless made under Tax Law > State & Local Taxes > Income Tax > urgent necessity or to release from detention or to prevent Corporations & Unincorporated Associations > immediate seizure of person or property. Imposition of Tax [HN9] A tax imposed upon foreign companies, which Unlawful Taxation -- Duress -- Interstate does not apply to domestic corporations, is not for that Commerce. reason obnoxious to the provisions of most of the State Constitutions requiring taxes to be equal and uniform. If a foreign corporation is engaged only in business Since the effect of such legislation is simply to classify which is interstate commerce, and hence not taxable by corporations and to impose certain taxes upon the class of the State, its rights would not be affected by a forfeiture foreign companies. of its permit to do business in the State; and such forfeiture for nonpayment of a license tax would not be duress which would make the payment thereof by it Governments > State & Territorial Governments > under protest an involuntary one. Employees & Officials Tax Law > State & Local Taxes > Administration & Taxation -- License -- Equality and Uniformity. Proceedings > Collection Tax Law > State & Local Taxes > Real Property Tax > A license tax on foreign corporations is not invalid if Collection > General Overview equal and uniform in its operation and application to all [HN10] A better rule is that the collecting officer is of that class, though a like tax is not imposed on domestic exempt from liability to the taxpayer, who should seek corporations. relief from the State of Texas, a county, or a municipality on whose account the tax was collected. Unlawful Taxes -- Action to Recover Back -- Page 4 52 Tex. Civ. App. 634, *; 115 S.W. 361, **; 1908 Tex. App. LEXIS 434, ***1 Parties. Chicago, V. & W. Coal Co., 79 Ill., 121; German Alliance Ins. Co. v. Van Cleave, 191 Ill., 410; Swift & It seems, in the opinion of Mr. Justice Rice, that, in Co. v. United States, 111 U.S. 22; Baker v. Panola an action to recover back from the Secretary of State County, 30 Tex. 87; Wood v. Stirman, 37 Tex. 585; City taxes illegally collected by him from a corporation, the of Galveston v. Snyder, 39 Tex. 236; Galveston [***3] petition should allege that the money collected was still Gas Co. v. County of Galveston, 54 Tex. 287; Galveston in the possession of that officer. County v. Gorman, 49 Tex. 279; Galveston County v. Galveston Gas Co., 72 Tex. 509. COUNSEL: Bulkley, Gray & More and J. M. Patterson, for appellant. Chapters 19 and 72 of the laws of the Twenty-ninth Legislature of the State of Texas impair the obligation of A taxing officer can be sued. He can not justify upon the the contract entered into between the State of Texas and ground that the suit is against the State. Virginia Coupon plaintiff on the 23d day of May, 1901. American Sm. & Cases, Poindexter v. Greenhow, 114 U.S. 270; Scottish Ref. Co. v. Colorado, 204 U.S. 103; Cumberland Teleph. Union Nat. Ins. Co. v. Herriott, 80 N. W., 666; Insurance & Tel. Co. v. Hopkins, 90 S.W. 594; Virginia Coupon Co. v. Van Cleave, 191 Ill., 410; In re Tyler, 149 U.S. Cases, 114 U.S. 270. 164; Smyth v. Ames, 169 U.S. 466; Pennoyer v. McConnaughy, 140 U.S. 1; Scott v. Donald, 165 U.S. Interstate commerce can not be taxed or discriminated 658; Tindal v. Wesley, 167 U.S. 204; In re Ayres, 123 against in any way. A tax upon a foreign corporation U.S. 443. doing purely an interstate commerce, like the tax in question, is in violation of paragraph 3, section 1 of the The taxes sought to be recovered in this case were not Constitution of the United States. In re Kinyon, 75 Pac., voluntarily paid. Virginia Coupon Cases, 114 U.S. 270; 268; Menke v. State, 97 N. W., 1020; Wrought Iron Insurance Co. v. Van Cleave, 191 Ill., 410; Arkansas Range Co. v. Campen, 47 S. E., 658; Rock Island Plow Bldg. & Loan Assn. v. Madden, 175 U.S. 269; Erskine v. Co. v. Peterson, 101 N. W., 616; DeWitt v. Berger Mfg. Van Arsdale, 15 Wall., 75; Denver v. Evans, 84 Pac., 65; Co., 81 S.W. 334; Bateman v. Western Star Milling Co., Rumford Chemical Works v. Ray, 33 Atl., 443, 34 Atl., 1 Tex. Civ. App. 90; Gunn v. White Sewing Machine 814; Robertson v. Frank Bros., 132 U.S. 17; City of Co., 20 S.W. 591; Stratford v. City Council of Chicago v. Klinkert, 94 Ill. App., 524; Swift & Co. v. Montgomery, 20 So., 127; Stockard v. Morgan, 185 U.S. United States, 111 U.S. 22; Galveston County v. 27; Caldwell v. North Carolina, 187 U.S. 622; Norfolk & Galveston Gas Co., 72 Tex. 509. W. Ry. [***4] Co. v. Sims, 191 U.S. 441; McCall v. California, 136 U.S. 104; McNeil v. Southern Ry. Co., 26 Taxes paid under protest, duress or compulsion may be Sup. Ct. Rep., 722. recovered [***2] back in an action at law if illegal. Erskine v. Van Arsdale, 15 Wall., 75; Stone v. Nelson, 42 Soliciting the sale of goods is not doing business, and is N. W., 548; City of Marshall v. Snediker, 25 Tex. 460; protected by the Commerce Clause of the Federal Scottish Union & Nat. Ins. Co. v. Herriott, 80 N. W., 666; Constitution. In addition to the authorities last above City of Denver v. Evans, 84 Pac., 65; Rumford Chemical enumerated, the following will apply: Rearick v. State of Works v. Ray, 33 Atl., 443, 34 Atl., 814; Boston & Pennsylvania, 27 Sup. Ct. Rep. (U.S.), 160; Ex parte Sandwich Glass Co. v. City of Boston, 45 Mass., 181; Masse, 92 S.W. 1082; French, Fitch & Co. v. Hicks, 92 Dunnell Mfg. Co. v. Newell, 2 Atl., 766; Creamer v. S.W. 1034; King v. Monitor Drill Co., 92 S.W. 1046; Inhabitants of Bremen, 40 Atl., 555; Woodmere Clark & Marshall on Corporations, 755; Leloup v. Port of Cemetery Assn. v. Springwells Township, 90 N. W., 277; Mobile, 127 U.S. 625; Western U. Tel. Co. v. Alabama, Gaar-Scott & Co. v. Sorum, 90 N. W., 801; La Salle 132 U.S. 475. County v. Simmons, 10 Ill., 513; Harvey & Boyd v. Board of Trustees, 42 Ill., 336; Prickett v. Madison The keeping of an office in a foreign State by a County, 14 Ill. App., 454; Chicago v. Sperbeck, 69 Ill. corporation for the purpose of soliciting business, is not App., 562; Robertson v. Frank Bros. Co., 132 U.S. 17; doing business in such foreign State only. Norfolk & W. Chicago v. Klinkert, 94 Ill. App., 524; City of Chicago v. Ry. Co. v. Pennsylvania, 136 U.S. 114; Texas & P. Ry. Waukesha Brewing Co., 97 Ill. App., 585; Henry v. Co. v. Davis, 93 Tex. 378. Town of Chester, 15 Vt., 460; Chicago & A. R. Co. v. Page 5 52 Tex. Civ. App. 634, *; 115 S.W. 361, **; 1908 Tex. App. LEXIS 434, ***4 What is or is not doing business within a State so that the Tax Cases, 18 Wall., 229; Hoyt v. Sprague, 103 U.S. 630; State may exercise some power of taxation other than the Gloucester Ferry Co. v. Pennsylvania, 114 U.S. 196; ordinary ad valorem tax upon a foreign corporation? Pennsylvania v. Standard Oil Co., 101 Pa. St., 119. Mearcham v. Lumber Co., 187 Pa. St., 12; Wolf Dryer Co. v. Bigler & Co., 192 Pa. St., 466; Coyt v. Sutton, 102 Discriminating taxes are illegal and in violation of the Mich., 324; Talapoosa Lumber Co. v. Holbert, [***5] 5 Constitution of the United States. Ward v. Maryland, 79 N. Y., 559; Maxwell & Co. v. Edens, 65 Mo. App., 439; U.S. [***7] (12 Wall.), 418; Reser v. Umatilla County, Milan M. & N. Co. v. Gorton, 95 Tenn., 590; Davis & 86 Pac., 598; Laundry Cases, 27 Fed., 765; Duckwall v. Rankin Co. v. Dix, 64 Fed., 406; Beard v. American Pub. City of New Albany, 25 Ind., 283; Eden v. People, 161 Co., 71 Ala., 60; Doty v. Michigan C. R. Co., 8 Abb. Pr. Ill., 296; Oliver v. Washington Mills, 93 Mass., 268; Rep., 427; Gunn v. White Sewing Mach. Co., 20 S.W. Cook on Corporations, sec. 572, C and D; Pullman Car 591; Bateman v. Western Star Milling Co., 1 Tex. Civ. Co. v. Pennsylvania, 141 U.S. 18; Gulph & Ship Island App. 90; Lyons & Thomas Hdw. Co. v. Reading Hdw. Railroad Co. v. Hughes, 183 U.S. 67; Postal Telegraph Co., 21 S.W. 300; Zuberbier Co. v. Harris, 35 S.W. 403; Co. v. Adams, 155 U.S. 688-696; Guy v. Baltimore, 100 Havens & Geddes Co. v. Diamond, 93 Ill. App., 557; U.S. 434; Weber v. Virginia, 103 U.S. 344; M'Culloch v. Sullivan v. Sullivan Timber Co., 15 So., 491; State v. State of Maryland, 4 Wheaton, 415; Union Refrigerator Anniston Rolling Mills, 21 So., 921; In re Transit Co. v. Kentucky, 199 U.S. 194; Kehrer v. Schollenberger, 171 U.S. 1. Stewart, 187 U.S. 60. Corporations are persons and are protected by the The tax in question is a property tax. Beach on Private Fourteenth Amendment to the Constitution of the United Corporations, secs. 801, 820; San Fransisco v. Insurance States. Smyth v. Ames, 169 U.S. 466; Santa Clara Co., 74 Cal., 113; Parker v. Insurance Co., 42 La., 429; County v. Southern Pac. Ry. Co., 118 U.S. 394; Taylor on Private Corporations, 479; Commonwealth v. Charlotte, etc., R. Co. v. Gibbes, 142 U.S. 386; Gulf, C. Standard Oil Co., 101 Pa. St., 119; Ellis v. Frazier, 63 & S. F. Ry. Co. v. Ellis, 165 Tex. 150; Clark & Marshall Pac., 642; Reser v. Umatilla County, 86 Pac., 595; on Corporations, 755; Hammond Beef & Provision Co. v. Louisville & N. Ry. Co. v. Wright, 116 Fed., 670; Desty Best, 40 Atl., 338. on Taxation, 199; Cooley on Taxation, 165. The laws of the Twenty-ninth Legislature, being chapters Graduated taxes are illegal. Chapter 19 is in violation of 19 and 72 of the laws of the State of Texas, for the year the Constitution of the State of Texas and special 1905, are in violation of the Fourteenth Amendment of provisions of Section 48, Article 3; and Sections [***8] the Constitution of the [***6] United States. Union 1, 2, and 3, Article 8. Schuster v. City of Louisville, 89 Refrigerator Transit Co. v. Kentucky, 199 U.S. 194; S.W. 589; Cook County v. Fairbank, 222 Ill., 578; Ward v. Maryland, 12 Wall., 418; Cooley on Dalrymple v. City of Milwaukee, 53 Wis., 178; State v. Constitutional Limitations, sec. 16; Brown v. Maryland, Gorman, 40 Minn., 232; Fatjo v. Pfister, 117 Cal., 83; 12 Wheaton, 449; Gibbons v. Ogden, 9 Wheaton, 1; Clark & Marshall on Corporations, page 760, sec. 291. Caldwell v. North Carolina, 187 U.S. 622; Norfolk & W. If the tax imposed by Chapters 19 and 72, General Law R. R. Co. v. Sims, 191 U.S. 441; Wrought Iron Range of 1905, is not a property tax, it is an occupation tax and Co. v. Campen, 47 S. E., 658; Virginia Coupon Cases, invalid because not equal and uniform upon the same 114 U.S. 270; Smyth v. Ames, 169 U.S. 466; In re class of subjects. State v. Galveston, H. & S. A. Ry. Co., Thornton, 12 Fed., 538; Santa Clara County v. Southern 100 Tex. 153; State v. Texas & P. Ry. Co., 100 Tex. 279; Pac. Ry. Co., 118 U.S. 395, 9 Sawyer, 166. Pullman Palace Car Co. v. State, 64 Tex. 274; Hoefling v. A State law which attempts to tax that which is beyond City of San Antonio, 85 Tex. 228. its jurisdiction is void and violates provisions of the Robert Vance Davidson, Attorney-General and Claude Fourteenth Amendment of the Constitution of the United Pollard, Assistant, for appellee. States. Union Transit Co. v. Kentucky, 199 U.S. 202; United States v. Railway Co., 106 N. Y., 334; Wheat., A tax collecting officer is not personally pecuniarily 430; 15 Wall., 281, 300; St. Louis v. Ferry Co., 11 Wall., liable for taxes improperly collected by him, especially so 423; Tappen v. Bank, 19 Wall., 490; Delaware Railway when it is not shown that the money is still in his Page 6 52 Tex. Civ. App. 634, *; 115 S.W. 361, **; 1908 Tex. App. LEXIS 434, ***8 possession. Money voluntarily paid under an property or any right, vested or otherwise. Allen v. unconstitutional assessment of taxes can not be recovered Tyson-Jones Buggy Co., 91 Tex. 22; Miller v. Goodman, of the tax-collecting officer after it has been paid into the 91 Tex. 41; Brin v. Wachusetts Shirt Co., 42 S.W. 295; treasury. Continental Land and Cattle Co. v. Board, 80 Lasater v. Purcell, Mill and Elevator Co., 22 Tex. Civ. Tex. 492; Texas Land & Cattle Co. v. Hemphill County, App. 33; Texas [***11] & Pac. Ry. Co. v. Davis, 93 61 S.W. 333; [***9] Dickens v. Jones, 27 Am. Dec., Tex. 378; Purcell v. Johnston L. & Mort. Co., 44 Am. St. 488; Saunders v. Simmons, 30 Ark., 274. Rep., 29; Wessell v. Johnston L. & Mort. Co., 44 Am. St. Rep., 529; 2 Dillon on Municipal Corporations, 947. The taxes sought to be recovered were voluntarily paid, and, therefore, can not be recovered, even though Chapters 19 and 72, Acts of the Twenty-ninth improperly collected. Houston v. Feser, 76 Tex. 365; Legislature, are not in violation of any provision of the Galveston City Co. v. Galveston, 56 Tex. 494; Galveston Fourteenth Amendment to the Constitution of the United County v. Gorman, 49 Tex. 310; Lamborn v. County States. A foreign corporation is not a "citizen" within the Commissioners, 97 U.S. 181; Railroad Co. v. meaning of the prohibition that the privileges or Commissioners, 98 U.S. 542; Little v. Bowers, 134 U.S. immunities of citizens of the United States shall not be 554; San Francisco N. B. Co. v. Dinwiddie, 13 Fed., 789; abridged. The right of foreign corporations to do business Wessel v. Johnston L. & Mort. Co., 44 Am. St. Rep., within a State is purely ex comitate, and statutory 529; First National Bank v. Mayor, 45 Am. Rep., 476; provisions either limiting such right, or imposing license Peebles v. City of Pittsburg, 47 Am. Rep., 714; McMillan fees as a prerequisite to such right, or decreeing the v. Richards, 9 Calif., 417; Phelps v. New York, 2 L. R. forfeiture of such right for failure to comply with A., 626; Phillips v. Jefferson County, 5 Kan., 412; prescribed regulations, can not be regarded as depriving Abaunsee County v. Walker, 8 Kan., 431; Robbins v. foreign corporations of their property without due process Latham, 36 S.W. 33; Sheldon v. School District, 24 of law. Hall v. Virginia, 8 Wallace, 168; Philadelphia Conn., 88; 2 Cooley on Taxation, 1500; 2 Dillon Fire Assn. v. New York, 119 U.S. 110; Pembina C. S. M. Municipal Corp., 947. & M. Co. v. Pennsylvania, 125 U.S. 181; Hooper v. California, 155 U.S. 648; Orient Insurance Co. v. Daggs, The Acts of the Twenty-ninth Legislature, Chapters 19 172 U.S. 557; Gray on Limitations of Taxing Power, par. and 72, do not impair the obligation of any contract 1098, et seq.; [***12] Murphree on Foreign entered into between the State of Texas and appellant. Corporations, pars. 32-36; Beale on Foreign Constitution of Texas, art. 8, sec. 4; Acts of 25th Corporations, par. 79. Legislature, pp. 140, 168; Acts of 29th Legislature, [***10] Chapters 19 and 72; New Orleans City, etc., R. The tax imposed under the Act of the Twenty-ninth R. Co. v. New Orleans, 143 U.S. 192; Delaware Railroad Legislature is not discriminating. Murphree on Foreign Tax v. P. W. & B. R. R. Co., 18 Wall., 206; Railway Co. Corporations, par. 162. v. Philadelphia, 101 U.S. 528; Citizens Savings Bank v. Owensborough, 173 U.S. 636; Covington v. Kentucky, The tax in question is not a property tax, but is a privilege 173 U.S. 231; Louisville Water Co. v. Clark, 143 U.S. 1; or license tax, and is not in any respect invalid or illegal. Wyandott v. Corrigan, 35 Kan., 21; City of New Orleans Beale on Foreign Corporations, par. 508, and authorities v. Orleans R. R. Co., 21 Am. St. Rep., 365; Gray on cited; Gray on Limitations of the Taxing Power, pars. Limitations of Taxing Power, pars. 1001-5-8; Murphree 54-57. on Foreign Corporations, pars. 34-36. The State's power to impose a license tax, whether If appellant is engaged exclusively in interstate exercised for revenue or for purposes of regulation, is commerce, it is not necessary that it should have a permit co-extensive with the power of the sovereignty to exclude to do business in Texas; but if appellant, with full foreign corporations from its jurisdiction, and is subject knowledge of the facts constituting the character of its only to the limitation that it must not encroach upon the business, voluntarily paid the tax, its suit can not be exclusive power of Congress to regulate interstate maintained. A forfeiture of its permit for failure to pay commerce. Murphree on Foreign Corporations, par. 143; such tax, if its business is exclusively interstate, would Beale on Foreign Corporations, pars. 508, 509, and have imposed no burden upon it nor deprived it of any authorities cited. Page 7 52 Tex. Civ. App. 634, *; 115 S.W. 361, **; 1908 Tex. App. LEXIS 434, ***12 JUDGES: RICE, Associate Justice. illegal, which we deem unnecessary to set out. OPINION BY: RICE A general demurrer to this petition being sustained by the court, appellants excepted and gave notice of OPINION appeal, so that the only question for our consideration is as to the correctness of the judgment of the trial [***15] [*639] [**361] RICE, Associate court sustaining said demurrer. Justice.--Appellant instituted this suit against appellee individually to recover the sum of $ 575, with interest By its third assignment of error appellant insists that thereon, $ 287 of which was alleged to have been paid by the court erred in sustaining the general demurrer to its it to him as Secretary [***13] of State on or about the petition, because it appeared therefrom that the franchise 28th day of April, 1905, and $ 288 of which was paid to laws of the State of Texas were unconstitutional and void, him as Secretary of State on April 30, 1906, which said being in contravention of the Constitution of the United amounts were paid as a franchise tax, claimed to be due States and of this State. By its first proposition thereunder from it to the State by virtue of the Acts of the 29th it is insisted that said acts impair the obligation of the Legislature, pp. 21 and 100, for said years. contract entered into between the State and plaintiff on the 23rd day of May, 1901. The Act of the Legislature The suit was predicated on the contention that said under consideration [HN1] provided for the payment by Acts of the Legislature under which the tax was collected every foreign corporation heretofore authorized or were and are unconstitutional and void. After all formal thereafter [*640] authorized to do business in this State, requisites were stated, the petition alleged, substantially, a certain franchise tax, based upon the authorized capital that the State in 1901, granted it a permit under the then stock of such corporation, providing the time for its existing law to transact business within the State for a payment and prescribing a penalty of twenty-five percent period of ten years, and that it paid the franchise tax then on the amount of the taxes due for failure to pay the imposed for said privilege; that thereafter, in the years same, as well as forfeiture of right to do business in the 1905 and 1906, the Secretary of State, by virtue of the State, and directing the Secretary of State to declare such Acts of the 29th Legislature, heretofore mentioned, forfeiture without judicial ascertainment by entering the demanded and received from appellant the amounts sued same upon a ledger to be kept in his office relating to for as a franchise tax for said years; that said tax was so such corporations. (Sec. 1, [***16] pp. 21, 22, 23, Acts paid by it under written protest, on the ground that said 29th Leg., 1905.) And by an amendment thereto, p. 100, law was unconstitutional and void, but the points relied sec. 1, Acts of 29th Leg., it was further provided that it upon were not set forth in said protest. The petition, should be a misdemeanor on the part of the officers of however, asserts the invalidity of said law chiefly said corporations subject to the payment of such franchise [***14] upon the following grounds, viz.: That having tax, to fail to give under oath accurate information as to been granted a permit under the laws of 1901, for a the amount of its capital stock, when demanded by said period of ten years, and having paid the tax therefor, Secretary of State. There was a somewhat similar [**362] the Legislature had no authority by a subsequent provision in the revised statutes in force in 1901, relative Act to impose an additional tax, and to do so would be to the right of granting permits to foreign corporations to violative of the provision of both the State and Federal do business within this State, but the amount of such tax Constitutions, which forbids any State to pass any law was increased by the Acts of the 29th Legislature. impairing the obligation of contracts. It further alleged that said law imposed a greater burden upon foreign than We do not think that because a permit was granted to upon domestic corporations, and was, therefore, an unjust appellant under a former law the State would be thereby discrimination as against it in favor of domestic precluded from passing any further franchise tax law corporations; that the same was an Indiana corporation, upon the same subject, even though it changed the doing wholly an interstate business, and was, therefore, conditions and imposed a greater tax than the former law. not subject to the payment of the franchise tax and was At the time that said permit was first granted our statute not required to obtain a permit, and to demand the same (art. 650) expressly provided that [HN2] "all charters or would be in violation of law. There were other allegations amendments to charters under the provisions of this under which it is claimed that said franchise tax was chapter shall be subject to the power of the Legislature to Page 8 52 Tex. Civ. App. 634, *640; 115 S.W. 361, **362; 1908 Tex. App. LEXIS 434, ***16 alter, reform or amend the same." And while this Act invalid or illegal. might be regarded [***17] as applicable alone to domestic corporations, there seems to be no good reason [HN5] It is well settled that a State has the absolute why this should not be held to be the law in the absence right to exclude or permit foreign corporations from of such a statute, because it has been held that unless the doing business within its boundaries, and that it is an act grant of a franchise to a foreign corporation expressly of comity or grace on its part to permit their coming in at exempted it from license taxation, the imposition of such all, and it has the right to impose such conditions as it tax is not invalid, and does not impair the obligation of may see proper in granting said permission. In Beale on any contract, and that no corporation could claim an Foreign Corporations, sec. 508, it is said: "The granting immunity from taxation or from license because it paid a of such right or privilege rests entirely within the consideration for its charter or franchise, in the absence discretion of the State; and, of course, when granted may of a stipulation on the part of the State or other taxing be accompanied with such conditions as its Legislature power that the bonus was received in lieu of any further may judge most befitting to its interest and policy. It may or future taxation. [HN3] Even a provision in a charter require, as a condition of the granting of the privilege and fixing a specified sum to be paid as taxes, but not also of its continued exercise, that the corporation pay a providing that such sum shall be in lieu of other taxes, is specified sum to the State each year or month, or a not a contract that no greater tax shall be laid. (New specified portion of its gross receipts or of the profits of Orleans City R. R. Co. v. New Orleans, 143 U.S. 192; its business, or a sum to be ascertained in any convenient Delaware R. R. Tax, 18 Wall. 206; Union P. Ry. Co. v. mode which it may prescribe. The validity of the tax can Philadelphia, 101 U.S. 528; Citizens' Savings Bank v. in no [***20] way be dependent upon the mode which Owensboro, 173 U.S. 636; Covington v. Kentucky, 173 the State may deem fit to adopt in fixing the amount for U.S. 231; Louisville Water Co. v. Clark, 143 U.S. 1; any year which it will exact for the franchise. No Wyandotte v. Corrigan, 35 Kan. 21; Gray on Limitations constitutional objection lies in the way of a legislative of Taxing [***18] Power, pars. 1001-5-8; Murphree on body prescribing any mode of measurement to determine Foreign Corporations, pars. 34-36.) Besides this, [HN4] the amount it will charge for the privileges it bestows." our State Constitution provides "that the power to tax It is further said in the same section: "This tax is not corporations and corporate property shall not be a property tax, even when it is measured by the amount of surrendered or suspended by Act of the Legislature by property of a corporation. Therefore, to levy such a tax in any contract or grant to which the State shall be a party" addition to a property tax is not double taxation, and the (Art. 8, sec. 4), which was in force when appellant tax is not subject to a constitutional requirement that secured its permit. We therefore hold that, taxes shall be uniform." notwithstanding a former permit had been granted, the inherent power remained in the State to change or amend The same author, section 509, continuing says: the law at any time thereafter, even to the extent of [HN6] "A State may, as has been seen, tax any privilege levying [*641] an additional burden for the permission it grants. Such a tax, or rather license fee, is the payment granted to foreign corporations to do business within the exacted of a foreign corporation for the privilege of doing State; and that such change of the law would not be in business within the State. Since a foreign corporation violation of the Constitution prohibiting the passage of may be allowed to do business in a State upon conditions, any Act impairing the obligation of contracts. the payment of a sum of money may be made a condition; and this may in form be the payment of a tax By its eleventh proposition under this assignment greater than or different from that paid by a domestic appellant urges that the tax in question was a property corporation. Such a tax is valid. It is not properly an tax; and by its twelfth, that fees paid to the Secretary of exercise of the power to tax [***21] property, but is a [**363] State for obtaining a permit for incorporation are license fee paid for the privilege of entering the State, and not taxes; and by its thirteenth, that graduated taxes are its validity is a necessary deduction from the right illegal, and therefore, that the Acts of the Legislature absolutely to exclude the foreign corporation." See also under consideration [***19] are in violation of the Gray on Limitations of Taxing Powers, pars. 4 to 57; Constitution of the State. Appellee, on the other hand, Home Ins. Co. v. New York, 134 U.S. 594. insists that the tax in question is not a property tax, but is a privilege or license tax, and is, therefore, in no respect [*642] [HN7] Taxes imposed on a foreign Page 9 52 Tex. Civ. App. 634, *642; 115 S.W. 361, **363; 1908 Tex. App. LEXIS 434, ***21 corporation as a condition of doing business generally in the payment involuntary." So that in the present case it the State, not connected with the grant of any special can not be urged that the demand on the part of the privilege, is a license or privilege tax, and not a property officer that appellant should pay the tax for doing tax, although the amount of it may be determined by the business within the State was an unlawful demand, capital stock of the corporation. A foreign corporation because he clearly had the right to make such demand. can only come into the State and do business there by the The demand was not made for the payment of a tax for consent of the State, and the charge imposed by the State doing an interstate business, but for doing [**364] as the condition of that consent is not a tax on property. business within the State. This objection, that it was not (Horn Silver Mining Co. v. New York, 143 U.S. 305; in fact doing business within the State, was not then Murphree on Foreign Corporations, par. 143.) urged, and seems not to have been within the contemplation either of the Secretary of State or of We think the quotations from the foregoing appellant at the [***24] time of the demand for and the authorities amply establish the principle that the State has payment of the money. If appellant was doing an the authority to impose a franchise tax, and that the same interstate business, as pleaded and contended for by it, is constitutional. We therefore overrule this assignment. then a forfeiture of its [*643] permit could in no wise affect it, because its right to do an interstate business But it is insisted by appellant under another without first obtaining a permit is unquestioned. (Allen v. assignment that since it appears from the allegations Tyson-Jones Buggy Co., 91 Tex. 22; Miller v. Goodman, [***22] of its petition that it was doing an interstate 91 Tex. 41; Lasater v. Purcell Mill & Elevator Co., 22 business, therefore, it was not subject to the franchise tax Tex. Civ. App. 33; Texas & Pac. Ry. Co. v. Davis, 93 demanded of it, and hence the tax having been paid by it Tex. 378.) So that the payment of the franchise tax in under protest, that it should be held to have the right to response to the demand by the Secretary of State was, in recover the same. In reply to this it might be said that the our judgment, a voluntary payment on the part of permit granted it was for the purpose of allowing it to do appellant, with a full knowledge of the facts. It was not business within the State, and that it was no fault on the made under compulsion or duress, so that even if it were part of the State that it failed to conduct a business held to have been unlawfully imposed and exacted, which therein in accordance with its permit. And the fact that it in our judgment was not the case, it is not recoverable. paid a franchise tax for this purpose could not affect the (Houston v. Feeser, 76 Tex. 365; Galveston City Co. v. question if said franchise tax was legal, which we hold to Galveston, 56 Tex. 486; Galveston Co. v. Gorham, 49 be the case. The ground of the protest in this instance was Tex. 279; Lamborn v. County Commissioners, 97 U.S. not that the tax was illegal because of the fact that 181; Union Pac. Railroad Co. v. Commissioners, 98 U.S. appellant was doing an interstate business, but for the 541; Little v. Bowers, 134 U.S. 547; San Francisco N. R. reason alone, as stated in its protest, that the law itself Co. v. Dinwiddie, 13 F. 789; Wessel v. Johnston Land & imposing this franchise tax was unconstitutional and Mortgage [***25] Co., 44 Am. St. Rep. 529; First Natl. void. It therefore follows that if the law imposing the Bank v. Mayor, 45 Am. Rep. 476; Peebles v. City of franchise tax is legal, that appellant is in no position to Pittsburgh, 47 Am. Rep. 714; McMillan v. Richards, 9 complain on this score; but it is insisted by appellee that Cal. 365; Phelps v. New York, 2 L.R.A. 626; Phillips v. the taxes sought to be collected were voluntarily paid, Jefferson County, 5 Kan. 412; Wabaunsee, County v. and therefore can not be recovered, even though [***23] Walker, 8 Kan. 431; Robins v. Latham, 36 S.W. 33; illegally exacted. The rule on this subject seems to be Sheldon v. South School District, 24 Conn. 88; Cooley clearly stated in Dillon on Municipal Corporations, vol. on Taxation, vol. 2, p. 1500, Dillon on Municipal Corp., 2, p. 947, as follows: [HN8] "Where a party pays an vol. 2. p. 947.) illegal demand with the full knowledge of all the facts which render such demand illegal, without an immediate Again, it is urged that the tax imposed discriminated and urgent necessity therefor, or unless to release his in favor of domestic corporations as against foreign. It person or property from detention, or to prevent an will be observed that the tax is imposed alike upon all immediate seizure of his person or property, such foreign corporations. (Acts 29th Leg., Chaps. 19 and 72.) payment must be deemed to be voluntary, and can not be In Murphree on Foreign Corporations, par. 162, where recovered back; and the fact that the party at the time of other authorities on the same subject are collated, it is making the payment files a written protest does not make said: [HN9] "A tax imposed upon foreign companies, but Page 10 52 Tex. Civ. App. 634, *643; 115 S.W. 361, **364; 1908 Tex. App. LEXIS 434, ***25 which does not apply to domestic corporations, is not for the demurrer was for this reason also properly sustained; that reason obnoxious to the provisions of most of the but the decision, of course, is not predicated upon this State Constitutions requiring taxes to be equal and conclusion. In the case of Hardesty v. Fleming, 57 Tex. uniform. Since the effect of such legislation is simply to 395, it was [***27] held that a suit might be brought classify corporations and to impose certain taxes upon the against [*644] a tax collector to recover taxes illegally class of foreign companies; and the classification being collected, if paid under protest, provided suit was brought based upon legitimate distinctions, and the burden before the money was paid over by the collecting officer; [***26] being equal within the class, there can be no but in the case of Continental Land & Cattle Co. v. question as to the validity of the tax. Nor could the Board, it is said: [HN10] "A better rule is that the provision as to equality and uniformity be applied to collecting officer is exempt from liability to the tax payer, license taxes, for they are, in their very nature, the subject who should seek relief from the State, county, or of governmental discretion." The tax so imposed being municipality on whose account the tax was collected." equal and alike upon all foreign corporations within the See also on the same subject, Texas Land & Cattle Co. v. same class, we therefore think can not be assailed merely Hemphill, 61 S.W. 333, where the same rule is upon the ground that a less tax is imposed upon domestic announced. corporations; the effect of the Act being simply to classify corporations and impose a like tax upon all The remaining assignments of error, in our judgment, within the same class, which under the law, it seems the are not well taken, and, without discussing them in detail, State has the clear right to do. We therefore overrule this the same are overruled. contention. Believing that no error has been shown, the judgment It will be noticed that the petition in this case fails to of the trial court is affirmed. allege that appellee had the money so collected from Affirmed. appellant in his possession at the time the suit was instituted. This being true, it is the opinion of the writer, Writ of error refused. however not concurred in by the majority of the court, that the petition was insufficient on this ground, and that Page 1 THE GILLETTE COMPANY et al., Plaintiffs and Appellants, v. FRANCHISE TAX BOARD, Defendant and Respondent. [And five other cases.*] A130803 COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT, DIVISION FOUR 207 Cal. App. 4th 1369; 144 Cal. Rptr. 3d 555; 2012 Cal. App. LEXIS 833 July 24, 2012, Opinion Filed NOTICE: sought review of a judgment from the Superior Court of the City and County of San Francisco (California), which NOT CITABLE--SUPERSEDED BY GRANT OF sustained respondent Franchise Tax Board's demurrer REHEARING without leave to amend and dismissed the taxpayers' action for a refund of corporate income taxes paid SUBSEQUENT HISTORY: Rehearing granted, pursuant to Rev. & Tax. Code, § 19382. Depublished by Gillette Co. v. Franchise Tax Bd., 2012 Cal. App. LEXIS 970 (Cal. App. 1st Dist., Aug. 9, 2012) OVERVIEW: The taxpayers asserted that the Multistate Subsequent opinion on rehearing at, Substituted opinion Tax Compact gave them the option under Rev. & Tax. at The Gillette Co. v. Franchise Tax Bd., 2012 Cal. App. Code, § 38006, art. III, subd. 1, to elect its apportionment LEXIS 1030 (Cal. App. 1st Dist., Oct. 2, 2012) formula. The court observed that interstate compacts were both statutory law and binding contracts between PRIOR HISTORY: [***1] member states, which superseded conflicting state law. The withdrawal provision in § 38006, art. X, subd. 2, did * The Procter & Gamble Manufacturing Co. v. not render the compact less than a binding agreement. Franchise Tax Bd. (No. CGC-10-495912); California could not unilaterally amend the compact by Kimberly-Clark Worldwide, Inc. v. Franchise Tax mandating the use of the double-weighted sales Bd. (No. CGC-10-495916); Sigma-Aldrich, Inc. v. apportionment formula in Rev. & Tax. Code, § 25128, Franchise Tax Bd. (No. CGC-10-496437); RB subd. (a). The compact expressly required that taxpayers Holdings (USA) Inc. v. Franchise Tax Bd. (No. be allowed to elect its apportionment formula. Depriving CGC-10-496438); Jones Apparel Group, Inc. v. the taxpayers of that option would violate the Franchise Tax Bd. (No. CGC-10-499083). constitutional prohibition in U.S. Const., art. I, § 10, cl. 1, Superior Court of San Francisco City and County, No. and Cal. Const., art. I, § 9, against impairing the CGC-10-495911, Richard A. Kramer, Judge. obligation of contracts and also would violate the reenactment rule of Cal. Const., art. IV, § 9, because CASE SUMMARY: there had been no amendment and reenactment of the option. Course of performance evidence as to other states' amendments was irrelevant. There was no surrender or PROCEDURAL POSTURE: Appellant taxpayers suspension of taxing powers under Cal. Const. art. XIII, § Page 2 207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **; 2012 Cal. App. LEXIS 833, ***1 31. Constitutional Law > Congressional Duties & Powers > Contracts Clause > Coverage OUTCOME: The court reversed the judgment of Governments > Legislation > Effect & Operation > dismissal. Amendments Governments > Legislation > Types of Statutes CORE TERMS: compact, interstate compacts, [HN3] As is true of other contracts, the contract clause of multistate, withdrawal, formula, apportionment, the United States Constitution shields compacts from signatory, binding, apportionment formula, uniformity, impairment by the states. Therefore, upon entering a repeal, repealing, election, enacting, taxation, interstate, compact, it takes precedence over the subsequent statutes withdraw, apportion, refund, elect", business income, of signatory states and, as such, a state may not amend, unilaterally, enforceable, payroll, taxing, state unilaterally nullify, revoke or amend one of its compacts law, reenactment, mandatory, subject matter if the compact does not so provide. Thus interstate compacts are unique in that they empower one state LexisNexis(R) Headnotes legislature--namely the one that enacted the agreement--to bind all future legislatures to certain principles governing the subject matter of the compact. Upon entering into an interstate compact, a state Governments > Legislation > Types of Statutes effectively surrenders a portion of its sovereignty; the Governments > State & Territorial Governments > compact governs the relations of the parties with respect General Overview to the subject matter of the agreement and is superior to [HN1] Interstate compacts are legislatively enacted, both prior and subsequent law. Further, when enacted, a binding and enforceable agreements between two or more compact constitutes not only law, but a contract which states. Some interstate compacts require congressional may not be amended, modified, or otherwise altered consent, but others, that do not infringe on the federal without the consent of all parties. One party may not sphere, do not. The case law has set forth three primary enact legislation which would impose burdens upon the indicia: establishment of a joint organization for compact absent the concurrence of the other signatories. regulatory purposes; conditional consent by member Nor may states amend a compact by enacting legislation states in which each state is not free to modify or repeal that is substantially similar, unless the compact itself its participation unilaterally; and state enactments which contains language enabling a state or states to modify it require reciprocal action for their effectiveness. through legislation concurred in by the other states. Contracts Law > Contract Interpretation > General Civil Procedure > Justiciability > Standing > General Overview Overview Governments > Legislation > Interpretation Tax Law > State & Local Taxes > Administration & Governments > Legislation > Types of Statutes Proceedings > Credits, Overassessments & Refunds [HN2] Where federal congressional consent was neither Tax Law > State & Local Taxes > Income Tax > given nor required, an interstate compact must be Corporations & Unincorporated Associations > General construed as state law. Moreover, since interstate Overview compacts are agreements enacted into state law, they [HN4] In an action for the refund of corporate taxes paid have dual functions as enforceable contracts between to the state pursuant to Rev. & Tax. Code, § 19382, the member states and as statutes with legal standing within taxpayers have standing to claim that the tax computed each state; and thus courts interpret them as both. The and assessed is void in whole or in part. contractual nature of a compact is demonstrated by its adoption: There is an offer (a proposal to enact virtually Civil Procedure > Justiciability > Standing > General verbatim statutes by each member state), an acceptance Overview (enactment of the statutes by the member states), and Tax Law > State & Local Taxes > Administration & consideration (the settlement of a dispute, creation of an Proceedings > Credits, Overassessments & Refunds association, or some mechanism to address an issue of Tax Law > State & Local Taxes > Income Tax > mutual interest). Corporations & Unincorporated Associations > Page 3 207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **; 2012 Cal. App. LEXIS 833, ***1 Imposition of Tax some type of notice requirement. [HN5] The Multistate Tax Compact, at Rev. & Tax. Code, § 38006, art. III, subd. 1, explicitly gives taxpayers Governments > State & Territorial Governments > whose income is subject to apportionment and allocation Finance under the laws of a party state the option to elect to [HN8] See Cal. Const. art. XIII, § 31. apportion its taxes under the Uniform Division of Income for Tax Purposes Act, Rev. & Tax. Code, § 25120 et seq., the compact formula. This is a right specifically extended Governments > State & Territorial Governments > not to the party states but to taxpayers as third parties Finance regulated under the compact, and as such taxpayers may Tax Law > State & Local Taxes > Income Tax > seek to enforce this right as part of a tax refund suit. Corporations & Unincorporated Associations > Moreover, the stated purposes of the compact explicitly Imposition of Tax embrace taxpayer interests. These purposes include [HN9] By entering the Multistate Tax Compact, facilitating (1) proper determination of state and local tax California has neither surrendered nor suspended its liability of multistate taxpayers, including the equitable taxing powers. apportionment of tax bases; and (2) taxpayer convenience. § 38006, art. I, subds. 1, 3. Governments > Legislation > Effect & Operation > Amendments Governments > Legislation > Statutory Remedies & Governments > Legislation > Types of Statutes Rights [HN10] By its very nature an interstate compact shifts [HN6] Compacts are statutory law. Consequently, the some of a state's authority to another state or states. Thus assertion of private rights created or otherwise affected signatory states cede a level of sovereignty over matters by an interstate compact is procedurally similar to the covered in the compact in favor of pursuing multilateral assertion of such rights conferred by other statutes of the action to resolve a dispute or regulate an interstate affair. jurisdiction dealing with similar subject matter. Because the compact is both a statute and a binding agreement among sovereign signatory states, having entered into it, California cannot, by subsequent Governments > Legislation > Expirations, Repeals & legislation, unilaterally alter or amend its terms. Indeed, Suspensions an interstate compact is superior to prior and subsequent Tax Law > State & Local Taxes > Income Tax > statutory law of member states. Corporations & Unincorporated Associations > Imposition of Tax [HN7] The Multistate Tax Compact provides for a state's Contracts Law > Contract Interpretation > General orderly withdrawal, namely by enacting a statute Overview repealing the compact. However, any repealing Governments > Legislation > Interpretation legislation must be prospective in nature, because it Governments > Legislation > Types of Statutes cannot affect any liability already incurred by or [HN11] In part because compacts are agreements among chargeable to a party state prior to the time of such sovereign states, courts will not read absent terms into withdrawal. Rev. & Tax. Code, § 38006, art. X, subd. 2. them or dictate relief inconsistent with their express Although notice to sister states is not specifically terms. required, by requiring repealing state legislation, the process itself calls for a measured, deliberative decision prior to withdrawal. Nevertheless, the right to withdraw is Governments > Legislation > Expirations, Repeals & unilateral. The withdrawal provision does not render the Suspensions compact something less than a binding agreement. This Tax Law > State & Local Taxes > Income Tax > type of withdrawal provision is common in other Corporations & Unincorporated Associations > interstate compacts and has not been the death knell Imposition of Tax rendering them nonbinding and invalid. California is a [HN12] The plain language of the withdrawal provision party to a number of interstate compacts containing in the Multistate Tax Compact, enabling a party state to virtually identical withdrawal provisions, coupled with withdraw from the compact by enacting a statute Page 4 207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **; 2012 Cal. App. LEXIS 833, ***1 repealing the same, allows only for complete withdrawal turns monitors the first party's compliance with contract from the compact. California has not withdrawn from the terms. Thus the foundation for finding course of compact. After withdrawal, a state remains liable for any performance evidence relevant and reliable is faulty. obligations incurred prior to withdrawal. Faced with the desire to escape an obligation under the compact, a state's Constitutional Law > Congressional Duties & Powers > only option is to withdraw completely by enacting a Contracts Clause > General Overview repealing statute. That is what the plain language says, [HN16] See U.S. Const., art. I, § 10, cl. 1. and a court cannot read into that language an inconsistent term allowing for piecemeal amendment or elimination of compact provisions. Constitutional Law > Congressional Duties & Powers > Contracts Clause > General Overview [HN17] See Cal. Const., art. I, § 9. Tax Law > State & Local Taxes > Income Tax > Corporations & Unincorporated Associations > Imposition of Tax Constitutional Law > Congressional Duties & Powers > [HN13] The express, unambiguous terms of the Contracts Clause > Coverage Multistate Tax Compact require extending taxpayers the [HN18] The constitutional prohibition against impairing option of electing the Uniform Division of Income for the obligation of contracts extends to interstate compacts. Tax Purposes Act, Rev. & Tax. Code, § 25120 et seq., and set forth reciprocal repeal terms allowing a member state to cease its participation and reclaim its sovereignty. Governments > Legislation > Effect & Operation > A contrary interpretation would run counter to the Amendments express purposes of the compact, which include [HN19] See Cal. Const., art. IV, § 9. facilitating equitable apportionment of tax bases and promoting uniformity or compatibility in significant Governments > Legislation > Effect & Operation > components of tax systems. Rev. & Tax. Code, § 38006, Amendments art. I, subds. 1, 2. [HN20] The reenactment rule of Cal. Const., art. IV, § 9, applies to acts which are in terms amendatory of some Contracts Law > Contract Interpretation > Parol former act. Its applicability does not depend on the Evidence > Course of Dealing method of amendment, but rather on whether legislators [HN14] The course of performance of a contract is only and the public have been reasonably notified of direct relevant to ascertaining the parties' intention at the time changes in the law. of contracting. Civ. Code, § 1636. SUMMARY: Contracts Law > Contract Interpretation > Parol CALIFORNIA OFFICIAL REPORTS SUMMARY Evidence > Course of Dealing Tax Law > State & Local Taxes > Income Tax > The trial court sustained the Franchise Tax Board's Corporations & Unincorporated Associations > demurrer without leave to amend and dismissed an action Imposition of Tax for a refund of corporate income taxes (Rev. & Tax. [HN15] When the parties perform under a contract, Code, § 19382). The taxpayers asserted that the without objection or dispute, they are fulfilling their Multistate Tax Compact gave them the option (Rev. & understanding of the terms of the contract. The course of Tax. Code, § 38006, art. III, subd. 1) to elect the performance doctrine is thus premised on the assumption compact's apportionment formula. (Superior Court of the that one party's response to another party's action is City and County of San Francisco, No. CGC-10-495911, probative of their understanding of the contract terms. Richard A. Kramer, Judge.) But in the context of the Multistate Tax Compact, the The Court of Appeal reversed the judgment of member states do not perform or deliver their obligations dismissal. The court observed that interstate compacts are to one another, unlike a typical contract in which a party both statutory law and binding contracts between member provides services or goods to the other party, who in Page 5 207 Cal. App. 4th 1369, *; 144 Cal. Rptr. 3d 555, **; 2012 Cal. App. LEXIS 833, ***1 states, which supersede conflicting state law. The offer (a proposal to enact virtually verbatim statutes by withdrawal provision (§ 38006, art. X, subd. 2) does not each member state), an acceptance (enactment of the render the compact less than a binding agreement. statutes by the member states), and consideration (the California could not unilaterally amend the compact by settlement of a dispute, creation of an association, or mandating the use of the double-weighted sales some mechanism to address an issue of mutual interest). apportionment formula (Rev. & Tax. Code, § 25128, subd. (a)). The compact expressly requires that taxpayers (3) Constitutional Law § 72--Impairment of be allowed to elect its apportionment formula. Depriving Contract--Interstate Compacts.--As is true of other the taxpayers of that option would violate the contracts, the contract clause of the United States constitutional prohibition against impairing the obligation Constitution shields compacts from impairment by the of contracts (U.S. Const., art. I, § 10, cl. 1; Cal. Const., states. Therefore, upon entering a compact, it takes art. I, § 9) and also would violate the reenactment rule precedence over the subsequent statutes of signatory (Cal. Const., art. IV, § 9) because there had been no states and, as such, a state may not unilaterally nullify, amendment and reenactment of the option. Course of revoke or amend one of its compacts if the compact does performance evidence as to other states' amendments was not so provide. Thus interstate compacts are unique in irrelevant. There was no surrender or suspension of that they empower one state legislature--namely the one taxing powers (Cal. Const. art. XIII, § 31). (Opinion by that enacted the agreement--to bind all future legislatures Reardon, J., with Ruvolo, P. J., and Sepulveda, J.,+ to certain principles governing the subject matter of the concurring.) [*1370] compact. Upon entering into an interstate compact, a state effectively surrenders a portion of its sovereignty; the + Retired Associate Justice of the Court of compact governs the relations of the parties with respect Appeal, First Appellate District, assigned by the to the subject matter of the agreement and is superior to Chief Justice pursuant to article VI, section 6 of both prior and subsequent law. Further, when enacted, a the California Constitution. compact constitutes not only law, but a contract which may not be amended, modified, or otherwise altered HEADNOTES without the consent of all parties. One party may not enact legislation which would impose burdens upon the CALIFORNIA OFFICIAL REPORTS HEADNOTES compact absent the concurrence of the other signatories. Nor may states amend a compact by enacting legislation (1) State of California § 6--Contracts--Interstate that is [*1371] substantially similar, unless the compact Compacts.--Interstate compacts are legislatively enacted, itself contains language enabling a state or states to binding and enforceable agreements between two or more modify it through legislation concurred in by the other states. Some interstate compacts require congressional states. consent, but others, that do not infringe on the federal sphere, do not. The case law has set forth three primary (4) Taxpayers' Remedies § indicia: establishment of a joint organization for 11--Proceedings--Corporate Tax Refund regulatory purposes; conditional consent by member Action--Standing.--In an action for the refund of states in which each state is not free to modify or repeal corporate taxes paid to the state pursuant to Rev. & Tax. its participation unilaterally; and state enactments which Code, § 19382, the taxpayers have standing to claim that require reciprocal action for their effectiveness. the tax computed and assessed is void in whole or in part. (2) State of California § 6--Contracts--Interstate (5) Corporations § 59--Taxation--Apportionment of Compacts--Interpretation.--Where federal Unitary Business--Multistate Tax Compact--Option to congressional consent was neither given nor required, an Elect Formula.--The Multistate Tax Compact explicitly interstate compact must be construed as state law. gives taxpayers whose income is subject to Moreover, since interstate compacts are agreements apportionment and allocation under the laws of a party enacted into state law, they have dual functions as state the option (Rev. & Tax. Code, § 38006, art. III, enforceable contracts between member states and as subd. 1) to elect to apportion its taxes under the Uniform statutes with legal standing within each state; and thus Division of Income for Tax Purposes Act (Rev. & Tax. courts interpret them as both. The contractual nature of a Code, § 25120 et seq.), the compact formula. This is a compact is demonstrated by its adoption: There is an Page 6 207 Cal. App. 4th 1369, *1371; 144 Cal. Rptr. 3d 555, **; 2012 Cal. App. LEXIS 833, ***1 right specifically extended not to the party states but to Code, § 25128, had repealed the Rev. & Tax. Code, § taxpayers as third parties regulated under the compact, 38006, taxpayer election to apportion under the and as such taxpayers may seek to enforce this right as Multistate Tax Compact formula, mandating the part of a tax refund suit. Moreover, the stated purposes of exclusive use of the double-weighted sales apportionment the compact explicitly embrace taxpayer interests. These formula. However, § 38006 is not just a statute but is also purposes include facilitating (1) proper determination of the codification of the compact, and through this state and local tax liability of multistate taxpayers, enactment California has entered a binding, enforceable including the equitable apportionment of tax bases; and agreement with the other signatory states. Multiple flaws (2) taxpayer convenience (§ 38006, art. I, subds. 1, 3). in the FTB's position were apparent. First, under established compact law, the Multistate Tax Compact (6) Statutes § 4--Operation and Effect--Interstate supersedes subsequent conflicting state law. Second, the Compacts--Assertion of Private Rights.--Compacts are federal and state Constitutions prohibit states from statutory law. Consequently, the assertion of private passing laws that impair the obligations of contracts. And rights created or otherwise affected by an interstate finally, the FTB's construction of the effect of the compact is procedurally similar to the assertion of such amended § 25128 ran afoul of the reenactment clause of rights conferred by other statutes of the jurisdiction the California Constitution. dealing with similar subject matter. [Cal. Forms of Pleading and Practice (2012) ch. 540, (7) Corporations § 59--Taxation--Apportionment of Taxes and Assessments, § 540.340.] Unitary Business--Multistate Tax Compact--Withdrawal Provision.--The Multistate Tax (10) State of California § 6--Contracts--Interstate Compact provides for a state's orderly withdrawal, Compacts--Unilateral Amendment namely by enacting a statute repealing the compact. Impermissible.--By its very nature an interstate compact However, any repealing legislation must be prospective shifts some of a state's authority to another state or states. in nature, because it cannot affect any liability already Thus signatory states cede a level of sovereignty over incurred by or chargeable to a party state prior to the time matters covered in the compact in favor of pursuing of such withdrawal (Rev. & Tax. Code, § 38006, art. X, multilateral action to resolve a dispute or regulate an subd. 2). Although notice to sister states is not interstate affair. Because the compact is both a statute and specifically required, by requiring repealing state a binding agreement among sovereign signatory states, legislation, the process itself calls for a measured, having entered into it, California cannot, by subsequent deliberative decision prior to withdrawal. Nevertheless, legislation, unilaterally alter or amend its terms. Indeed, the right to withdraw is unilateral. The withdrawal an interstate compact is superior to prior and subsequent provision does not render the compact something less statutory law of member states. than a binding agreement. This type of withdrawal provision is [*1372] common in other interstate (11) State of California § 6--Contracts--Interstate compacts and has not been the death knell rendering them Compacts--Interpretation.--In part because compacts nonbinding and invalid. California is a party to a number are agreements among sovereign states, courts will not of interstate compacts containing virtually identical read absent terms into them or dictate relief inconsistent withdrawal provisions, coupled with some type of notice with their express terms. [*1373] requirement. (12) Corporations § 59--Taxation--Apportionment of (8) Taxation § 4--Governmental Powers--Prohibition Unitary Business--Multistate Tax Against Surrender or Suspension--Multistate Tax Compact--Withdrawal Provision--Partial Withdrawal Compact.--By entering the Multistate Tax Compact, Not Authorized.--The plain language of the withdrawal California has neither surrendered nor suspended its provision in the Multistate Tax Compact, enabling a party taxing powers. state to withdraw from the compact by enacting a statute repealing the same, allows only for complete withdrawal (9) Corporations § 59--Taxation--Apportionment of from the compact. California has not withdrawn from the Unitary Business--Multistate Tax Compact--Option to compact. After withdrawal, a state remains liable for any Elect Formula--Unaffected by Other Law.--The obligations incurred prior to withdrawal. Faced with the Franchise Tax Board (FTB) asserted that Rev. & Tax. desire to escape an obligation under the compact, a state's Page 7 207 Cal. App. 4th 1369, *1373; 144 Cal. Rptr. 3d 555, **; 2012 Cal. App. LEXIS 833, ***1 only option is to withdraw completely by enacting a applies to acts which are in terms amendatory of some repealing statute. That is what the plain language says, former act. Its applicability does not depend on the and a court cannot read into that language an inconsistent method of amendment, but rather on whether legislators term allowing for piecemeal amendment or elimination of and the public have been reasonably notified of direct compact provisions. changes in the law. (13) Corporations § 59--Taxation--Apportionment of COUNSEL: Silverstein & Pomerantz, Amy L. Unitary Business--Multistate Tax Compact--Option to Silverstein, Edwin P. Antolin, Johanna W. Roberts and Elect Formula--Mandatory Nature.--The express, Charles E. Olson for Plaintiffs and Appellants. unambiguous terms of the Multistate Tax Compact require extending taxpayers the option of electing the BraunHagey & Borden, Matthew Borden; and Jeffrey B. Uniform Division of Income for Tax Purposes Act (Rev. Litwak as Amici Curiae on behalf of Plaintiffs and & Tax. Code, § 25120 et seq.) and set forth reciprocal Appellants. repeal terms allowing a member state to cease its participation and reclaim its sovereignty. A contrary Wm. Gregory Turner for Council on State Taxation as interpretation would run counter to the express purposes Amicus Curiae on behalf of Plaintiffs and Appellants. of the compact, which include facilitating equitable Law Offices of Miriam Hiser, Miriam Hiser; Masters, apportionment of tax bases and promoting uniformity or Mullins & Arrington and Richard L. Masters for compatibility in significant components of tax systems Interstate Commission for Juveniles as Amicus Curiae on (Rev. & Tax. Code, § 38006, art. I, subds. 1, 2). behalf of Plaintiffs and Appellants. (14) Contracts § 27--Construction and Kamala D. Harris, Attorney General, Paul D. Gifford, Interpretation--Evidence to Aid--Course of Assistant Attorney General, Joyce E. Hee and Lucy F. Performance.--The course of performance of a contract Wang, Deputy Attorneys General, for Defendant and is only relevant to ascertaining the parties' intention at the Respondent. time of contracting (Civ. Code, § 1636). Joe Huddleston, Shirley Sicilian and Sheldon Laskin for (15) Corporations § 59--Taxation--Apportionment of Multistate Tax Commission as Amicus Curiae on behalf Unitary Business--Multistate Tax Compact--Course of of Defendant and Respondent. Performance Evidence Irrelevant.--When the parties perform under a contract, without objection or dispute, JUDGES: Opinion by Reardon, J., with Ruvolo, P. J., they are fulfilling their understanding of the terms of the and Sepulveda, J.,* concurring. contract. The course of performance doctrine is thus premised on the assumption that one party's response to * Retired Associate Justice of the Court of another party's action is probative of their understanding Appeal, First Appellate District, assigned by the of the contract terms. But in the context of the Multistate Chief Justice pursuant to article VI, section 6 of Tax Compact, the member states do not perform or the California Constitution. deliver their obligations to one another, unlike a typical contract in which a party provides services or goods to OPINION BY: Reardon the other party, who in turns monitors the first party's compliance with contract terms. Thus the foundation for OPINION finding course of performance evidence relevant and [**558] reliable is faulty. [*1374] REARDON, J.--California is a signatory to the (16) Constitutional Law § 72--Impairment of Multistate Tax Compact (Compact). (Rev. & Tax. Code,1 Contract--Interstate Compacts.--The constitutional § 38001, California's enactment of the Compact.) This prohibition against impairing the obligation of contracts [***2] binding, multistate agreement obligates member extends to interstate compacts. states to offer its multistate taxpayers the option of using either the Compact's three-factor formula to apportion (17) Statutes § 13--Amendment--Reenactment and allocate income for state income tax purposes, or the Rule.--The reenactment rule (Cal. Const., art. IV, § 9) Page 8 207 Cal. App. 4th 1369, *1374; 144 Cal. Rptr. 3d 555, **558; 2012 Cal. App. LEXIS 833, ***2 state's own alternative apportionment formula. (§ 38006, amend.4 art. [*1375] III, subd. 1.) This is one of the Compact's key mandatory provisions designed to secure a baseline 3 Other appellants are Procter & Gamble level of uniformity in state income tax systems, a central Manufacturing Company; Kimberly-Clark purpose of the agreement. Worldwide, Inc., and its subsidiaries; Sigma-Aldrich, Inc.; RB Holdings (USA) Inc., 1 Unless noted otherwise, all statutory references and Jones Apparel Group, Inc. are to the Revenue and Taxation Code. 4 Despite the absence of a judgment of dismissal, we deem the order to incorporate such Prior to 1993, California subscribed to a single judgment because the trial court sustained a method of apportioning and allocating income, the demurrer to all causes of action, and all that Compact formula, which ascribed equal weight to three remains to render the order appealable is the factors: property, payroll and sales. (Former § 25128, as formality of entering a judgment of dismissal. added by Stats. 1966, ch. 2, § 7, p. 179.) Then, in 1993 (Melton v. Boustred (2010) 183 Cal.App.4th 521, the Legislature amended section 25128 to give double 527-528, fn. 1 [107 Cal. Rptr. 3d 481].) weight to the sales factor for most business activity, [*1376] [**559] specifying that "[n]otwithstanding Section 38006, all business income shall be apportioned to this state by I. BACKGROUND multiplying the [business] income by a fraction, the numerator of which is the property factor plus the payroll A. Historical Context Leading to Enactment of the factor plus twice the sales factor, and the denominator Compact [***3] of which is four ... ." (Former § 25128, subd. (a), Recognizing the need for uniformity in the italics added, as amended by Stats. 1993, ch. 946, § 1, p. apportionment of corporate income for tax purposes 5441.)2 among the various taxing states, in 1957 the National 2 For purposes of this appeal, the current version Conference of Commissioners on Uniform State Laws of section 25128, subdivision (a) is similar in all promulgated the Uniform Division of Income for Tax material respects to the 1993 amendment, reading Purposes Act (UDITPA). (7A pt. I West's U. Laws Ann. as follows: "Notwithstanding Section 38006, all (2002) pp. 141-142 & § 9.) To apportion a multistate business income shall be apportioned to this state corporation's business income among the [***5] various by multiplying the business income by a fraction, taxing states, UDITPA uses a three-factor, equally the numerator of which is the property factor plus weighted formula consisting of property, payroll and the payroll factor plus twice the sales factor, and sales receipts. (7A pt. I West's U. Laws Ann., § 9.) the denominator of which is four ... ." California adopted the UDITPA in 1966. (§ 25120 et seq.; Stats. 1966, ch. 2, § 7, pp. 177-181.) These consolidated appeals brought by appellants The Gillette Company and its subsidiaries, and other By 1959, only a few states had adopted the UDITPA. corporate entities (Taxpayers),3 present the issue of (7A pt. I West's U. Laws Ann., supra, p. 141.) That year, whether, for the tax years at issue since 1993, Taxpayers the United States Supreme Court delivered its decision in were entitled to elect the Compact formula, or, as Northwestern Cement Co. v. Minn. (1959) 358 U.S. 450, respondent Franchise Tax Board (FTB) asserts, did the 452 [3 L. Ed. 2d 421, 79 S. Ct. 357] (Northwestern 1993 amendment to section 25128 repeal and supersede Cement), holding that "net income from the interstate that formula, thereby making the state formula operations of a foreign corporation may be subjected to mandatory? We conclude that the Compact is a valid state taxation provided the levy is not discriminatory and multistate compact, and California is bound by it and its is properly apportioned to local activities within the apportionment election provision unless and until taxing State forming sufficient nexus to support the California withdraws from the Compact by enacting a same." Northwestern Cement raised concerns in the statute [***4] that repeals section 38006. Accordingly, business community and within weeks of the decision, since California has not repealed section 38006 and Congress commenced hearings, culminating in the withdrawn from the Compact, we reverse the trial court's passage of Public Law No. 86-272 as an emergency, order sustaining the FTB's demurrer without leave to temporary measure some six months later. This law was Page 9 207 Cal. App. 4th 1369, *1376; 144 Cal. Rptr. 3d 555, **559; 2012 Cal. App. LEXIS 833, ***5 intended to restrict the application of Northwestern Section 38006, article IV adopts the UDITPA and its Cement and created a subcommittee to study state equally weighted, three-factor apportionment formula, business taxes and recommend legislation establishing stating in part: "All business income shall be apportioned uniform standards which states would [***6] observe in to this State by multiplying the income by a fraction, the taxing income of interstate companies. (Fatale, numerator of which is the property factor plus the payroll Federalism and State Business Activity Tax Nexus: factor [***8] plus the sales factor, and the denominator Revisiting Public Law No. 86-272 (Spring 2002) 21 Va. of which is three." (§ 38006, art. IV, subd. 9.) However, Tax Review, 435, 475-476; U.S. Steel Corp. v. Multistate article III allows taxpayers the option of apportioning and Tax Comm'n (1978) 434 U.S. 452, 455 [54 L.Ed.2d 685, allocating income pursuant to the UDITPA formula or 98 S.Ct. 799] (U.S. Steel).) The subsequent study, pursuant to a given state's alternative apportionment commonly referred to as the "Willis Report" after provisions: "Any taxpayer subject to an income tax Congressman Edwin E. Willis who chaired the whose income is subject to apportionment and allocation subcommittee,5 called for federal legislation that would for tax purposes pursuant to the laws of a party State ... have limited state authority to tax interstate business may elect to apportion and allocate his income in the operations and imposed a uniform apportionment regime manner provided by the laws of such State ... without on the states. (State Taxation of Interstate Commerce, reference to this compact, or may elect to apportion and House Com. on Judiciary, Special Subcom. on State allocate in accordance with Article IV." (§ 38006, art. III, Taxation of Interstate Commerce, 89th Cong., 1st Sess. subd. 1.) As noted in the Multistate Tax Commission's (1965).) Third Annual Report (1969-1970),6 "The Multistate Tax Compact makes UDITPA available to each taxpayer on 5 Fatale, supra, 21 Va. Tax Rev. at page 477. an optional basis, thereby preserving for him the substantial advantages with which lack of uniformity In the wake of the Willis Report, Congress provides him in some states. Thus a corporation which is introduced a number of bills incorporating its selling into a state in which it has little property or recommendations. (U.S. Steel, supra, 434 U.S. at p. 456, payroll will want to insist upon the use of the three-factor fn. [*1377] 4; Sharpe, State Taxation of Interstate formula (sales, property and payroll) which is included in Businesses and the Multistate Tax Compact: The Search UDITPA because that will substantially reduce [***9] for a Delicate Uniformity (1974) 11 Colum. J. of Law his tax liability to that state below what it would be if a and Social Problems 231, 242 & n. 43.) To stave off single sales factor formula were applied to him[;] on the federal encroachment [***7] on their taxing powers and other hand, he will look with favor upon the application devise workable alternatives that would eliminate the of the single sales factor formula to him by a state from need for congressional action, state tax administrators and which he is selling into [*1378] other states, since that other state leaders drafted the Compact; by June 1967, will reduce his tax liability to that state. The Multistate nine states had enacted the Compact, which by its terms Tax Compact thus preserves the right of the states to became effective after seven states had adopted it. make such alternative formulas available to taxpayers [**560] (Multistate Tax Com., First Ann. Rep. (1968) even though it makes uniformity available to taxpayers pp. 1-2; § 38006, art. X, subd. 1.) where and when desired." (Id. at p. 3.) B. Compact Provisions 6 Hereafter, Third Commission Report. California enacted the Compact in 1974. (§ 38001, Secion 38006, article V sets out the rules for sales Stats. 1974, ch. 93, § 3, p. 193.) Its purposes are to "1. and use tax credits and exemptions, therein obligating Facilitate proper determination of State and local tax each party state to provide a full credit to taxpayers who liability of multistate taxpayers, including the equitable previously paid sales or use tax to another state with apportionment of tax bases and settlement of respect to the same property, and to honor sales and use apportionment disputes. [¶] 2. Promote uniformity or tax exemption certificates from other states. (§ 38006, art. compatibility in significant components of tax systems. V, subd. 1.) [¶] 3. Facilitate taxpayer convenience and compliance in the filing of tax returns ... . [¶] 4. Avoid duplicative The Compact leaves other matters entirely to state taxation." (§ 38006, art. I.) control. For example, it reserves to the states control over Page 10 207 Cal. App. 4th 1369, *1378; 144 Cal. Rptr. 3d 555, **560; 2012 Cal. App. LEXIS 833, ***9 the rate of tax (§ 38006, art. XI, subd. (a)), and simply interpretation, established by case law, that limited does not address the composition of a corporation's tax application of the compact clause "'to agreements that are base. "directed to the formation of any combination tending to the increase of political power in the States, which may As well, the Compact creates the Multistate Tax encroach upon or interfere with the just supremacy of the Commission [***10] (Commission) with powers to United States." ' [Citation.] This rule states the proper study state and local tax systems, develop and balance between federal and state power with respect recommend proposals for greater uniformity of state and [***12] to compacts and agreements among States." (434 local tax laws, and compile and publish information U.S. at p. 471, initial quote from Virginia v. Tennessee helpful to the states. [**561] (§ 38006, art. VI, subds. 1, (1893) 148 U.S. 503, 519 [37 L. Ed. 537, 13 S. Ct. 728].) 3.) Each party state appoints a member to the Commission and pays its share of expenses. (Id., art. VI, Framing the test as whether the Compact enhances subds. 1(a), 4(b).) The Commission may adopt uniform state power with respect to the federal government, the regulations in cases where two or more states have court concluded it did not: "This pact does not purport to uniform or similar provisions relating to specific types of authorize the member States to exercise any powers they taxes. (Id., art. VII.) However, such regulations are could not exercise in its absence. Nor is there any advisory only--each state makes its own decision whether delegation of sovereign power to the Commission; each to adopt the regulation in accordance with its own law. State retains complete freedom to adopt or reject the rules (Id., art. VII, subd. 3.) Additionally, the Commission may and regulations of the Commission. Moreover ... , each perform interstate audits, if requested by a party state; the State is free to withdraw at any time." (U.S. Steel, supra, governing article applies only in states that specifically 434 U.S. at p. 473.) In the end the court rejected all of the adopt it by statute. (Id., art. VIII, subds. 1, 2.) plaintiffs' challenges to the constitutional validity of the Compact. (434 U.S. at p. 479.) Finally, under the Compact, states are free to withdraw from the Compact at any time "by enacting a D. Amendment of Section 25128; Litigation statute repealing the same." (§ 38006, art. X, subd. 2.) Prior to 1993, California required corporations to C. U.S. Steel apportion their business income to California using the standard UDITPA, equally weighted three-factor In 1972, a group of multistate corporate taxpayers apportionment formula. (§ 25128, as adopted in 1966; see brought an action on behalf of themselves and all other § 38006, art. IV, subd. 9.) In 1993, the Legislature such taxpayers threatened [***11] with audits by the amended this formula to give double weight to the sales Commission. The complaint challenged the factor and specified that the new formula was mandatory, constitutionality of the Compact on several grounds, providing [***13] in relevant part: [**562] including that it was invalid under the compact clause of "Notwithstanding Section 38006 [(the Compact)], all the United States Constitution.7 (U.S. Steel, supra, 434 business income shall be apportioned to this state by U.S. at p. 458.) multiplying the [business] income by a fraction, the numerator of which is the property factor plus the payroll 7 The compact clause of article I, section 10, factor plus twice the sales factor, and the denominator of clause 3 of the United States Constitution states: which is four ... ." (§ 25128, subd. (a), italics added; "No state shall, without the consent of Congress, Stats. 1993, ch. 946, § 1, p. 5441.) ... enter into any agreement or compact with another state, or with a foreign power ... ." In January 2010, the Taxpayers lodged six [*1379] complaints for the refund of taxes which the court thereafter consolidated. Therein, they argued that the The high court acknowledged that the compact amended section 25128 did not override or repeal the clause, taken literally, would require the states to obtain UDITPA formula set forth in section 38006, and sought a congressional approval before entering into any refund of approximately $34 million. [*1380] The agreement among themselves, "irrespective of form, Taxpayers alleged that they began filing claims for refund subject, duration, or interest to the United States." (U.S. in 2006,8 based on their election to compute their Steel, supra, 434 U.S. at p. 459.) However, it endorsed an California apportionable income "using the three-factor Page 11 207 Cal. App. 4th 1369, *1380; 144 Cal. Rptr. 3d 555, **562; 2012 Cal. App. LEXIS 833, ***13 apportionment formula (property, payroll, and 12.) Initially used to resolve boundary disputes, today single-weighted sales) set forth in ... § 38006." The FTB interstate compacts are a staple of interstate cooperation denied the refund claims for the years at issue. and, in addition to taxes, span a wide range of subject matter and [*1381] issues including forest firefighting; 8 Sigma-Aldrich, Inc., began filing refund water allocation; mining regulation; storage of low level claims in 2003; RB Holdings (USA), Inc., began radioactive waste; transportation; environmental filing refund claims in 2007. preservation and resource conservation; regulation of electric [**563] energy; higher education and regional The FTB demurred on grounds that the amended cultural development. (Davis, Interstate Compacts in section 25128 mandated the exclusive [***14] use of the Commerce and Industry (1998) 23 Vt. L.Rev. 133, double-weighted sales factor, and according to its plain 139-143.) and unambiguous language, negated the Taxpayers' claim of entitlement to elect the UDITPA formula. The trial As we have seen, some interstate compacts require court agreed that section 25128 "clearly express[ed] an congressional consent, but others, that do not infringe on intention to take away the alternative under [section] [***16] the federal sphere, do not. Questioning whether 38006," and additionally the court in U.S. Steel similar statutes in two states constituted a compact, the determined that this alternative statutory scheme "could Supreme Court has outlined what it deemed "classic be obviated in the manner that the Legislature did." indicia" of such instruments: "We have some doubt as to Therefore, it sustained the FTB's demurrer to the whether there is an agreement amounting to a compact. complaints without leave to amend and entered judgment The two statutes are similar in that they both require accordingly. reciprocity and impose a regional limitation, both legislatures favor the establishment of regional banking II. DISCUSSION in New England, and there is evidence of cooperation among legislators, officials, bankers, and others in the A. Introduction two States in studying the idea and lobbying for the The Taxpayers are adamant that the Compact is a statutes. But several of the classic indicia of a compact valid, binding compact and as such, the Legislature are missing. No joint organization or body has been cannot override and eliminate the section 38006 option established to regulate regional banking or for any other for taxpayers to elect the Compact's apportionment purpose. Neither statute is conditioned on action by the formula. The FTB maintains as a threshold matter that the other State, and each State is free to modify or repeal its Taxpayers lack standing to complain of any purported law unilaterally. Most importantly, neither statute violation of the Compact. On the substantive front the requires a reciprocation of the regional limitation." FTB contends that the plain language of section 25128 (Northeast Bancorp v. Board of Governors, FRS (1985) mandates the exclusive use of the double-weighted sales 472 U.S. 159, 175 [86 L. Ed. 2d 112, 105 S. Ct. 2545] apportionment formula, thereby eliminating use of the (Bancorp).) The Ninth Circuit Court of Appeals has aptly equally weighted three-factor apportionment formula set summarized Bancorp as setting forth three primary forth as a taxpayer [***15] option in section 38006. indicia: "These are establishment of a [***17] joint Further, it urges that under California statutory and organization for regulatory purposes; conditional consent contract law, the Legislature had the power, and properly by member states in which each state is not free to enacted legislation, to repeal section 38006 to the extent modify or repeal its participation unilaterally; and state necessary to impose this mandatory apportionment enactments which require reciprocal action for their formula on taxpayers. effectiveness." (Seattle Master Builders v. Pacific Northwest Electric Power (9th Cir. 1986) 786 F.2d 1359, B. Nature of Interstate Compacts 1363.) (1) Some background on the nature of interstate [HN2] (2) Where, as here, federal congressional compacts is in order. [HN1] These instruments are consent was neither given nor required, the Compact legislatively enacted, binding and enforceable agreements must be construed as state law. (McComb v. Wambaugh between two or more states. (Litwak, Interstate Compact (3d Cir. 1991) 934 F.2d 474, 479.) Moreover, since Law: Cases and Materials (Semaphore Press 2011) pp. 5, interstate compacts are agreements enacted into state law, Page 12 207 Cal. App. 4th 1369, *1381; 144 Cal. Rptr. 3d 555, **563; 2012 Cal. App. LEXIS 833, ***17 they have dual functions as enforceable contracts compact absent the concurrence of the other signatories." between member states and as statutes with legal standing Cast a little differently, "[i]t is within the competency of a within each state; and thus we interpret them as both. State, which is a party to a compact with another State, to (Aveline v. Bd. of Probation and Parole (1999) 729 A.2d legislate in respect of matters covered by the compact so 1254, 1257; see Broun et al., The Evolving Use and the long as such legislative action is in approbation and not Changing Role of Interstate Compacts (ABA 2006) § in reprobation of the compact." (Henderson v. Delaware 1.2.2, pp. 15-24 (Broun on Compacts); 1A Sutherland, River Joint Toll Bridge Com. (1949) 362 Pa. 475 [66 Statutory Construction (7th ed. 2009) § 32:5; In re C.B. A.2d 843, 849-850].) Nor may states amend a compact by (2010) 188 Cal.App.4th 1024, 1031 [116 Cal.Rptr.3d enacting legislation that is substantially similar, unless 294] [recognizing that Interstate Compact on Placement the compact itself contains language enabling a state of Children shares characteristics of both contractual [***20] or states to modify it through legislation " agreements and statutory law].) 'concurred in' " by the other states. (International Union v. Delaware River Joint Toll Bridge, supra, 311 F.3d at (3) The contractual [***18] nature of a compact is pp. 276-280.) demonstrated by its adoption: "There is an offer (a proposal to enact virtually verbatim statutes by each C. Taxpayers Have Standing to Pursue These Actions [*1382] member state), an acceptance (enactment of the statutes by the member states), and consideration (the The FTB asserts that even if California breached its settlement of a dispute, creation of an association, or obligations under the Compact, the Taxpayers have no some mechanism to address an issue of mutual interest.)" judicial remedy, are not parties to the agreement and have (Broun on Compacts, supra, § 1.2.2, p. 18.) [HN3] As is no enforceable rights under it. true of other contracts, the contract clause of the United (4) First, [HN4] this is an action for the refund of States Constitution shields compacts from impairment by corporate taxes paid to the state pursuant to section the states. (Aveline v. Bd. of Probation and Parole, supra, 19382, and without question the Taxpayers have standing 729 A.2d at p. 1257, fn. 10.) Therefore, upon entering a in such an action to claim "that the tax computed and compact, "it takes precedence over the subsequent assessed is void in whole or in part ... ." (Ibid.) [*1383] statutes of signatory states and, as such, a state may not unilaterally nullify, revoke or amend one of its compacts (5) Furthermore, [HN5] the Compact, at section if the compact does not so provide." (Ibid.; accord, 38006, article III, subdivision 1 explicitly gives taxpayers International Union v. Deleware River Joint Toll Bridge whose income is subject to apportionment and allocation (3d Cir. 2002) 311 F.3d 273, 281.) [**564] Thus under the laws of a party state the option to elect to interstate compacts are unique in that they empower one apportion its taxes under UDITPA, the Compact formula. state legislature--namely the one that enacted the This is a right specifically extended not to the party states agreement--to bind all future legislatures to certain but to taxpayers as third parties regulated under the principles governing the subject matter of the compact. Compact, and as such Taxpayers may seek to enforce this (Broun on Compacts, supra, § 1.2.2, p. 17.) right as part of its tax refund suit. Moreover, the stated purposes of the Compact explicitly embrace [***21] As explained [***19] and summarized in C.T. taxpayer interests. These purposes include facilitating (1) Hellmuth v. Washington Metropolitan Area "proper determination of State and local tax liability of Transportation (D.Md. 1976) 414 F.Supp. 408, 409 multistate taxpayers, including the equitable (Hellmuth): "Upon entering into an interstate compact, a apportionment of tax bases" and (2) "taxpayer state effectively surrenders a portion of its sovereignty; convenience." (§ 38006, art. I, subds. 1, 3.) the compact governs the relations of the parties with respect to the subject matter of the agreement and is Alabama v. North Carolina (2010) 560 U.S. ___ superior to both prior and subsequent law. Further, when [176 L. Ed. 2d 1070, 130 S.Ct. 2295], characterized as enacted, a compact constitutes not only law, but a "particularly instructive" by the FTB, is not. There, the contract which may not be amended, modified, or Supreme Court ruled that the agency created by the otherwise altered without the consent of all parties. It, Compact could not bring claims for breach of compact by therefore, appears settled that one party may not enact a party state in a stand-alone action under the Supreme legislation which would impose burdens upon the Court's original jurisdiction because it had "neither a Page 13 207 Cal. App. 4th 1369, *1383; 144 Cal. Rptr. 3d 555, **564; 2012 Cal. App. LEXIS 833, ***21 contractual right to performance by the party States nor by enacting repealing legislation.) enforceable statutory rights under [the compact]." (Id. 560 U.S. at p. ___ [130 S.Ct. at p. 2315].) Our case has Moreover, the Compact satisfies indicia of a nothing to do with the unique features of federal original compact. (See Seattle Master Builders v. Pacific jurisdiction. (U.S. Const., art. III, § 2, cl. 2.) Northwest Electric Power, supra, 786 F.2d at p. 1363.) The Commission is an operational body charged with (6) [**565] In any event, in contrast, here the duties and powers in furtherance of the Compact's codified compact extends the right to election to purposes. It oversees the Compact, is composed of tax appropriate taxpayers. We find the decision in Borough administrators from all member states, and is financed of Morrisville v. Delaware River Basin Com. (E.D.Pa. through a process of allocation and apportionment. (§ 1975) 399 F.Supp. 469, 472-473, footnote 3 persuasive. 38006, art. VI.) Meeting on at least an annual basis, and There, the plaintiff municipalities who used water from with representation from each signatory state, the the Delaware River claimed that the [***22] compact Commission is a vehicle for continuing [***24] commission in question exceeded its authority and cooperative action among those states. violated the compact and federal law by imposing certain water charges. Resolving the standing issue in favor of Additionally, the Compact builds in binding the plaintiffs, the district court further stated that "'[t]o reciprocal obligations that advance uniformity. First, as hold that the Compact is an agreement between the we have discussed, it secures an election for multistate political signatories imputing only to those signatories taxpayers to opt for apportioning their business income standing to challenge actions pursuant to it would be under UDITPA, the Compact formula, or in accordance unduly narrow in view of the direct impact on plaintiffs with the state's own apportionment formula. (§ 38006, and other taxpayers.'" (Id. at p. 473.) This view is art. III, subd. 1.) The election provision is not optional for reinforced by commentators: "For the most part, party states. Because any multistate taxpayer "may elect" interstate compacts have not created any privately either approach, the party states must make the election assertable rights ... . However, this is not invariably the available.(Ibid.) As set forth above, the Commission has case. For example, water allocation compacts, while they explained that the mandate to make UDITPA available on apportion water among states, may affect the rights of an optional basis to taxpayers preserves "the substantial individual water users in such a way as to make them advantages with which lack of uniformity provides [the proper parties to suits. In such situations, the governing taxpayer] in some states." (Third Commission Report, fact is that [HN6] compacts are statutory law. supra, at p. 3.) Thus the [**566] Compact reserves to Consequently, the assertion of private rights created or the states the right to provide taxpayers with alternative otherwise affected by a compact is procedurally similar to formulas, while at the same time making uniformity the assertion of such rights conferred by other statutes of available when and where desired. (Third Commission the jurisdiction dealing with similar subject matter." Report, at p. 3.) (Zimmerman & Wendell, The Law and Use of [***23] As well, the Compact commits each state to provide Interstate Compacts (The Council of State Governments sales and use tax credits and exemptions. (§ 38006, art. 1976) Compact Law, ch. 1, pp. 14-15.) [*1384] V.) Again, the sales and use tax provisions are mandatory D. The Compact Is a Valid, Enforceable Interstate on signatory states. Compact (7) Finally, [***25] [HN7] the Compact provides To reiterate, the high court in U.S. Steel upheld the for a state's orderly withdrawal, namely by enacting a facial validity of the Compact against various statute repealing the Compact. However, any repealing constitutional challenges. (U.S. Steel, supra, 434 U.S. at legislation must be prospective in nature, because it pp. 473-479.) Our own Attorney General has cannot "affect any liability already incurred by or acknowledged the binding force of the Compact. (80 chargeable to a party State prior to the time of such Ops.Cal.Atty.Gen. 213, 214 (1997): by virtue of enacting withdrawal." (§ 38006, art. X, subd. 2.) Although notice the Compact as part of the law of this state, the Compact to sister states is not specifically required, by requiring makes California a member of the Commission and the repealing state legislation, the [*1385] process itself only way to withdraw from commission membership is calls for a measured, deliberative decision prior to withdrawal. Moreover, advance notice could easily be Page 14 207 Cal. App. 4th 1369, *1385; 144 Cal. Rptr. 3d 555, **566; 2012 Cal. App. LEXIS 833, ***25 accomplished through the work of the Commission. 9 Multistate Tax Compact, Suggested State Legislation and Enabling Act, accessed on the Nevertheless, the right to withdraw is unilateral. Web site of the Multistate Tax Commission on Citing Bancorp, the FTB suggests that the withdrawal July 23, 2012 provision renders the Compact something less than a not been the death knell rendering them nonbinding and [*1386] invalid. California is a party to a number of interstate compacts containing virtually identical withdrawal (8) The FTB also intimates that the Compact is provisions, coupled with some type of notice invalid under article 13, section 31 of our state requirement. (See Gov. Code, § 66801, art. X, subd. (c) Constitution, which states: [HN8] "The power to tax may [delineating withdrawal provision for Tahoe Regional not be surrendered or suspended by grant or contract." Planning [***26] Compact]; Veh. Code, § 15027 [same But of course [HN9] by entering the Compact, California for Driver License Compact]; Welf. & Inst. Code, § has neither surrendered nor suspended its taxing powers. 1400, art. XI, subd. (a) [same for Interstate Compact on California retains full control of its tax base, [***28] tax Juveniles]; Pen. Code, § 11180, art. XII, § A [Interstate rate and tax revenues; it simply has obligated itself to Compact for Adult Offender Supervision]; Ed. Code, § provide taxpayers with an option to use UDITPA or the 12510, art. VIII [Compact for Education].) state formula and can rescind that obligation by withdrawing from the Compact. Furthermore, the situation in Bancorp, cited by the FTB, differs dramatically from the case at hand. There, E. California Cannot Unilaterally Repeal Compact Massachusetts and Connecticut enacted similar statutes Terms allowing regional interstate banking acquisitions. However, unlike section 38006, these statutes were not The thrust of the FTB on appeal is this: Confirming jointly entered into as a binding agreement; they did not the Legislature's authority to amend, repeal or supersede create an administrative body nor did they require existing statutes, it proceeds to urge as a matter of reciprocation in key respects; and they could be changed statutory construction that the Legislature's choice of the as well as repealed at will. (Bancorp, supra, 472 U.S. at "[n]otwithstanding Section 38006" language in the 1993 p. 175.) amended section 25128 overrides section 38006, thus excising the taxpayer option to use UDITPA, the The FTB also points to a recent Commission Compact apportionment formula. Indeed, it goes so far as document that refers to the Compact as a "model law" to say that this language "constitutes a repeal of section and "not truly a compact."9 The Commission's statements 38006 to the extent necessary to impose a mandatory do not alter the reality that the Compact is binding on double-weighted sales apportionment formula upon California. Indeed, the Compact operates as a model law taxpayers." as to those states that choose to be associate members, rather than signatory members. Pursuant to the (9) Were this simply a matter of statutory Commission bylaws, the Commission may [***27] grant construction involving two statutes--sections 25128 and associate membership to states which have not enacted 38006--we would at least entertain the FTB's argument the Compact but which have, for example, enacted that section 25128 repealed the section 38006 taxpayer legislation that makes effective adoption of the Compact election to apportion under the Compact formula, and dependent on a subsequent condition. (Third Commission now mandates the exclusive use of the double-weighted Report, supra, at p. 96.) Before the Legislature enacted sales apportionment formula. However, [***29] this the Compact, California was an associate member. Now construct is not sustainable because it completely ignores it is a full Compact member, having enacted the Compact the dual nature of section 38006. Once one filters in the "into law and entered into [it] with all jurisdictions reality that section 38006 is not just a statute but is also legally joining therein ... ." (§ 38001.) That the Compact the codification of the Compact, and that through this did not "enter into force" until enacted into [**567] law enactment California has entered a binding, enforceable by seven states also distinguishes it from a model law. agreement with the other signatory states, the multiple flaws in the FTB's position become apparent. First, under Page 15 207 Cal. App. 4th 1369, *1386; 144 Cal. Rptr. 3d 555, **567; 2012 Cal. App. LEXIS 833, ***29 established compact law, the Compact supersedes Compact, in whole or in part." subsequent conflicting state law. Second, the federal and state Constitutions prohibit states from passing laws that (11) As a matter of compact law, this cannot be. impair the obligations of contracts. And finally, the FTB's Having established that the Compact is a binding, valid construction of the effect of the amended section 25128 compact, we construe and apply it according to its terms. runs afoul of the reenactment clause of the California (Texas v. New Mexico (1983) 462 U.S. 554, 564, [77 L. Constitution. Ed. 2d 1, 103 S. Ct. 2558].) [HN11] In part because compacts are agreements among sovereign states, we will The Compact Supersedes Section 25128 not read absent terms into them or dictate relief inconsistent with their express terms. (Alabama v. North [HN10] (10) By its very nature an interstate compact Carolina, supra, 130 S.Ct at p. 2313.) shifts some of a state's authority to another state or states. Thus signatory states cede a level of sovereignty over (12) With these concepts in mind, it is obvious that matters covered in the Compact in favor of pursuing [HN12] the plain language of the withdrawal provision, multilateral action to resolve a dispute or regulate an enabling a party state to withdraw from the Compact "by interstate affair. (Hess v. Port Authority Trans-Hudson enacting a statute repealing the same," allows only for Corporation (1994) 513 U.S. 30, 42 [130 L. Ed. 2d 245, complete withdrawal from the Compact. California has [*1387] 115 S. Ct. 394]; Broun on Compacts, supra, § not withdrawn from the Compact. After withdrawal, a 1.2.2, p. 23.) Because [***30] the Compact is both a state remains liable for any obligations [***32] incurred statute and a binding agreement among sovereign prior to withdrawal. Faced with the desire to escape an signatory states, having entered into it, California cannot, obligation under the Compact, a state's only option is to by subsequent legislation, unilaterally alter or amend its withdraw completely by enacting a repealing statute. That terms. Indeed, as an interstate compact the Compact is is what the plain language says, and we will not read into superior to the prior and subsequent statutory laws of that language an inconsistent term allowing for piecemeal member states. (McComb v. Wambaugh, supra, 934 F.2d amendment or elimination of compact provisions. at p. 479; Hellmuth, supra, 414 F.Supp. at p. 409.) [*1388] This means that the Compact trumps section 25128, The FTB refers us to Alabama v. North Carolina, such that, contrary to the FTB's assertion, section 25128 involving the same compact withdrawal provision, to cannot override the UDITPA election offered to support its position that we should not restrictively multistate taxpayers in [**568] section 38006, article interpret the withdrawal provisions of the Compact. The III, subdivision 1. It bears repeating that the Compact FTB focuses on the following passage: "The Compact requires states to offer this taxpayer option. If a state imposes no limitation on North Carolina's exercise of its could unilaterally delete this baseline uniformity statutory right to withdraw. ... [Citation] There is no provision, it would render the binding nature of the restriction upon a party State's enactment of such a law ... compact illusory and contribute to defeating one of its ." (Alabama v. North Carolina, supra, 560 U.S. at p. ___ key purposes, namely to "[p]romote uniformity or [130 S.Ct. at p. 2313], italics omitted.) However, the FTB compatibility in significant components of tax systems." omits the context, which is crucial. North Carolina (§ 38006, art. I, subd. 2.) Because the Compact takes withdrew from the compact in question by enacting a law precedent over subsequent conflicting legislation, these repealing its status as a member state, as required by the outcomes cannot come to pass. compact. (Id., 560 U.S. at p. ___ [130 S.Ct. at p. 2304].) The plaintiffs alleged that North Carolina withdrew in The FTB offers an alternative argument, namely that bad faith to avoid monetary sanctions. Holding that there the UDITPA election can [***31] be superseded and was no limitation [***33] on North Carolina's exercise repealed pursuant to the Compact's own withdrawal of its withdrawal right, the Supreme Court explained that provision. Specifically, it casts the withdrawal clause as a there was nothing in the compact suggesting that there flexible tool giving member states the "means of were certain purposes for which the conferred withdrawal overriding any and all of its provisions, including the power could not be employed. (Id., 560 U.S. at p. ___ election and apportionment provisions. Member states [130 S.Ct. at p. 2313].) In context, it is apparent that the can simply utilize the unrestricted withdrawal provision case does not support the principle of partial withdrawal ... to repeal and withdraw from the Multistate Tax Page 16 207 Cal. App. 4th 1369, *1388; 144 Cal. Rptr. 3d 555, **568; 2012 Cal. App. LEXIS 833, ***33 or piecemeal alteration or amendment. Rather, the to "whether, in terminating its efforts to obtain a withdrawal provision calls for withdrawal from the license, North Carolina failed to take what the Compact by passing a law repealing the Compact, period. parties considered 'appropriate' steps ... ." (Alabama v. North Carolina, supra, 560 U.S. at p. In further support of its position that the withdrawal ___ [130 S.Ct. at p. 2309].) The compact in provision should be construed [**569] to permit partial question obligated the defendant to take repeal or unilateral amendment, the FTB interprets the appropriate steps to ensure that an application to severability clause as providing for liberal construction of construct and operate the facility in question was Compact provisions. This standard clause says that if any filed and issued by the proper authority. (Id., 560 provision is declared invalid, the remaining provisions U.S. at p. ___ [130 S.Ct. at p. 2303].) The issue will not be affected. In other words, if a court declares was what constituted "appropriate steps" under any provision unconstitutional or invalid, it will be the compact. Of course, in this particular context, severed to avoid invalidation of the entire Compact. (§ the parties' course of performance would help 38006, art. XII.) How this clause advances the FTB's flesh out that concept. cause is not apparent to this court. It has nothing to do with liberal construction or the validity of state action to (14) As important, the proffered interpretation runs alter or amend existing Compact [***34] provisions. counter to the express purposes of the Compact, which include facilitating "equitable apportionment of tax Taking a slightly different tact, the FTB points out bases" and promoting "uniformity or compatibility in that a number of parties to the Compact have adopted significant components of tax systems." (§ 38006, statutes over the years that deviate from the Compact's [***36] art. I, subds. 1, 2.) The FTB's interpretation, that taxing provisions. According to materials furnished in the the Compact does not require states to provide multistate FTB's request for judicial notice and summarized in its taxpayers with the election to use the UDITPA formula, brief, 14 of 20 member states have passed some variation would eviscerate the availability of a common formula of a mandatory, state-specific apportionment formula that for all taxpayers to use as an alternative, thereby diluting departs from the Compact provisions. The states have a potent uniformity provision of the Compact. Moreover, accomplished this in a variety of ways. [HN14] the course of performance of a contract is only relevant to ascertaining the parties' intention at the time of (13) The FTB recommends that we consider the contracting. (Civ. Code, § 1636; Cedars-Sinai Medical extrinsic evidence of this "course of conduct" in Center v. Shewry, supra, 137 Cal.App.4th at p. 983.) The ascertaining whether the Compact is reasonably express, stated purposes of the Compact are a much truer susceptible to an interpretation that renders its taxing measure of that intent than the subsequent statutory provisions nonbinding and capable of being amended, changes to state apportionment formulae. superseded and repealed, in whole or part, by [*1389] member states. Both parties concur that the key is (15) [**570] Similarly, the purpose of admitting whether the Compact is reasonably susceptible to the course of performance evidence is grounded in common interpretation offered. (Cedars-Sinai Medical Center v. sense: [HN15] "[W]hen the parties perform under a Shewry (2006) 137 Cal.App.4th 964, 980 [41 Cal. Rptr. contract, without objection or dispute, they are fulfilling 3d 48].)10 It is not. As we have demonstrated, [HN13] the their understanding of the terms of the contract." Compact's express, unambiguous terms require extending (Employers Reinsurance Co. v. Superior Court (2008) taxpayers the option of electing UDITPA, and set forth 161 Cal.App.4th 906, 922 [74 Cal. Rptr. 3d 733].) The reciprocal repeal terms allowing a member state to cease course of performance doctrine is thus premised on the its [***35] participation and reclaim its sovereignty. assumption that one party's response to another party's action is probative of their understanding of the contract 10 The FTB adds that "[i]n interpreting a [***37] terms. But in the context of the Compact, the compact, 'the parties' course of performance under member states do not perform or deliver their obligations the Compact is highly significant,'" quoting to one another, unlike a typical contract in which a party Alabama v. North Carolina, supra, 560 U.S. at provides services or goods to the other party, who in turn page ___ [130 S.Ct. at page 2309]. As a general monitors the first party's compliance with contract terms. statement this is highly misleading. The court's Thus the foundation for finding course of performance reference to the course of performance pertained Page 17 207 Cal. App. 4th 1369, *1389; 144 Cal. Rptr. 3d 555, **570; 2012 Cal. App. LEXIS 833, ***37 evidence relevant and reliable is faulty. For example, in part: [HN19] "A statute may not be amended by reference Cedars-Sinai, the reviewing court concluded that course to its title. A section of a statute may not be amended of conduct [*1390] performance was not relevant to unless the section is re-enacted [***39] as amended." interpret a disputed provision because the conduct in question had nothing to do with providing incentives to (17) Long ago our Supreme Court expressed the monitor or enforce contract compliance. (Cedars-Sinai purpose of the reenactment rule as avoiding " 'the Medical Center v. Shewry, supra, 137 Cal.App.4th at p. enactment of statutes in terms so blind that legislators 983.) themselves [are] sometimes deceived in regard to their effect, and the public, from the difficulty of making the F. The FTB's Construction Violates the Federal and State necessary examination and comparison, fail[s] to become Constitutional Prohibition Against Impairment of appraised [sic] of the changes made in the laws.' " Contracts (Hellman v. Shoulters (1896) 114 Cal. 136, 152 [45 P. 1057]; accord American Lung Assn. v. Wilson (1996) 51 (16) Our federal and state Constitutions forbid Cal.App.4th 743, 748 [59 Cal. Rptr. 2d 428].) [**571] enactment of state laws that impair contractual Clearly [HN20] the reenactment rule applies to acts obligations. [HN16] "No state shall ... pass any ... law "'which are in terms ... amendatory of some former act.' impairing the obligation of contracts ... ." (U.S. Const., [Citation.]" (American Lung Assn. v. Wilson, supra, 51 art. I, § 10, cl. 1.) [HN17] "A ... law impairing the Cal.App.4th at p. 749.) Its applicability does not [*1391] obligation of contracts may not be passed." (Cal. Const., depend on the method of amendment, but rather "on art. I, § 9.) [HN18] This constitutional prohibition whether legislators and the public have been reasonably extends to [***38] interstate compacts. (Green v. Biddle notified of direct changes in the law." (Ibid.) (1823) 21 U.S. 1, 12-13, 17 [5 L. Ed. 547] [Kentucky law that narrowed rights and diminished interests of The FTB's construct would trigger the reenactment landowners under compact between Kentucky and statute because it posits that the newly amended section Virginia violated compact and was unconstitutional]; Doe 25128 repealed and superseded the UDITPA v. Ward (W.D.Pa. 2000) 124 F.Supp.2d 900, 915, fn. 20.) apportionment formula. Nonetheless, the purportedly A construction of section 25128 that overrides and deleted UDITPA election remains in section 38006, disables California's obligation under the Compact to causing confusion such that neither the public nor afford taxpayers the option of apportioning income under legislators would have adequate notice [***40] that the UDITPA formula would be unconstitutional, violative section 38006 had been eviscerated by the later of the prohibition against impairing contracts. enactment. G. The FTB's Construction Runs Afoul of the III. DISPOSITION Constitutional Reenactment Rule The judgment of dismissal is reversed. FTB to bear The FTB is adamant that the intent of the costs on appeal. "[n]otwithstanding Section 38006" language in section 25128 is to repeal and supersede the taxpayer election to Ruvolo, P. J., and Sepulveda, J.,* concurred. apportion under the Compact formula. At a minimum this * Retired Associate Justice of the Court of outcome would eliminate or rewrite article III, Appeal, First Appellate District, assigned by the subdivision 1 and eliminate article IV, subdivision 9 of Chief Justice pursuant to article VI, section 6 of section 38006. However, this result flies in the face of the California Constitution. California Constitution, article IV, section 9, stating in Page 1 HARSHA v. CITY OF DETROIT Docket No. 161 SUPREME COURT OF MICHIGAN 261 Mich. 586; 246 N.W. 849; 1933 Mich. LEXIS 812; 90 A.L.R. 853 January 25, 1933, Submitted (Calendar No. 37,094) January 31, 1933, Decided CASE SUMMARY: legislature when it passed later taxation laws because it was subject to the fundamental power of the state to amend its laws. PROCEDURAL POSTURE: Plaintiff taxpayer sought review of an order of the trial court (Michigan), which OUTCOME: The court affirmed the trial court's entered a decree for defendant city. The taxpayer's judgment that entered a decree for the city in the equitable action sought a declaratory judgment that taxpayer's action for a declaration that amendments to tax certain tax increases enacted after she purchased a bond laws applicable to the city enacted after she purchased the issued by the city subject to Mich. 1 Comp. Laws § 2228 city's bond were void as against her and to enjoin the city et seq. (1929) were void as against her because they from issuing refunding bonds under one of the statutes. impaired the contract evidenced by her bond, in violation of the state and federal constitutions. CORE TERMS: municipal, rate of taxation, Pub Acts, CONSTITUTIONAL LAW, amend, charter, repeal, OVERVIEW: The taxpayer contended that statutes that bonded indebtedness, indebtedness, municipal purposes, increased the city's power to borrow money and changed taxation, general law, impaired, impair, legislative power, the limit of taxation and the amount of bonded vested right, borrowing money, constitutional provision, indebtedness allowed, which were enacted after she constitutional power, municipality, holder, coupons, purchased her bond, were void because the laws that power to borrow money, power of taxation, legislative existed at the time she made her contract were department, obligation of contracts, contracting, incorporated into the contract's terms. She sought a bondholder, pursuance, impairing decree holding the later legislation void and sought an injunction against the issue of refunding bonds under one LexisNexis(R) Headnotes of the statutes. On appeal, the court affirmed because the later legislation was an exercise of power authorized by the state constitution and did not impair the taxpayer's contract because her contract was at all times subject to Governments > Legislation > Enactment the right of the state, through the legislature, to exercise [HN1] The legislative power is the authority to make, its constitutional powers and functions. A taxation statute alter, amend, and repeal laws. In Michigan, it is was not subject to repeal or amendment only if the intent co-extensive with that of the parliament of England, save not to repeal or amend was so directly and unmistakably as limited and restrained by the state and federal expressed as to leave no reason for doubt. The taxpayer's Constitutions. One legislature cannot limit or restrict the contract, evidenced by the bond, was not impaired by the Page 2 261 Mich. 586, *; 246 N.W. 849, **; 1933 Mich. LEXIS 812, ***; 90 A.L.R. 853 power of its successor. generally true that the power to tax is limited in extent, in purpose, and in methods only by the will of the state as expressed in its laws. Governments > Legislation > Types of Statutes Governments > Local Governments > Charters Governments > Local Governments > Finance Constitutional Law > Congressional Duties & Powers > [HN2] The Constitution of Michigan provides that the Contracts Clause > General Overview legislature shall provide by a general law for the Governments > Local Governments > Finance incorporation of cities, and by a general law for the Governments > State & Territorial Governments > incorporation of villages; such general laws shall limit Finance their rate of taxation for municipal purposes, and restrict [HN5] Fixing the limit of municipal indebtedness is their powers of borrowing money and contracting debts. delegated by the Constitution of the state to the Mich. Const. art. 8, § 20. Under such general laws, the legislature, which has full power and authority to increase electors of each city and village shall have power and it by general law. The legislature may regulate the authority to frame, adopt and amend its charter and to amount of municipal indebtedness and the rate of taxation amend an existing charter of the city or village heretofore of cities. It is expressly authorized by Mich. Const. art. 8, granted or passed by the legislature for the government of § 20 so to do. Its powers are plenary. It may increase or the city or village and, through its regularly constituted decrease the limit of bonded indebtedness and the rate of authority, to pass all laws and ordinances relating to its taxation for municipal purposes, subject to the municipal concerns, subject to the Constitution and prohibition in the Constitution of the state and of the general laws of this State. Mich. Const. art. 8, § 21. United States that such legislation shall not operate directly upon contracts so as to impair their obligation by abrogating or lessening the means of their enforcement. Administrative Law > Separation of Powers > Constitutional Controls > General Overview Constitutional Law > Congressional Duties & Powers > Constitutional Law > Congressional Duties & Powers > Contracts Clause > General Overview Contracts Clause > General Overview Governments > State & Territorial Governments > [HN6] Where the right to alter, amend, or repeal a statute Relations With Governments existed, it must be held to be a part of a contract based [HN3] Municipal corporations are state agencies, and, thereon, and the subsequent exercise of that right would subject to constitutional restrictions, the legislature may be in accordance with the contract and could not impair modify the corporate charters of municipal corporations its obligation. at will. Powers are granted to them as state agencies to carry on local government. The state still has authority to Governments > State & Territorial Governments > amend their charters and enlarge or diminish their Finance powers. They derive all their powers from the source of their creation, and those powers are at all times subject to [HN7] The Michigan Constitution provides that the power of taxation shall never be surrendered or the control of the legislature. Such powers, also, in the suspended by any grant or contract to which the state or absence of any constitutional regulation forbidding it, any municipal corporation shall be a party. Mich. Const. may be enlarged or diminished, extended or curtailed, or art. 10, § 9. withdrawn altogether, as the legislature may determine. Governments > Local Governments > Finance Governments > State & Territorial Governments > Governments > State & Territorial Governments > Finance Relations With Governments Tax Law > State & Local Taxes > General Overview [HN8] Under Mich. Const. art. 8, §§ 20, 21, authorizing [HN4] The power to impose taxes is vested exclusively in the legislature to provide by a general law for the the legislative department of government, and cannot be incorporation of cities and to restrict their powers of exercised except in pursuance of its authority. The borrowing, the question of the bonding limits of cities is a levying of taxes is solely the function of the legislature. legislative one over which they have no control except as Subject to constitutional restrictions, it must be taken as Page 3 261 Mich. 586, *; 246 N.W. 849, **; 1933 Mich. LEXIS 812, ***; 90 A.L.R. 853 provided in the enabling act. 6. MUNICIPAL CORPORATIONS -- CONSTITUTIONAL LAW. Governments > Legislation > Expirations, Repeals & Powers are granted to municipal corporations as Suspensions State agencies to carry on local government, and State [HN9] Before a statute, particularly one relating to has authority [***2] to amend their charters and enlarge taxation, should be held to be irrepealable or not subject or diminish their powers. to amendment, an intent not to repeal or amend must be so directly and unmistakably expressed as to leave no 7. CONSTITUTIONAL LAW -- POWER TO reason for doubt. Otherwise the intent is not plainly IMPOSE TAXES VESTED EXCLUSIVELY IN expressed. LEGISLATIVE DEPARTMENT. HEADNOTES Power to impose taxes is vested exclusively in legislative department of government, and may not be [***1] 1. CONSTITUTIONAL LAW -- POWER exercised except in pursuance of its authority. OF LEGISLATURE TO MAKE AND CHANGE LAW. 8. MUNICIPAL CORPORATIONS -- Legislative power is authority to make, alter, amend, LEGISLATURE HAS POWER TO INCREASE and repeal laws. MUNICIPAL INDEBTEDNESS. 2. CONSTITUTIONAL LAW -- POWER LIMITED Fixing limit of municipal indebtedness is within ONLY BY STATE AND FEDERAL constitutional power of legislature, which has full power CONSTITUTIONS. and authority to increase it by general law. In this State, legislative power is co-extensive with 9. CONSTITUTIONAL LAW -- LEGISLATURE that of parliament of England, save as limited and AUTHORIZED TO REGULATE MUNICIPAL restrained by State and Federal Constitutions. INDEBTEDNESS. 3. CONSTITUTIONAL LAW -- LEGISLATURE Legislature is expressly authorized by Constitution MAY NOT LIMIT ITS SUCCESSOR. (art. 8, § 20) to regulate amount of municipal indebtedness and rate of taxation of cities. One legislature may not limit or restrict power of its successor. 10. CONSTITUTIONAL LAW -- IMPAIRMENT OF CONTRACTS. 4. CORPORATIONS -- POWER TO AMEND OR REPEAL CHARTERS OF PRIVATE Legislature may increase or decrease limit of bonded CORPORATIONS. indebtedness and rate of taxation for municipal purposes, subject to prohibition of State and Federal Constitutions Rule that corporate charters in which no power of that such legislation shall not operate so as to impair amendment or repeal is retained, when accepted, obligation of contracts by abrogating or lessening means constitute contracts between State and corporation, of their enforcement. applies to private corporations only. 11. CONSTITUTIONAL LAW -- CONTRACT OF 5. MUNICIPAL CORPORATIONS -- STATE BONDHOLDER SUBJECT [***3] TO LEGISLATIVE AGENCIES -- LEGISLATURE MAY MODIFY POWER TO INCREASE CITY'S POWER TO CHARTERS. BORROW. Municipal corporations are State agencies, and, Since legislature has power, under Constitution, to subject to constitutional restrictions, legislature may increase limit of city's power to borrow money and rate modify corporate charters of municipal corporations at of taxation, contract of holder of city's bond is subject to will. said power, and therefore its exercise would be in accordance with said contract and not in impairment of Page 4 261 Mich. 586, *; 246 N.W. 849, **; 1933 Mich. LEXIS 812, ***3; 90 A.L.R. 853 its obligation. their locating in particular municipality (Const., art. 10, § 9). 12. CONSTITUTIONAL LAW -- STATUTES -- POWER TO AMEND OR REPEAL. 17. CONSTITUTIONAL LAW -- TENDER OF BONDS AND COUPONS IN PAYMENT OF TAXES -- Before statute, particularly one relating to taxation, STATUTES. should be held to be irrepealable or not subject to amendment, intent not to repeal or amend must be so Provision in Act No. 1, Pub. Acts 1932 (2d Ex. directly and unmistakably expressed as to leave no reason [***5] Sess.), providing that bonds issued by city in for doubt. pursuance thereto, and attached coupons, due or to become due, may be tendered in payment of general taxes 13. CONSTITUTIONAL LAW -- IMPAIRMENT or special assessments of said city, delinquent or due and OF CONTRACTS -- STATUTES. payable, in lieu of money, held, not violative of constitutional provision prohibiting surrender of power of Constitutional provision prohibiting passage of laws taxation by grant or contract (Const., art. 10, § 9). impairing obligation of contracts may not be construed to prohibit exercise by legislature of its constitutional SYLLABUS powers. Appeal from Wayne; Miller (Guy A.), J. Submitted 14. CONSTITUTIONAL LAW -- NO VESTED January 25, 1933. (Docket No. 161, Calendar No. RIGHT PRECLUDING CHANGE OF EXISTING LAW. 37,094.) Decided January 31, 1933. There can, in nature of things, be no vested right in Bill by Daisy E. Harsha against City of Detroit and existing law which precludes its change or repeal, nor others for declaration of rights secured by a bond of the vested right in omission to legislate upon particular City of Detroit. Bill dismissed. Plaintiff appeals. subject which exempts contract from effect of subsequent Affirmed. legislation [***4] upon its subject-matter by competent legislative authority. COUNSEL: John R. Rood, for plaintiff. 15. CONSTITUTIONAL LAW -- IMPAIRMENT Clarence E. Wilcox, Corporation Counsel, and Paul T. OF CONTRACT -- INCREASING POWER OF CITY Dwyer, Assistant Corporation Counsel, for defendants. TO BOND -- STATUTES. Hal H. Smith, Archibald Broomfield, and Beaumont, Obligation of contract of holder of bond issued by Smith & Harris, amici curioe. City of Detroit subject to limitations imposed by Act No. 279, Pub. Acts 1909, held, not impaired by enactment of OPINION BY: POTTER Act No. 126, Pub. Acts 1929, and Act No. 1, Pub. Acts 1932 (2d Ex. Sess.), increasing power of city to bond, in OPINION absence of agreement by city that no further bonds would be issued, or that limit of bonded indebtedness would not [*588] [**850] POTTER, J. Plaintiff, a citizen, be raised (U.S. Const., art. 1, § 10; Const. of Mich., art. 2, resident, and taxpayer of the city of Detroit, a municipal § 9). corporation, by bill in equity for a declaratory decree and [*589] injunction, claims she is the holder of a bond of 16. CONSTITUTIONAL LAW -- [***6] defendant city issued subject to the provisions of SURRENDERING POWER OF TAXATION -- Act No. 279, Pub. Acts 1909 (see 1 Comp. Laws 1929, § PURPOSE OF CONSTITUTIONAL PROVISION. 2228 et seq.), which limited the rate of taxation on the assessed value of the real and personal property in Purpose of constitutional provision prohibiting defendant city to 2 per cent. per annum, and limited the surrender of power of taxation by grant or contract is to power of defendant city to borrow money on the credit of prevent municipalities from granting special rate of the city to 8 per cent. of the assessed valuation of the real taxation to private corporations or exempting from and personal property in the city; that by Act No. 203, taxation their property for limited time on condition of Page 5 261 Mich. 586, *589; 246 N.W. 849, **850; 1933 Mich. LEXIS 812, ***6; 90 A.L.R. 853 Pub. Acts 1911, the limit of the rate of taxation and of Article 8, § 20, Constitution 1908. bonded indebtedness was continued, but by Act No. 126, Pub. Acts 1929, though the rate of taxation was continued "Under such general laws, the electors of each city as before, the limit of the defendant city's power to and village shall have power and authority to frame, borrow money was raised to 10 per cent. of the assessed adopt and amend its charter and to amend an existing valuation of the real and personal property in the city; charter of the city or village heretofore granted or passed that the limit of taxation and of bonded indebtedness was by the legislature for the government of the city or village not changed by Act No. 1, Pub. Acts 1932 (2d Ex. Sess.), and, through its regularly constituted authority, to pass all and that Act No. 126, Pub. Acts 1929, and Act No. 1, laws and ordinances relating to its municipal concerns, Pub. Acts 1932 (2d Ex. Sess.), are void as against subject to the Constitution and general laws of this State." plaintiff, because they impair the obligation of her Article 8, § 21, Constitution 1908. contract, evidenced by her bond, in violation of the Corporate charters in which no power of amendment provisions of the Constitution of this State and of the or repeal is retained, when accepted, constitute contracts United States prohibiting the passage [***7] of laws between the State and the corporation. [*591] impairing the obligation of contracts. Dartmouth College v. Woodward, 4 Wheat. (17 U.S.) She contends: [***9] 518. This rule applies to private corporations only. [HN3] Municipal corporations are State agencies, "Laws which subsist at the time and place of the and, subject to constitutional restrictions, the legislature making of a contract, and where it is to be performed, may modify the corporate charters of municipal enter into and form a part of it, as fully as if they had corporations at will. 12 C.J. p. 1031. Powers are granted been expressly referred to or incorporated in its terms. to them as State agencies to carry on local government. This principle embraces alike those laws which affect its The State still has authority to amend their charters and construction and those which affect its enforcement or enlarge or diminish their powers. 1 Cooley, discharge." Farmers & Merchants Bank v. Federal Constitutional Limitations (8th Ed.), p. 393. Reserve Bank, 262 U.S. 649, 660 (43 Sup. Ct. 651, 30 A.L.R. 635). "They derive all their powers from the source of their creation, and those powers are at all times subject to the [*590] She seeks decree holding such later control of the legislature. Such powers, also, in the legislation void, and injunction against the issuance of absence of any constitutional regulation forbidding it, refunding bonds under Act No. 1, Pub. Acts 1932 (2d Ex. may be enlarged or diminished, extended or curtailed, or Sess.), and other relief. Defendants admit the facts, but withdrawn altogether, as the legislature may determine." deny the legislation complained of impairs the obligation Rogers v. Burlington, 3 Wall. (70 U.S.) 654. of plaintiff's contract. There was decree for defendants. Plaintiff appeals. [HN4] The power to impose taxes is vested exclusively in the legislative department of government, [HN1] The legislative power is the authority to and cannot be exercised except in pursuance of its make, alter, amend, and repeal laws. 1 Cooley, authority. The levying of taxes is solely the function of Constitutional Limitations (8th Ed.), p. 183. In this State, the legislature. 37 Cyc. p. 724. Subject to constitutional it is co-extensive with that of the parliament of England, restrictions, "it must be taken as generally true that the save as limited and restrained by the State and Federal power to tax [***10] is limited in extent, in purpose, and Constitutions. 1 Cooley, Constitutional Limitations in methods only by the will of the State as expressed in [***8] (8th Ed.), p. 177; 12 C.J. p. 749. One legislature its laws." 1 Cooley on Taxation (3d Ed.), p. 178; 2 Smith, cannot limit or restrict the power of its successor. 12 C.J. Modern Law of Municipal Corporations, § 1477. p. 806. [HN2] The Constitution of this State provides: [HN5] Fixing the limit of municipal indebtedness is "The legislature shall provide by a general law for delegated by the Constitution of this State to the the incorporation of cities, and by a general law for the legislature, which has full power and authority to increase incorporation of villages; such general laws shall limit it by general law. 44 C.J. p. 1117; 6 McQuillin, their rate of taxation for municipal purposes, and restrict Municipal Corporations (2d Ed.), p. 12, § 2366; Wharton their powers of borrowing money and contracting debts." v. City of Greensboro, 149 N.C. 62 (62 [*592] S.E. Page 6 261 Mich. 586, *592; 246 N.W. 849, **850; 1933 Mich. LEXIS 812, ***10; 90 A.L.R. 853 740). The legislature [**851] may regulate the amount "This is a new section and forever prohibits the of municipal indebtedness and the rate of taxation of surrender or suspension of the taxing power of the State cities. It is expressly authorized by article 8, § 20, of the or any municipality therein." (2 Debates, Constitutional Constitution so to do. Its powers are plenary. It may Convention, p. 1435.) increase or decrease the limit of bonded indebtedness and the rate of taxation for municipal purposes, subject to the In City Commission of Jackson v. Vedder, 209 Mich. prohibition in the Constitution of this State and of the 291, it was held (quoting syllabus): United States that such legislation shall not operate [HN8] "Under the Constitution (article 8, §§ 20, 21) directly upon contracts so as to impair their obligation by authorizing the legislature to provide by a general law for abrogating or lessening the means of their enforcement. the incorporation of cities and to restrict their powers of Wolff v. New Orleans, 103 U.S. 358. There is no borrowing, the question of the bonding limits of cities is a constitutional provision against changing [***11] the legislative one over which they have no control except as limit of bonded indebtedness or limiting the rate of provided [***13] in the enabling act." taxation for municipal purposes which in cities under the home rule act obtained when plaintiff acquired her bond. Plaintiff's contract is not impaired unless by the State She had no contract with the State or with defendant city exercising its legislative power to amend the home rule that the limit of bonded indebtedness or the rate of act by increasing the limit of the restrictions upon cities taxation for municipal purposes might not be changed. for borrowing money. The argument in her behalf She was bound to know the legislative power of the State amounts to saying plaintiff's contract is impaired by the over the limit of bonded indebtedness and the rate of lawful exercise of the legislative power of the State. taxation for municipal purposes of defendant city Missouri Pacific R. Co. v. Kansas, 216 U.S. 262 (30 Sup. contained in the Constitution, and that the legislature Ct. 330). "The claim of an irrepealable contract cannot be possessed full power and authority by legislative action to [*594] predicated upon a contract which is repealable." increase the limit of the defendant city's power to borrow Hammond Packing Co. v. Arkansas, 212 U.S. 322 (29 money and the rate of taxation for municipal purposes. Sup. Ct. 370, 15 Ann. Cas. 645); Coombes v. Getz, 285 Her contract was at all times subject to the right of the U.S. 434 (52 Sup. Ct. 435), per Cardozo, J. [HN9] State, through its legislative department, to exercise its Before a statute, particularly one relating to taxation, constitutional powers and functions. should be held to be irrepealable or not subject to amendment, an intent not to repeal or amend must be so As early as Dartmouth College v. Woodward, supra, directly and unmistakably expressed as to leave no reason 696, Justice Story pointed out that [HN6] where the right for doubt. Otherwise the intent is not plainly expressed. to alter, amend, or repeal a statute existed, it must be held Citizens' Savings Bank v. Owensboro, 173 U.S. 636 (19 to be a part of a contract based thereon, and the Sup. Ct. 530, 571). subsequent exercise of that right would *** mi143b75 p006 0916 [*593] be in accordance [***12] with the The power vested by the Constitution of this State in contract and could not impair its obligation. This the legislature to limit the rate of taxation of cities for principle has been repeatedly recognized. Greenwood v. municipal [***14] purposes and restrict their powers of Freight Co., 105 U.S. 13; Hamilton Gas Light & Coke borrowing money and contracting debts is complete in Co. v. Hamilton City, 146 U.S. 258 (13 Sup. Ct. 90). itself and unrestricted. Plaintiff took the bond of defendant city subject to the possibility the legislature [HN7] The Constitution of this State provides: might, at some future time when the public interest "The power of taxation shall never be surrendered or demanded it, by appropriate legislation, raise the limit of suspended by any grant or contract to which the State or taxation upon the property in the city subject to any municipal corporation shall be a party." Article 10, § assessment, and raise the limit upon the bonded 9, Constitution 1908. indebtedness which might be contracted by defendant city. The constitutional provisions which prohibit the In its explanation of the proposed changes in the passage of laws impairing the obligation of contracts Michigan Constitution and the reasons therefor, the cannot be construed to prohibit the exercise by the Constitutional Convention of 1908 said: legislature of its constitutional powers. There can, in the nature of things, be no vested right in an existing law Page 7 261 Mich. 586, *594; 246 N.W. 849, **851; 1933 Mich. LEXIS 812, ***14; 90 A.L.R. 853 which precludes its change or repeal, nor vested right in tendered in payment of general taxes or special the omission to legislate upon a particular subject which assessments of the city, delinquent or due and payable, in exempts a contract from the effect of subsequent lieu of money. There is no provision in the Constitution legislation upon its subject-matter by competent of this State in relation to this subject which it is claimed legislative authority. Fitzgerald v. Railroad Co., 63 Vt. has any effect upon this provision in the statute, save that 169, 173 (22 Atl. 76, 13 L.R.A. 70); Louisville & quoted [***17] above, which provides the power of Nashville R. Co. v. Mottley, 219 U.S. 467 (31 Sup. Ct. taxation shall never be surrendered or suspended by any 265). grant or contract to which the State or any municipal corporation shall be a party. This provision found its way [*595] Plaintiff had no contract with defendant city into the Constitution because in the early history of the [***15] that no further city bonds would be issued nor State some corporations had been granted special rates of that no further indebtedness would be contracted. None taxation, and these charter provisions were held to be that the limit of bonded indebtedness and the rate of contracts which could not be impaired by subsequent taxation of property therein might not be raised. This action upon the part of the State; and municipalities, for case is to be distinguished from Von Hoffman [**852] v. the purpose of having industrial corporations located City of Quincy, 4 Wall. (71 U.S.) 535; Antoni v. therein, were prone to attempt to exempt their property Greenhow, 107 U.S. 769 (2 Sup. Ct. 91); Wolff v. New from taxation for a limited time on condition of their Orleans, supra; Louisiana v. Pilsbury, 105 U.S. 278; locating in the particular municipality. It has no Hendrickson v. Apperson, 245 U.S. 105 (38 Sup. Ct. 44), application to a case like that here involved, where it is the principles of which were recognized in Hammond v. sought to provide the evidence of the indebtedness of the Place, 116 Mich. 628 (72 Am. St. Rep. 543), which city to the bondholder may be received and canceled in involved legislation which, in some measure, impaired payment of the obligation of the bondholder as a taxpayer the ability of a bondholder to obtain payment of his bond; to the city. It amounts to a set-off of indebtedness by the and, from cases like Smith v. Appleton, 19 Wis. 468, respective parties. In McGahey v. Virginia, 135 U.S. 662 where bonds were issued to refund city indebtedness, (10 Sup. Ct. 972), a similar question was before the under a statute providing no other bonds should be issued supreme court of the United States, and it was said: until the bonds in question were paid, and a later statute authorizing a subsequent issuance of bonds for railroad [*597] "The holders of the [***18] coupons of said purposes was held to impair the obligation of the contract bonds, whether still attached thereto or separated of the holders of the first bonds. therefrom, are entitled, by a solemn engagement of the State, to use them in payment of State taxes and public Instead of plaintiff having a contract providing the dues. This was determined in Hartman v. Greenhow, 102 limit of the rate of [***16] taxation of defendant city for U.S. 672, decided in January, 1881; in Antoni v. municipal purposes could not be raised, and which Greenhow, 107 U.S. 769 (2 Sup. Ct. 91), decided in restricted defendant city's power of borrowing money and March, 1883; in the Virginia Coupon Cases, 114 U.S. contracting debts, the Constitution, the fundamental law 269 (5 Sup. Ct. 903), decided in April, 1885; and in all of this State, provides such rate of taxation and such the cases on the subject that have come before this court restriction on defendant city's power of borrowing money for adjudication. This question, therefore, may be and contracting debts might be raised by the legislature. considered as foreclosed and no longer open for Plaintiff contracted with reference to this fundamental consideration. It may be laid down as undoubted law that law, is bound thereby, and the obligation of her contract, the lawful owner of any such coupons has the right to evidenced by her bond, was not impaired by the tender the same after maturity in absolute payment of all legislature of the State exercising its constitutional taxes, debts, dues and demands due from him to the [*596] power in passing Act No. 126, Pub. Acts 1929, State." and Act No. 1, Pub. Acts 1932 (2d Ex. Sess.). This principle is recognized in 3 Cooley on Taxation Plaintiff contends that Act No. 1, Pub. Acts 1932 (2d (4th Ed.), § 1252, and by many other cases. Ex. Sess.), is invalid because it provides as to bonds issued in pursuance of its provisions that the bonds and We hold there is nothing in these provisions of Act coupons attached thereto, due or to become due, may be No. 1, Pub. Acts 1932 (2d Ex. Sess.), which will render Page 8 261 Mich. 586, *597; 246 N.W. 849, **852; 1933 Mich. LEXIS 812, ***18; 90 A.L.R. 853 such bonds invalid, either as impairing the obligation of Decree affirmed, but without costs. plaintiff's contract, or in any other manner that has been suggested to this court. [***19] No other questions are McDONALD, C.J., and CLARK, SHARPE, raised on this appeal. NORTH, FEAD, WIEST, and BUTZEL, JJ., concurred. Page 1 INTERNATIONAL BUSINESS MACHINES CORPORATION, Plaintiff-Appellant, v DEPARTMENT OF TREASURY, Defendant-Appellee. No. 146440 SUPREME COURT OF MICHIGAN 496 Mich. 642; 852 N.W.2d 865; 2014 Mich. LEXIS 1282 January 15, 2014, Argued July 14, 2014, Decided July 14, 2014, Filed SUBSEQUENT HISTORY: Motion granted by, (Docket No. 306618). It held that because there was a Rehearing denied by, Stay denied by IBM v. Dep't of facial conflict between the BTA's mandatory sales-factor Treasury, 855 N.W.2d 512; 2014 Mich. LEXIS 2132 apportionment formula and the Compact's elective three- (Mich., Nov. 14, 2014) factor apportionment formula, the Legislature had repealed the Compact's election provision by implication PRIOR HISTORY: [***1] when it enacted the BTA. The Supreme Court granted International Business Machines Corporation (IBM) IBM's application for leave to appeal. 494 Mich. 874, 832 brought an action in the Court of Claims against the N.W.2d 388 (2013). In a lead opinion by Justice Viviano, Department of Treasury, challenging the department's joined by Justices Cavanagh and Markman, and a ruling that IBM was not entitled to apportion its business concurring opinion by Justice Zahra, the Supreme Court income tax base and modified gross receipts tax base held: The modified gross receipts tax is an income tax for using the three-factor apportionment formula provided in purposes of the Multistate Tax Compact. IBM was the Multistate Tax Compact, MCL 205.581 et seq., and entitled to use the Compact's elective three-factor was instead required to apportion its income using the apportionment formula to calculate its 2008 Michigan sales-factor formula in the Business Tax Act, MCL taxes. Court of Appeals judgment reversed; Court of 208.1101 et seq., when calculating its state taxes for Claims order granting summary disposition in favor of 2008. Under this ruling, IBM was entitled to a refund of the Department reversed; case remanded to the Court of only $1,253,609 for the 2008 tax year rather than the Claims for entry of an order granting summary $5,955,218 it had sought. IBM moved for summary disposition in favor of IBM. Justice Viviano, joined by disposition under MCR 2.116(C)(10), and the department Justices Cavanagh and Markman, held that the modified moved for summary disposition under MCR 2.116(I)(2). gross receipts tax fit within the Compact's broad After a hearing, the Court of Claims, Joyce A. definition of "income tax" by taxing a variation of net Draganchuk, J., denied IBM's motion and granted income, specifically, the entire [***3] amount received summary disposition in favor of the department, ruling by the taxpayer as determined from any gainful activity that the BTA mandated the use of the sales-factor minus inventory and certain other deductions that are apportionment formula. The Court of Appeals, Ronayne expenses not specifically and directly related to a Krause, P.J., and Borrello, J. (Riordan, J., concurring), particular transaction. He further concluded that the Court affirmed the Court of Claims order in an unpublished of Appeals erred by holding that the BTA had repealed opinion per curiam issued November [***2] 20, 2012 the Compact's election provision by implication because Page 2 496 Mich. 642, *; 852 N.W.2d 865, **; 2014 Mich. LEXIS 1282, ***3 the statutes could be reconciled when read in pari CORE TERMS: compact, election, apportionment materia. Justice Zahra, concurring, agreed that IBM was formula, repeal, apportion, tax base, income tax, entitled to use the Compact's elective apportionment apportionment, repealed, multistate, lead opinion's, formula for its 2008 Michigan taxes, and also that the tax mandatory, tax acts, tax year, taxation, elect, formula, bases at issue were "income taxes" within the meaning of gross receipts tax, gross receipts, apportioned, allocate, the Compact. He would not have reached the question gross income, modified, implied repeal, contractual, whether the Legislature repealed the Compact's election enacting, state law, impliedly, business income, pari provision by implication when it enacted the BTA materia because the Legislature made clear that taxpayers were entitled to use the Compact's election provision for the LexisNexis(R) Headnotes 2008, 2009, and 2010 tax years. Justice McCormack, joined by Chief Justice Young and Justice Kelly, dissenting, would have affirmed the Court of Appeals judgment, concluding that allowing taxpayers to Civil Procedure > Appeals > Standards of Review > De apportion their multistate income in accordance with the Novo Review Compact's formula violated the Legislature's Civil Procedure > Summary Judgment > Appellate unambiguous [***4] directive that taxes established Review > Standards of Review under the BTA must be in accordance with the BTA's [HN1] An appellate court reviews de novo a court of sales-only apportionment formula. She further concluded claims decision on a motion for summary disposition. that there was no constitutional barrier that prevented the Legislature from making the Compact's alternative election provision unavailable to taxpayers. Civil Procedure > Appeals > Standards of Review > De IBM v. Dep't of Treasury, 2012 Mich. App. LEXIS 2293 Novo Review (Mich. Ct. App., Nov. 20, 2012) Governments > Legislation > Interpretation [HN2] An appellate court reviews de novo issues of CASE SUMMARY: statutory interpretation. OVERVIEW: HOLDINGS: [1]-A corporation was Constitutional Law > Bill of Rights > Fundamental entitled to use the Multistate Tax Compact's three-factor Rights > Procedural Due Process > General Overview apportionment formula for its 2008 Michigan taxes; Tax Law > State & Local Taxes > Income Tax > [2]-The express repeal of the Compact's election Corporations & Unincorporated Associations > General provision effective January 1, 2011, was evidence that the Overview legislature had not impliedly repealed the provision when [HN3] Throughout the evolution of Michigan's method of it enacted the Michigan Business Tax Act (BTA); [3]-The business taxation, the Multistate Tax Compact has Compact's election provision remained in effect for the remained in effect. Another constant throughout this 2008 tax year; [4]-The corporation could use the history is that the legislature has always required a Compact's apportionment formula for that portion of its multistate taxpayer with business income or activity both tax base subject to the modified gross receipts tax for the within and without the state to apportion its tax base. This 2008 tax year; [5]-The court of appeals erred by holding process, known as formulary apportionment, has allowed that the BTA repealed the Compact's election provision Michigan to tax the portion of a taxpayer's multistate by implication. business carried on in Michigan without violating the Due Process Clause of the United States Constitution. OUTCOME: The Supreme Court reversed the court of appeals judgment in favor of the Department of Treasury, Governments > Legislation > Interpretation reversed the court of claims order granting summary Governments > Legislation > Expirations, Repeals & disposition in favor of the Department, and remanded to Suspensions the court of claims for entry of an order granting [HN4] Repeals by implication are disfavored. A court summary disposition in favor of the corporation. will presume, in most circumstances, that if the legislature had intended to repeal a statute or statutory Page 3 496 Mich. 642, *; 852 N.W.2d 865, **; 2014 Mich. LEXIS 1282, ***4 provision, it would have done so explicitly. Nevertheless, Overview when the intention of the legislature is clear, repeal by [HN7] See MCL 205.581, art III(1). implication may be accomplished by the enactment of a subsequent act inconsistent with a former act or by the Tax Law > State & Local Taxes > Income Tax > occupancy of the entire field by a subsequent enactment. Corporations & Unincorporated Associations > General However, where the intent of the legislature is claimed to Overview be unclear, it is the court's duty to proceed on the [HN8] MCL 205.581, art III(1) of the Multistate Tax assumption that the legislature desired both statutes to Compact allows a taxpayer subject to an income tax to continue in effect unless it manifestly appears that such elect to use a party state's apportionment formula or the view is not reasonably plausible. Repeals by implication Compact's three-factor apportionment formula. will be allowed only when the inconsistency and repugnancy are plain and unavoidable. The court will construe statutes, claimed to be in conflict, harmoniously Tax Law > State & Local Taxes > Income Tax > to find any other reasonable construction than a repeal by Corporations & Unincorporated Associations > General implication. Only when the court determines that two Overview statutes are so incompatible that both cannot stand will it [HN9] See MCL 205.581, art IV(9). find a repeal by implication. Tax Law > State & Local Taxes > Income Tax > Governments > Legislation > Interpretation Corporations & Unincorporated Associations > General [HN5] In attempting to find a harmonious construction of Overview the statutes, a court will regard all statutes upon the same Governments > Legislation > Interpretation general subject-matter as part of one system. Further, [HN10] The language of the Michigan Business Tax Act statutes in pari materia, although in apparent conflict, (BTA) is mandatory in nature. Under the statute, a should, so far as reasonably possible, be construed in taxpayer's BTA tax base must be apportioned through the harmony with each other, so as to give force and effect to BTA's sales-factor apportionment formula. each. Tax Law > State & Local Taxes > Income Tax > Governments > Legislation > Interpretation Corporations & Unincorporated Associations > General [HN6] In the construction of a particular statute, or in the Overview interpretation of its provisions, all statutes relating to the [HN11] Under MCL 205.581, art III(1) of the Multistate same subject, or having the same general purpose, should Tax Compact, the legislature provided a multistate be read in connection with it, as together constituting one taxpayer with a choice between the apportionment law, although they were enacted at different times, and method contained in the Compact or the apportionment contain no reference to one another. The endeavor should method required by Michigan's tax laws. If a taxpayer be made, by tracing the history of legislation on the elects to apportion its income through the Compact, MCL subject, to ascertain the uniform and consistent purpose 205.581, art IV(9) mandates that the taxpayer do so using of the legislature, or to discover how the policy of the a three-factor apportionment formula. Alternatively, if the legislature with reference to the subject-matter has been taxpayer does not make the Compact election, then the changed or modified from time to time. In other words, in taxpayer must use the apportionment formula set forth in determining the meaning of a particular statute, resort Michigan's governing tax laws. may be had to the established policy of the legislature as disclosed by a general course of legislation. With this purpose in view therefore it is proper to consider, not Tax Law > State & Local Taxes > Income Tax > only acts passed at the same session of the legislature, but Corporations & Unincorporated Associations > General also acts passed at prior and subsequent sessions. Overview Governments > Legislation > Interpretation Governments > Legislation > Expirations, Repeals & Tax Law > State & Local Taxes > Income Tax > Suspensions Corporations & Unincorporated Associations > General [HN12] By only repealing the Multistate Tax Compact's Page 4 496 Mich. 642, *; 852 N.W.2d 865, **; 2014 Mich. LEXIS 1282, ***4 election provision starting January 1, 2011, the legislature income, 1 or more forms of which expenses are not created a window in which it did not expressly preclude specifically and directly related to particular transactions. use of the Compact's election provision for BTA MCL 205.581, art II(4). Under the Compact's broad taxpayers. Further, the express repeal of the Compact's definition, a tax is an income tax if the tax measures net election provision effective January 1, 2011, is evidence income by subtracting expenses from gross income, with that the legislature had not impliedly repealed the at least one of the expense deductions not being provision when it enacted the BTA. Therefore, a review specifically and directly related to a particular of the 2011 amendments supports the conclusion that the transaction. Compact's election provision remained in effect for the 2008 tax year. Tax Law > State & Local Taxes > Income Tax > Corporations & Unincorporated Associations > Governments > Legislation > Interpretation Imposition of Tax Governments > Legislation > Expirations, Repeals & [HN17] See MCL 208.1203(2). Suspensions [HN13] Because there is a presumption against implied Tax Law > State & Local Taxes > Income Tax > repeals, it is the court's task to determine if there is any Corporations & Unincorporated Associations > General other reasonable construction that would harmonize Overview conflicting statutes and avoid a repeal by implication. [HN18] The modified gross receipts tax base is a taxpayer's gross receipts less purchases from other firms. Governments > Legislation > Expirations, Repeals & Suspensions Tax Law > State & Local Taxes > Income Tax > Governments > Legislation > Interpretation Corporations & Unincorporated Associations > General Tax Law > State & Local Taxes > General Overview Overview [HN14] Repeals by implication are rare, and properly so, [HN19] The Michigan Business Tax Act defines "gross given that a court will presume under most circumstances receipts" as the entire amount received by the taxpayer as that if the legislature had intended to repeal a statute or determined by using the taxpayer's method of accounting statutory provision, it would have done so explicitly. used for federal income tax purposes, less any amount They are even more unlikely in the realm of a state's deducted as bad debt for federal income tax purposes that taxation laws. corresponds to items of gross receipts, from any activity whether in intrastate, interstate, or foreign commerce Tax Law > State & Local Taxes > Income Tax > carried on for direct or indirect gain, benefit, or Corporations & Unincorporated Associations > General advantage to the taxpayer or to others. MCL 208.1111(1). Overview Not only is the gross receipts amount reduced by Governments > Legislation > Expirations, Repeals & numerous exclusions, it is also subject to a deduction for Suspensions the amount deducted as bad debt for federal income tax Governments > Legislation > Interpretation purposes that corresponds to items of gross receipts [HN15] The Michigan Business Tax Act and the included in the modified gross receipts tax (MGRT) base. Multistate Tax Compact are not so incompatible that both This total - the entire amount received by the taxpayer cannot stand. from any activity minus the bad-debt deduction and the numerous exclusions under MCL 208.1111 - is the gross receipts base from which the MGRT liability originates. Tax Law > State & Local Taxes > Income Tax > Corporations & Unincorporated Associations > Imposition of Tax Tax Law > State & Local Taxes > Income Tax > [HN16] The Multistate Tax Compact defines "income Corporations & Unincorporated Associations > General tax" as follows: a tax imposed on or measured by net Overview income including any tax imposed on or measured by an [HN20] After a taxpayer determines its gross receipts, the amount arrived at by deducting expenses from gross taxpayer then reduces the gross receipts base by Page 5 496 Mich. 642, *; 852 N.W.2d 865, **; 2014 Mich. LEXIS 1282, ***4 purchases from other firms. The purchases from other income from investments and from incidental or outside firms deductions include, among other things, inventory operations or sources. acquired during the tax year, including freight, shipping, delivery, or engineering charges included in the original Tax Law > Federal Income Tax Computation > Gross contract price; assets acquired during the tax year of a Income (IRC sec. 61) type that are, or under the internal revenue code will [HN25] Black's Law Dictionary states that gross income become, eligible for depreciation, amortization, or means total income from all sources before deductions, accelerated capital cost recovery for federal income tax exemptions, or other tax reductions. purposes; and materials and supplies to the extent not included in inventory or depreciable property. There are also deductions for compensation paid in certain Tax Law > Federal Income Tax Computation > Gross industries and for payments to independent contractors. Income (IRC sec. 61) Once gross receipts is reduced by any applicable Tax Law > State & Local Taxes > Income Tax > deductions, the taxpayer arrives at its modified gross Corporations & Unincorporated Associations > General receipts tax (MGRT) base, which is then subject to the Overview MGRT at a rate of.80 percent after allocation or [HN26] Like gross income under the Internal Revenue apportionment to the state. Code, gross receipts under the Michigan Business Tax Act are subject to myriad exclusions and deductions. Notably, gross receipts are subject to a reduction for the Tax Law > State & Local Taxes > Income Tax > purchase of inventory during the tax year, including Corporations & Unincorporated Associations > General freight, shipping, delivery, or engineering charges Overview included in the original contract price. This is similar to [HN21] For the modified gross receipts tax to be an the Internal Revenue Service's definition of "gross income tax under the Multistate Tax Compact, a tax must income" for manufacturing, merchandising, or mining measure net income by starting with gross income and businesses - total sales less the cost of goods sold. In subtracting expenses, with at least one of the expense addition, several of these exclusions or deductions are not deductions not specifically and directly related to a specifically and directly related to particular transactions. particular transaction. Depreciable assets can be assets used over a certain number of years and, thus, not related to a single Tax Law > Federal Income Tax Computation > Gross transaction. Materials and supplies purchased during a tax Income (IRC sec. 61) year can be used at any time for the operation of a [HN22] The Internal Revenue Code defines "gross business and for any amount of transactions. Finally, the income" as all income from whatever source derived and purchase of inventory, which includes such things as includes a nonexclusive list of items that includes things goods held for resale or raw materials, some of which can such as gross income derived from business and gains stay in a taxpayer's warehouse for an indeterminate derived from dealings in property. 26 U.S.C.S. § 61. amount of time, can be an expense not specifically or directly related to a particular transaction. Tax Law > Federal Income Tax Computation > Gross Income (IRC sec. 61) Tax Law > State & Local Taxes > Income Tax > [HN23] 26 C.F.R. § 1.61-1 provides that gross income Corporations & Unincorporated Associations > General includes income realized in any form, whether in money, Overview property, or services. [HN27] The modified gross receipts tax fits within the broad definition of "income tax" under the Multistate Tax Compact by taxing a variation of net income - the entire Tax Law > Federal Income Tax Computation > Gross amount received by the taxpayer as determined from any Income (IRC sec. 61) gainful activity minus inventory and certain other [HN24] 26 C.F.R. § 1.61-3 provides that gross income deductions that are expenses not specifically and directly for manufacturing, merchandising, or mining businesses related to a particular transaction. is the total sales, less the cost of goods sold, plus any Page 6 496 Mich. 642, *; 852 N.W.2d 865, **; 2014 Mich. LEXIS 1282, ***4 COUNSEL: For INTERNATIONAL BUSINESS tax base subject to the modified gross receipts tax of the MACHINES CORP, PLAINTIFF-APPELLANT: BTA. GREGORY A. NOWAK, DETROIT, MI. Accordingly, we reverse the Court of Appeals For TREASURY DEPARTMENT OF, judgment in favor of the Department, reverse the Court of DEFENDANT-APPELLEE: AG, MICHAEL R. BELL, Claims order granting summary disposition in favor of LANSING, MI; ZACHARY C. LARSEN, LANSING, the Department, and remand to the Court of Claims for MI. entry of an order granting summary disposition in favor of IBM. For MICHIGAN MANUFACTURES ASSOCIATION, AC: LONGWORTH GREG, GRAND RAPIDS, MI. I. FACTS AND PROCEEDINGS For MULTISTATE TAX COMMISSION, AC: AG, IBM is a corporation based in New York that MICHAEL R. BELL, LANSING, MI. provides information technology products and services worldwide. In December 2009, IBM [***6] filed its JUDGES: Chief Justice: Robert P. Young, Jr. Justices: Michigan Business Tax annual return for the 2008 tax Michael F. Cavanagh, Stephen J. Markman, Mary Beth year. Line 10 of IBM's return, the "Apportionment Kelly, Brian K. Zahra, Bridget M. McCormack, David F. Calculation" line, read "SEE ATTACHED ELECTION." Viviano. ZAHRA, J. (concurring). MCCORMACK, J. IBM filed a separate [*646] statement along with its (dissenting). return, entitled "Election to use MTC Three Factor Apportionment," indicating that it elected to apportion its OPINION BY: David F. Viviano business income tax base and modified gross receipts tax base using the three-factor apportionment formula OPINION provided in the Compact. Under these calculations, IBM sought a refund of $5,955,218. The Department [*644] [**868] BEFORE THE ENTIRE BENCH disagreed. It determined that IBM could not elect to use the Compact's formula and that IBM was entitled to a VIVIANO, J. refund of only $1,253,609 when calculated under the In this case, we must determine whether plaintiff BTA's sales-factor apportionment formula. International Business Machines Corporation (IBM) IBM filed a complaint in the Court of Claims, could elect to use the three-factor apportionment [*645] challenging the Department's decision. Thereafter, IBM formula under the Multistate Tax Compact1 (the moved for summary disposition under MCR Compact) for its 2008 Michigan taxes, or whether it was 2.116(C)(10), and the Department moved for summary required to use the sales-factor apportionment [***5] disposition under MCR 2.116(I)(2). [***7] After a formula under the Michigan Business Tax Act (BTA).2 hearing on the motions, the Court of [**869] Claims The Department of Treasury (the Department) rejected denied summary disposition to IBM and granted IBM's attempt to use the Compact's apportionment summary disposition in favor of the Department. The formula and, instead, required IBM to apportion its Court of Claims determined that the BTA mandated the income using the BTA's sales-factor formula. use of the sales-factor apportionment formula. 1 MCL 205.581 et seq. In an unpublished opinion, the Court of Appeals 2 MCL 208.1101 et seq. affirmed the Court of Claims order granting summary We conclude that IBM was entitled to use the disposition in favor of the Department.3 The Court of Compact's three-factor apportionment formula for its Appeals first determined that there was a facial conflict 2008 Michigan taxes and that the Court of Appeals erred between the BTA and the Compact insofar as the BTA by holding otherwise on the basis of its erroneous mandates use of the sales-factor formula while the conclusion that the Legislature had repealed the Compact permits taxpayers to elect to use a three-factor Compact's election provision by implication when it apportionment formula.4 On the basis of this conflict, the enacted the BTA. We further hold that IBM could use the Court of Appeals concluded that the Legislature had Compact's apportionment formula for that portion of its repealed the Compact's election provision by implication Page 7 496 Mich. 642, *647; 852 N.W.2d 865, **869; 2014 Mich. LEXIS 1282, ***7 [*647] when it enacted the BTA.5 The Court of Appeals then stated that it did not need to decide whether the modified gross receipts tax was an "income tax" under 7 IBM v Dep't of Treasury, 494 Mich 874; 832 the Compact subject to the Compact's apportionment N.W.2d 388 (2013). formula in light of its conclusion that the Compact's election provision had been repealed by implication.6 II. STANDARD OF REVIEW 3 IBM v Dep't of Treasury, unpublished opinion [HN1] We review de novo a Court of Claims per curiam of the Court of Appeals, issued decision on a motion for summary disposition.8 [HN2] November 20, 2012 (Docket No. 306618), 2012 We also review de novo issues of statutory Mich. App. LEXIS 2293. [***8] interpretation.9 4 Id. 2012 Mich. App. LEXIS 2293 at *6. 5 Id. 2012 Mich. App. LEXIS 2293 at *8-*10. It 8 Malpass v Dep't of Treasury, 494 Mich 237, also determined that the Compact was not a 245; 833 NW2d 272 (2013). binding contract. 9 Id. 6 Id. 2012 Mich. App. LEXIS 2293 at *11. Judge RIORDAN concurred in all respects except [*648] III. HISTORY OF BUSINESS TAXATION IN regarding the issue of repeal by implication. He MICHIGAN determined that the panel did not need to conclude that the BTA had impliedly repealed the Compact Because we believe it important to our analysis in because MCL 208.1309 allowed the taxpayer to this case, we begin with a discussion of the history of petition for another apportionment formula. He business taxation in Michigan. Michigan's taxation of concluded that the plain language of the BTA business income or activity began in 1953, when the required IBM to apportion its income tax Legislature enacted a business activities tax that taxed the consistently with the BTA. adjusted receipts of a taxpayer.10 This tax remained [**870] in effect until Michigan adopted its first IBM sought leave to appeal in this Court. We corporate income tax as part of the Income Tax Act of granted IBM's application and asked the parties to 1967 (ITA).11 Against the backdrop of the ITA, address Michigan joined the Multistate Tax Compact in 1970 when the Legislature enacted MCL 205.581.12 The (1) whether the plaintiff could elect to Compact "symbolized the recognition that, as applied to use the apportionment formula provided in multistate businesses, traditional state tax administration the Multistate Tax Compact, MCL was inefficient and costly to both [***10] State and 205.581, in calculating its 2008 tax taxpayer."13 Thus, the goals of the Compact include liability to the State of Michigan, or facilitating and promoting equitable and uniform taxation whether it was required to use the of multistate taxpayers.14 To this end, the [*649] apportionment formula provided in the Compact operates in conjunction with Michigan's tax Michigan Business Tax Act, MCL acts, containing several provisions designed to ensure 208.1101 et seq.; (2) whether § 301 of the uniform taxation of multistate taxpayers. Michigan Business Tax Act, MCL 208.1301, repealed by implication Article 10 See 1953 PA 150. See also Armco Steel Corp III(1) of the Multistate Tax Compact; (3) v Dep't of Revenue, 359 Mich 430, 444; 102 whether the Multistate Tax Compact NW2d 552 (1960) ("This tax is part of a general constitutes a contract that cannot be scheme of State taxation of business activities in unilaterally altered or amended by a Michigan. It is a tax on Michigan activities member state; [***9] and (4) whether the measured, in amount, by adjusted receipts derived modified gross receipts tax component of from or attributable to Michigan sources . . . ."). the Michigan Business Tax Act constitutes 11 See MCL 206.61, as enacted by 1967 PA an income tax under the Multistate Tax 281. The stated purpose of the ITA was "to meet Compact.7 deficiencies in state funds by providing for the Page 8 496 Mich. 642, *649; 852 N.W.2d 865, **870; 2014 Mich. LEXIS 1282, ***10 imposition, levy, computation, collection, However, the BTA was short-lived. Effective January 1, assessment, and enforcement by lien and 2012, Michigan returned to a corporate income tax.22 At otherwise of taxes on or measured by net income [**871] the same time, the [*650] Legislature stayed activities . . . ." Title, 1967 PA 281. true to its past practice of repealing conflicting tax acts 12 1969 PA 343. Section 1 of 1969 PA 343, and expressly repealed the BTA.23 codified under MCL 205.581, includes the mandatory provisions of the Compact that must 19 2007 PA 36; MCL 208.1101 et seq. be enacted for a state to become a member. See 20 See MCL 208.1201; MCL 208.1203. US Steel Corp v Multistate Tax Comm, 434 U.S. 21 Enacting section 1 of 2006 PA 325 provides: 452, 455-456; 98 S Ct 799; 54 L Ed 2d 682 "The single business tax act, 1975 PA 228, MCL (1978). 208.1 to 208.145, is repealed effective for tax 13 US Steel Corp, 434 U.S. at 456. years that begin after December 31, 2007." 14 See [***11] MCL 205.581, Art I ("The 22 See 2011 PA 38. purposes of this compact are to: (1) Facilitate 23 See 2011 PA 39, which reads in part: proper determination of state and local tax liability of multistate taxpayers, including the Enacting section 1. The equitable apportionment on tax bases and Michigan business tax act, 2007 settlement of apportionment disputes[,] (2) PA 36, MCL 208.1101 to Promote uniformity or compatibility in significant 208.1601, is repealed effective on components of tax systems[,] (3) Facilitate the date that the secretary of state taxpayer convenience and compliance in the filing receives a written notice from the of tax returns and in other phases of tax department of treasury that the last administration[,] and (4) Avoid duplicative certificated credit or any taxation."). carryforward from that certificated credit has been claimed. In 1976, the Legislature replaced the corporate income tax with a single business tax.15 Unlike its Enacting section 2. This predecessor, the Single Business Tax Act (SBTA) taxed amendatory act [***13] does not business activity, not income, and operated as "a form of take effect unless House Bill No. value added tax."16 In enacting the SBTA, the Legislature 4361 of the 96th Legislature is expressly amended the ITA to the extent necessary to enacted into law. implement the SBTA and expressly repealed provisions of the ITA that would conflict with the SBTA.17 The [HN3] Throughout the evolution of our state's Legislature, however, did not expressly repeal the method of business taxation, the Compact has remained Compact.18 in effect. Another constant throughout this history is that 15 See MCL 208.1 et seq., as enacted by 1975 the Legislature has always required a multistate taxpayer PA 228. with business income or activity both within and without 16 Trinova Corp v Dep't of Treasury, 433 Mich the state to apportion its tax base.24 This process, known 141, 149; 445 NW2d 428 (1989). as formulary apportionment, has allowed Michigan to tax 17 See 1975 PA 233. the portion of a taxpayer's multistate business carried on 18 See id. in Michigan without violating the Due Process Clause of the United States Constitution.25 We now address The SBTA remained in effect until 2008, when the whether a multistate taxpayer retained the privilege of Legislature enacted [***12] the BTA, which is at issue electing the apportionment method provided by the in this case.19 Representing another shift in business Compact for the 2008 tax year. taxation, the BTA imposed two main taxes: the business income tax and the modified gross receipts tax.20 In 24 See MCL 205.553, as amended by 1954 PA enacting the BTA, the Legislature expressly repealed the 17; 1970 CL 206.115; 1979 CL 208.41; MCL SBTA, but again did not expressly repeal the Compact.21 208.1301. 25 Malpass, 494 Mich at 245-246. Page 9 496 Mich. 642, *650; 852 N.W.2d 865, **871; 2014 Mich. LEXIS 1282, ***13 IV. WHETHER IBM COULD ELECT TO USE THE Power to Rewrite Legislation under the COMPACT'S APPORTIONMENT FORMULA FOR Ballooning Conception of "Plain Repugnancy," ITS 2008 TAXES 45 Gonz L Rev 437, 464 (2010). Lord Edward Coke recognized the implied repeal doctrine as far To determine whether IBM could elect to use the back as 1614. See id., p 456-458 (discussing Lord Compact's three-factor apportionment formula to Coke's seminal case on the implied repeal calculate its 2008 Michigan taxes, we must decide if the doctrine--Doctor Foster's Case, 77 Eng Rep 1222 Legislature repealed the Compact's election provision by (KB, 1614)). implication [***14] when it enacted the BTA.26 28 Wayne Co Pros, 451 Mich at 576. 29 Washtenaw Co Rd Comm'rs v Pub Serv 26 This is the principal argument offered by the Comm, 349 Mich. 663, 680; 85 N.W.2d 134 Department in disallowing use of the Compact's (1957). apportionment formula. In the alternative, the 30 Wayne Co Pros, 451 Mich at 577. Department argues the Compact can be 31 Tillotson v Saginaw, 94 Mich 240, 244-245; harmonized with the BTA by reading the 54 NW 162 (1892). Compact's election provision and apportionment 32 Wayne Co Pros, 451 Mich at 576-577 formula into MCL 208.1309. We address this [***16] (emphasis added; citations and quotation argument in note 55 of this opinion. marks omitted). 33 Valentine v Redford Twp Supervisor, 371 [*651] A. LEGAL PRINCIPLES Mich 138, 144; 123 NW2d 227 (1963). As with We begin our analysis "with the axiom that [HN4] any issue of statutory interpretation, our goal "is repeals by implication are disfavored."27 We will to give effect to the Legislature's intent, focusing presume, "in most circumstances, that if the Legislature first on the statute's plain language." Malpass, 494 had intended to repeal a statute or statutory provision, it Mich at 247-248 (citation and quotation marks would have done so explicitly."28 Nevertheless, "[w]hen omitted). the intention of the legislature is clear, repeal by [HN5] In attempting to find a harmonious implication may be accomplished by the enactment of a construction of the statutes, we "will regard all statutes subsequent act inconsistent with a former act" or "by the upon the same general subject-matter as part of one occupancy of the entire field by a subsequent system . . . ."34 Further, "[s]tatutes in pari materia, enactment."29 [**872] However, "where the intent of although in apparent conflict, should, so far as reasonably the Legislature is claimed to be unclear, it is our duty to possible, be construed in harmony with each other, so as proceed on the assumption that the Legislature desired to give force and effect to each . . . ."35 This Court has both statutes to continue in effect unless it manifestly stated: appears that such view is not reasonably plausible."30 Repeals by implication will be allowed "only when the inconsistency [***15] and repugnancy are plain and It is a well-established rule that [HN6] in the construction of a particular statute, or unavoidable."31 We will "construe statutes, claimed to be in the interpretation of its provisions, all in conflict, harmoniously" to find "any other reasonable statutes relating to the same subject, or [*652] construction" than a repeal by implication.32 having the same general purpose, should Only when we determine that two statutes "are so be read in connection with it, as together incompatible that both cannot stand" will we find a repeal constituting one law, although they were by implication.33 enacted at different times, and contain no 27 Wayne Co Pros v Dep't of Corrections, 451 reference to one another. The endeavor Mich 569, 576; 548 NW2d 900 (1996). The should be made, by tracing the history of implied repeal doctrine has "remained stable over legislation on the subject, to ascertain the approximately four centuries of common law in [***17] uniform and consistent purpose of the United Kingdom and then here in the United the legislature, or to discover how the States." Markham, The Supreme Court's New policy of the legislature with reference to Implied Repeal Doctrine: Expanding Judicial the subject-matter has been changed or Page 10 496 Mich. 642, *652; 852 N.W.2d 865, **872; 2014 Mich. LEXIS 1282, ***17 modified from time to time. In other [HN8] This provision allows a taxpayer subject to an words, in determining the meaning of a income tax to elect to use a party state's apportionment particular statute, resort may be had to the formula or the Compact's three-factor apportionment established policy of the legislature as formula. disclosed by a general course of legislation. With this purpose in view 38 MCL 205.581, Art IV(9) ([HN9] "All therefore it is proper to consider, not only business income shall be apportioned to this state acts passed at [*653] the same session of by multiplying the income by a fraction, the the legislature, but also acts passed at prior numerator of which is the property factor plus the and subsequent sessions.36 payroll factor plus the sales factor, and the denominator of which is 3."). In this case, the Compact's election provision and § 301 39 MCL 205.581, Art III(1). of the BTA share the common purpose of setting forth the [*654] However, the Department rejected IBM's methods of apportionment of a taxpayer's multistate attempts to [***19] apportion its income through the business income; therefore, we must construe them Compact's apportionment formula. Instead, it required together as statutes in pari materia.37 IBM to apportion its BTA tax base consistently with the 34 Rathbun v State of Michigan, 284 Mich 521, BTA and its sales-factor formula. Section 301 of the BTA 544; 280 NW 35 (1938) (citation and quotation reads as follows: marks omitted). 35 Id. (citation and quotation marks omitted). (1) Except as otherwise provided in this 36 Id. at 543-544 (citation and quotation marks act, each tax base established under this omitted). act shall be apportioned in accordance 37 Id. at 543 ("Statutes in pari materia are those with this chapter. . . . which have a common purpose . . . ."). (2) Each tax base of a taxpayer whose B. APPLICATION business activities are confined solely to this state shall be allocated to this state. With the history of Michigan business taxation and Each tax base of a taxpayer whose applicable legal principles in mind, [***18] we turn to business activities are subject to tax both the specific statutes at issue. IBM sought to apportion its within and outside of this state shall be [**873] BTA tax base using the Compact's three-factor apportioned to this state by multiplying apportionment formula.38 In so doing, IBM relied on the each tax base by the sales factor calculated Compact's election provision, which reads in pertinent under section 303.40 part: [HN7] (1) Any taxpayer subject to an 40 MCL 208.1301. income tax whose income is subject to apportionment and allocation for tax We recognize that [HN10] the language of the BTA purposes pursuant to the laws of a party is mandatory in nature.41 Under the statute, a taxpayer's state or pursuant to the laws of BTA tax base must be apportioned through the BTA's subdivisions in 2 or more party states may sales-factor apportionment formula.42 The Department elect to apportion and allocate his income argues that this mandatory language precludes the use of in the manner provided by the laws of any other apportionment formula and, reading it in such state or by the laws of such states and isolation, we would agree. However, as stated previously, subdivisions without reference to this § 301 of the BTA is not the only provision of Michigan's compact, or may elect to apportion and tax laws pertaining to the apportionment of business allocate in accordance with article IV . . . [***20] income--the Compact's election provision shares .39 the same purpose. Therefore, we cannot interpret § 301 of the BTA in a vacuum.43 Rather, we must [*655] Page 11 496 Mich. 642, *655; 852 N.W.2d 865, **873; 2014 Mich. LEXIS 1282, ***20 consider it along with the Compact "by tracing the history that "[a]ll business income . . . shall be of legislation on the subject, to ascertain the uniform and apportioned [***22] to this state" through the consistent purpose of the legislature."44 standard three-factor apportionment formula); 1979 CL 208.45 (requiring that "[a]ll of the tax 41 See Fradco v Dep't of Treasury, 495 Mich base . . . shall be apportioned to this state" through 104, 114; 845 NW2d 81 (2014) ("The the three-factor apportionment formula). In 1991, Legislature's use of the word 'shall' . . . indicates a the Legislature began to phase out the SBTA's mandatory and imperative directive."). equally weighted, three-factor apportionment 42 MCL 208.1301(1). formula, requiring a progressively more 43 See also People v Stephan, 241 Mich App sales-factor-focused apportionment formula. See 482, 497; 616 NW2d 188 (2000) (recognizing that MCL 208.45, as amended by 1991 PA 77. interpreting the unambiguous language of two However, the new apportionment formula was conflicting statutes does not end the analysis still mandatory. because "courts do not construe individual statutes in a vacuum" but rather construe statutes The Department argues that the Legislature repealed together under the doctrine of in pari materia). the Compact's election provision when it enacted [*656] 44 Rathbun, 284 Mich at 543-544 (stating the BTA because § 301 of the BTA is the first tax further that courts "'will regard all statutes upon provision with apportionment language directly in the same general subject matter as part of one conflict with the Compact's election provision. The system'") (citation omitted). import of this argument is that the Compact's election provision was a dead letter when it was enacted because The BTA is not the first Michigan business tax act to both the ITA and the election provision required use of contain a mandatory apportionment formula. All our past the same three-factor apportionment formula. However, business tax acts mandated that a taxpayer with [**874] the Department's argument overlooks that the Compact's income or activity that was taxable within and without election provision, by using the terms "may elect," the [***21] state allocate and apportion its tax base contemplates a divergence between a party state's consistently with each respective act.45 These acts further mandated apportionment formula and the Compact's own mandated that the tax base be apportioned through a formula--either [***23] at the time of the Compact's specific apportionment formula.46 The mandatory adoption by a party state or at some point in the future.47 apportionment language of the BTA is nearly identical to Otherwise, there would be no point in giving taxpayers an the language of its predecessors. election between the two. In fact, reading the Compact's election provision as forward-looking--i.e., contemplating 45 See MCL 205.552, as amended by 1954 PA the future enactment of a state income tax with a 17 (providing that "[t]he adjusted receipts of a mandatory apportionment formula different from the taxpayer derived from or attributable to Michigan Compact's apportionment formula--is the only way to sources shall be determined in accordance with give meaning to the provision when it was enacted in the provisions of section 3 of this act"); 1970 CL Michigan.48 Viewed in this light, the BTA's mandatory 206.103 (providing that "[a]ny taxpayer having apportionment language may plausibly be read as income from business activity which is taxable compatible with the Compact's election provision. both within and without this state . . . shall allocate and apportion his net income as provided 47 MCL 205.581, Art III(1). See also Black's in this act"); 1979 CL 208.41 (providing that "[a] Law Dictionary (9th ed) (defining an "election" as taxpayer whose business activities are taxable "[t]he exercise of a choice; esp., the act of both within and without this state, shall apportion choosing from several possible rights or remedies his tax base as provided in this chapter"). in a way that precludes the use of other rights or 46 See MCL 205.553(b), as amended by 1954 remedies"). PA 17 (requiring that a taxpayer with adjusted 48 See Moore v Fennvile Pub Schs Bd of Ed, receipts attributable to activity within and without 223 Mich App 196, 201; 566 NW2d 31 (1997) Michigan apportion the receipts consistent with a ("It is the duty of the courts to interpret statutes so three-factor formula); 1970 CL 206.115 (requiring as to render no provision meaningless."). Page 12 496 Mich. 642, *656; 852 N.W.2d 865, **874; 2014 Mich. LEXIS 1282, ***23 Moreover, our review of the statutes in pari materia does not make the Compact election, then the taxpayer indicates a uniform and consistent purpose of the must use the apportionment formula set forth in Legislature for the Compact's election provision [***24] Michigan's governing tax laws. In this case, IBM's tax to operate alongside Michigan's tax acts.49 Just as it did base arose under the BTA. Had it not elected to use the [*657] when it enacted the ITA,50 the Legislature, Compact's apportionment formula, IBM would have been [**875] in enacting the BTA, had full knowledge of the required to apportion its tax base consistently [***26] Compact and its provisions.51 Even with such knowledge with the mandatory language of the BTA--i.e., through on both occasions, the Legislature left the Compact's the BTA's sales-factor apportionment formula.55 Thus, election provision intact. By contrast, the Legislature we believe the BTA and the Compact are compatible and expressly repealed or amended other inconsistent acts can be read as a harmonious whole. regarding the taxation of businesses.52 Had the Legislature believed that the Compact's election 53 See Wayne Co Pros, 451 Mich at 577. provision no longer had a place in Michigan's tax system 54 Id. at 576-577. or conflicted with the purpose of the BTA, it could have 55 Despite the above framework, the taken the necessary action to eliminate the election Department argues that if the BTA and the provision. Compact can be harmonized, it is only through MCL 208.1309(1), which allows a taxpayer to 49 Rathbun, 284 Mich at 543-544. petition to use another apportionment method. We 50 Although the ITA's apportionment method is disagree. The Department's "harmonization" largely consistent with the Compact's would actually be an abrogation of the election apportionment method, caselaw during the period provision. Section 309 requires that a taxpayer in which both were in effect reflects some petition the Department for another potential for inconsistency. See Consumers Power apportionment method and prove that the BTA's Co v Dep't of Treasury, 235 Mich App 380, 386 n apportionment provision does not fairly represent 6; 597 NW2d 274 (1999) (discussing definitional the taxpayer's business activity in the state. Thus, differences between the ITA and the Compact); the Department's interpretation takes the choice Chocola v Dep't of Treasury, 132 Mich App 820, out of the taxpayer's hands and is inconsistent 831; 348 NW2d 290 (1984); Donovan Const Co v with the plain language of the Compact. Dep't of Treasury, 126 Mich. App. 11; 337 Therefore, we decline to accept the Department's N.W.2d 297 (1983). proposed harmonization. 51 In re Reynolds Estate, 274 Mich. 354, 362; 264 N.W. 399 (1936) [***25] ("The Legislature, Subsequent action by the Legislature indicates that it in passing [a new act], is presumed to have done did not impliedly repeal the Compact's election provision so with a full knowledge of existing statutes."). when it enacted the BTA.56 On May 25, 2011, the 52 See notes 21 and 23 of this opinion. [**876] Legislature expressly amended the Compact's [***27] election provision by adding the following Because the Legislature gave no clear indication that language: it intended to repeal the Compact's election provision, we proceed under the assumption that the Legislature [E]xcept that beginning January 1, 2011 intended for both to remain in effect.53 After reading the any taxpayer subject to the Michigan statutes in pari materia, we conclude that a reasonable business tax act, 2007 PA 36, MCL construction exists other than a repeal by implication.54 208.1101 to 208.1601, or the income tax [HN11] Under Article III(1) of the Compact, the act of 1967, 1967 PA 281, MCL 206.1 to Legislature provided a multistate taxpayer with a choice 206.697, shall, for purposes of that act, between the apportionment method contained in the apportion and allocate in accordance with Compact or the apportionment method required by the provisions [*659] of that act and shall Michigan's tax laws. If a taxpayer elects to apportion its not apportion or allocate in accordance income through the Compact, Article IV(9) mandates that with article IV.57 the [*658] taxpayer do so using a three-factor apportionment formula. Alternatively, if the taxpayer There is no dispute that the Legislature specifically Page 13 496 Mich. 642, *659; 852 N.W.2d 865, **876; 2014 Mich. LEXIS 1282, ***27 intended to retroactively repeal the Compact's election implied repeals,60 it is our task to determine if there is provision for taxpayers subject to the BTA beginning any other reasonable construction that would harmonize January 1, 2011. The Legislature could have--but did the two statutes and avoid a repeal by implication.61 not--extend this retroactive repeal to the start date of the BTA. In addressing this legislation, the dissent suggests 60 See Jackson v Mich Corrections Comm, 313 that "the 2011 Legislature may have simply been acting Mich 352, 356; 21 NW2d 159 (1946). expressly to confirm what the 2007 Legislature believed 61 Wayne Co Pros, 451 Mich at 576-577 it had already done implicitly."58 We would agree with (emphasis added). See also Rathbun, 284 Mich at that conclusion if the Legislature had retroactively 544-545 (If we "can by any fair, strict, or liberal repealed the Compact's election provision beginning construction find for the two provisions a January 1, 2008, the effective date of the BTA. However, reasonable field of operation, without destroying [HN12] by only repealing the Compact's election their evident intent and meaning, preserving the provision starting January 1, 2011, the Legislature force of both, and construing them together in created a window in which [***28] it did not expressly harmony with the whole course of legislation preclude use of the Compact's election provision for BTA upon the subject, it is [our] duty to do so.") taxpayers. Further, we believe that the express repeal of (emphasis added). the Compact's election provision effective January 1, [HN14] Repeals by implication are rare, and 2011, is evidence that the Legislature had not impliedly properly so, given that we will presume under most repealed the provision when it enacted the BTA.59 circumstances that "if the Legislature [***30] [**877] Therefore, a review of the 2011 amendments supports our had intended to repeal a statute or statutory provision, it conclusion that the Compact's election provision would have done so explicitly."62 They are even more remained in effect for the 2008 tax year. unlikely in the realm of our state's taxation laws.63 This 56 See Baxter v Robertson, 57 Mich 127, 132; certainly creates a very [*661] high bar, but we disagree 23 NW 711 (1885) ("Legislative construction of with the dissent that we have made it absolute. Rather, by past legislation . . . is always entitled to be using the applicable canons of construction and faithfully considered with some care, so far as it throws applying our precedents in this area, we have arrived at a light on doubtful language . . . ."). reasonable construction that harmonizes the BTA and the 57 2011 PA 40 (emphasis added). Compact.64 58 Post at 6. 62 Wayne Co Pros, 451 Mich at 576. See also 59 See 1A Singer, Sutherland Statutory Matsushita Elec Indus Co v Epstein, 516 U.S. Construction (7th ed), § 23:11, p 485 ("[T]he later 367, 381; 116 S Ct 873; 134 L Ed 2d 6 (1996) express repeal of a particular statute may be some ("The rarity with which we have discovered indication that the legislature did not previously implied repeals is due to the relatively stringent intend to repeal the statute by implication."). standard for such findings, namely, that there be C. RESPONSE TO THE DISSENT an 'irreconcilable conflict' between the two federal statutes at issue."). The dissent's analysis has a tantalizing simplicity to 63 1A Singer, Sutherland Statutory Construction it. It homes in on the plain language and mandatory (7th ed), § 23:10, p 484, citing Sylk v United [*660] nature of the BTA's apportionment provision. States, 331 F Supp 661, 665 (ED Pa, 1971) ("On However, the dissent spends very little time considering subjects to which the legislature pays continuous, the language of the [***29] Compact, its history, or the close attention, such as internal revenue laws, the history of business taxation in Michigan. While this presumption against implied repeal may have approach may be proper in construing the BTA in a greater force."). typical case, it is incomplete when we are faced with the 64 Contrary to the dissent's suggestion, the question of implied repeal. Under such circumstances, question is not whether the 2008 Legislature that the dissent has arrived at the better or even the best [***31] could disregard a policy choice by the interpretation of the BTA does not end the inquiry. 1970 Legislature--obviously it could--but instead Rather, [HN13] because there is a presumption against what action it must take to make its intentions Page 14 496 Mich. 642, *661; 852 N.W.2d 865, **877; 2014 Mich. LEXIS 1282, ***31 clear in the absence of express repealing language 67 Because we are able to [***33] harmonize in the statute. the statutes and conclude that no repeal by implication occurred, we decline to discuss The dissent agrees that "every attempt" must be whether the Compact is binding and, thus, made to construe the BTA and the Compact whether the Legislature even could repeal the harmoniously. But, in the end, the dissent fails to heed Compact by implication. That inquiry involves this call. Instead, because of its rigid focus on the constitutional issues, which we will not reach mandatory language of the BTA--to the exclusion of the because they are unnecessary to resolve the case. language and history of the Compact, and its place in See Booth Newspapers, Inc v Univ of Mich Bd of Michigan's taxation scheme--the dissent's analysis is at Regents, 444 Mich 211, 234; 507 NW2d 422 odds with our longstanding implied-repeal jurisprudence. (1993) ("In addition, there exists a general presumption by this Court that we will not reach D. CONCLUSION AS TO THE ISSUE OF IMPLIED constitutional issues that are not necessary to REPEAL resolve a case."). In sum, because we are able to harmonize the BTA [**878] V. WHETHER THE MODIFIED GROSS and the Compact's election provision, we conclude that RECEIPTS TAX IS AN INCOME TAX UNDER THE [HN15] the statutes are not "'so incompatible that both COMPACT cannot stand.'"65 We believe that our interpretation allows the Compact's election provision to serve its Having determined that IBM could elect to use the purpose of providing uniformity to multistate taxpayers Compact's apportionment formula for the 2008 tax year, in light of Michigan's enactment of an apportionment we must next consider whether IBM could apportion its formula different from the Compact's formula. Any entire BTA tax base through the Compact's conflict apparent from a first reading of these statutes is apportionment formula. IBM's 2008 BTA tax base reconcilable when the statutes are read in pari materia.66 contained two components: the business income tax base [***32] Therefore, the Department has failed to and the modified gross receipts tax (MGRT) base. The overcome [*662] the presumption against repeals by parties quarrel over whether both components may be implication. Accordingly, the Court of Appeals erred by apportioned under the Compact. The Compact election is holding that the Legislature repealed the Compact's available to "[a]ny taxpayer subject to an income tax."68 election provision by implication when it enacted the While it is undisputed that [***34] the business income BTA. Instead, we hold that the Compact's election tax is an income tax, the Department argues that the provision was available to IBM for the 2008 tax year.67 [*663] MGRT is not an income tax, but rather a gross receipts tax not subject to the Compact's election 65 Valentine, 371 Mich at 144 (citation omitted). provision. Therefore, we must determine whether the 66 The Department also cannot show that the MGRT is an income tax under the Compact and, thus, Legislature intended to occupy the entire field apportionable under the Compact's three-factor covered by the Compact when it enacted the BTA apportionment formula. to establish a repeal by implication. Washtenaw Co Rd Comm'rs, 349 Mich at 680. The BTA and 68 MCL 205.581, Art III(1). the Compact, while having some overlapping provisions, occupy two different fields. The BTA [HN16] The Compact defines "income tax" as is a stand-alone tax act that governs the taxation follows: of businesses. The Compact acts as an overlay to Michigan's taxation system. It is specifically [A] tax imposed on or measured by net designed to leave the member states with income including any tax imposed on or "complete control over all legislation and measured by an amount arrived at by administrative action affecting the rate of tax, the deducting expenses from gross income, 1 composition of the tax base . . . , and the means or more forms of which expenses are not and methods of determining tax liability and specifically and directly related to collecting any taxes determined to be due." US particular transactions.69 Steel Corp, 434 U.S. at 457. Page 15 496 Mich. 642, *663; 852 N.W.2d 865, **878; 2014 Mich. LEXIS 1282, ***34 Under the Compact's broad definition, a tax is an income ."71 [HN19] The BTA defines "gross receipts" as tax if the tax measures net income by subtracting expenses from gross income, with at least one of the the entire amount received by the expense deductions not being specifically and directly taxpayer as determined by using the related to a particular transaction.70 taxpayer's method of accounting used for federal income tax purposes, less any 69 MCL 205.581, Art II(4). The Compact also amount deducted as bad debt for federal defines "gross receipts tax" in Art II(6) as follows: income tax purposes that corresponds to items of gross receipts . . . , from any [A] tax, other than a sales tax, activity whether in intrastate, interstate, or which is imposed on or measured foreign commerce carried on for direct or by the gross volume of business, in indirect gain, benefit, or advantage to the terms of gross receipts or in other taxpayer or to others . . . .72 terms, and in the determination of which no deduction [***35] is Not only is the gross receipts amount reduced by allowed which would constitute numerous exclusions, it is also subject to a deduction for the tax an income tax. the "amount deducted as bad debt for federal income tax purposes that corresponds to items of gross receipts included in the modified gross receipts tax base."73 This 70 We need not put a definitive label on the total--the entire amount received by the taxpayer from MGRT, a task with which commentators have any activity minus the bad-debt deduction and the struggled. See, e.g., McIntyre & Pomp, A Policy numerous exclusions under MCL 208.1111--is the gross Analysis of Michigan's Mislabeled Gross Receipts receipts base from which the MGRT liability originates. Tax, 53 Wayne L Rev 1283 (2007) (concluding that the MGRT is akin to a sales-subtraction value 71 MCL 208.1203(3). added tax but that it is not a transactional tax); 72 MCL 208.1111(1). Gandhi, Computing the Tax Base: The Michigan 73 Id. Business Tax, 53 Wayne L Rev 1369 (2007) (concluding that the MGRT is a reverse-build of [HN20] After the [***37] taxpayer determines its Michigan's now-repealed Single Business Tax); gross receipts through the above calculation, the taxpayer Grob & Roberts, The Michigan Business Tax then reduces the gross receipts base by "purchases from Replaces the State's Much-Vilified SBT, 17-Oct J other firms."74 The "purchases from other firms" Multistate Tax'n & Incentives 8 (2007) deductions include, among other things, "inventory (concluding that the MGRT is something between acquired during [*665] the tax year, including freight, a gross receipts tax and a gross margin tax). shipping, delivery, or engineering charges included in the Instead, we are only tasked with determining original contract price"; "assets . . . acquired during the whether the MGRT qualifies as an income tax tax year of a type that are, or under the internal revenue under the Compact. code will become, eligible for depreciation, amortization, or accelerated capital cost recovery for federal income tax "Modified gross receipts tax" is not defined by the purposes"; and materials and supplies to the extent not BTA, but MCL 208.1203(2) states, [HN17] "[The included in inventory or depreciable property.75 There MGRT] levied and imposed under this section is upon the are also deductions for compensation paid in certain privilege of [*664] doing business and not upon income industries and for payments to independent contractors.76 or property." Although this statement indicates that the Once gross receipts is reduced by any applicable MGRT is not a tax upon income under the BTA, we must deductions, the taxpayer arrives at its MGRT base, which [***36] still determine whether the MGRT fits under the is then subject to the MGRT at a rate of .80 percent after broad definition of "income tax" under the Compact. allocation or apportionment to this state.77 [HN18] The MGRT base is "a taxpayer's gross 74 MCL 208.1203(3). receipts . . . less purchases from other [**879] firms . . . 75 MCL 208.1113(6)(a) through (c). "Inventory" Page 16 496 Mich. 642, *665; 852 N.W.2d 865, **879; 2014 Mich. LEXIS 1282, ***37 is defined as "[t]he stock of goods held for resale "gross income" for manufacturing, merchandising, or in the regular course of trade of a retail or mining businesses--total sales less the cost of goods wholesale business" and [***38] "[f]inished sold.81 In addition, several of these exclusions or goods, goods in process, and raw materials of a deductions are not specifically and directly related to manufacturing business purchased from another particular transactions.82 Depreciable [*667] assets can person." MCL 208.1111(4)(a), (b). be assets used [***40] over a certain number of years 76 MCL 208.1113(6)(d) through (g). and, thus, not related to a single transaction.83 Materials 77 MCL 208.1203(1). and supplies purchased during a tax year can be used at any time for the operation of a business and for any Having examined how a taxpayer's MGRT base is amount of transactions. Finally, the purchase of calculated, we now turn to the question whether the inventory, which includes such things as goods held for MGRT fits within the Compact's definition of "income resale or raw materials, some of which can stay in a tax." [HN21] For the MGRT to be an income tax under taxpayer's warehouse for an indeterminate amount of the Compact, a tax must measure net income by starting time, can be an expense not specifically or directly with gross income and subtracting expenses, with at least related to a particular transaction.84 one of the expense deductions not specifically and directly related to a particular transaction.78 The Compact 81 "Cost of goods sold" is determined by a and the BTA do not define "gross income." Therefore, we taxpayer's inventory. See 33A Am Jur 2d, Federal look elsewhere to determine what normally constitutes Taxation, § 6500 ("A taxpayer must use gross income. [HN22] The Internal Revenue Code inventories to determine the cost of goods sold if defines "gross income" as "all income from whatever the production, purchase, or sale of merchandise source derived" and includes a nonexclusive list of items is an income-producing factor."). See also Thor that includes things such as "gross income derived Power Tool Co v Comm'r of Internal Revenue, [*666] from business" and "gains derived from dealings 439 U.S. 522, 530 n 9; 99 S. Ct. 773; 58 L. Ed. 2d in property."79 [HN23] 26 CFR § 1.61-1 [**880] 785 (1979); Hygienic Prods Co v Comm'r of provides that "[g]ross income includes income realized in Internal Revenue, 111 F2d 330, 331 (CA 6, 1940). any form, whether in money, property, or services." 82 While the Compact does not define the phrase [HN24] 26 CFR § 1.61-3 further provides that gross "not specifically and directly related to particular income for manufacturing, merchandising, or mining transactions," the use of the words "specifically," [***39] businesses is "the total sales, less the cost of "directly," and "particular" connotes a close goods sold, plus any income from investments and from relation to an individual transaction. See [***41] incidental or outside operations or sources." Moreover, Random House Webster's College Dictionary [HN25] Black's Law Dictionary states that gross income (2001). That is, the tax cannot be a tax focusing means "[t]otal income from all sources before deductions, on specific transactions, i.e., a transactional tax. exemptions, or other tax reductions."80 83 See 26 USC 167, 168. 84 MCL 208.1111(4)(a), (b). 78 MCL 205.581, Art II(4). 79 26 USC 61. We hold that [HN27] the MGRT fits within the 80 Black's Law Dictionary (9th ed), p 831. broad definition of "income tax" under the Compact by taxing a variation of net income--the entire amount These definitions of gross income are similar to the received by the taxpayer as determined from any gainful definition of gross receipts under the BTA--the entire activity minus inventory and certain other deductions that amount received by the taxpayer as determined from any are expenses not specifically and directly related to a gainful activity. [HN26] Like gross income under the particular transaction. Therefore, IBM could elect to use Internal Revenue Code, gross receipts are subject to the Compact's apportionment formula for that portion of myriad exclusions and deductions. Notably, gross its tax base subject to the MGRT for the 2008 tax year.85 receipts are subject to a reduction for the purchase of inventory during the tax year, including freight, shipping, 85 Our holding is limited to the determination delivery, or engineering charges included in the original that the MGRT is included within the Compact contract price. This is similar to the IRS's definition of definition of "income tax." As noted earlier in Page 17 496 Mich. 642, *667; 852 N.W.2d 865, **880; 2014 Mich. LEXIS 1282, ***41 note 70, we do not need to reach the issue whether take immediate effect.1 MCL 8.3u provides that the MGRT, generally, is an income tax. [*669] [t]he provisions of any law or VI. CONCLUSION statute which is re-enacted, amended or revised, so far as they are the same as We conclude that Court of Appeals erred by holding those of prior laws, shall be construed as a that the BTA repealed the Compact's election provision continuation of such laws and not as new by implication. Therefore, IBM could elect to use enactments. If any provision of a law is [**881] the Compact's apportionment formula during the repealed and in substance re-enacted, a 2008 tax [*668] year. We further hold that IBM could reference in any other law to the repealed use the Compact's apportionment [***42] formula to provision shall be deemed a reference to apportion its MGRT base under the BTA. Accordingly, the re-enacted provision. we reverse the Court of Appeals judgment in favor of the Department, reverse the Court of Claims order granting Pursuant to this provision, we must construe the Compact summary disposition in favor of the Department, and as though it had not been impliedly repealed.2 remand to the Court of Claims for entry of an order granting summary disposition in favor of IBM. 1 2011 PA 40. 2 See also 1A Singer, Sutherland Statutory David F. Viviano Construction (7th ed), Repeal and Reenactment, § 23:29. Michael F. Cavanagh That said, the BTA's exclusive apportionment Stephen J. Markman method remains in conflict with the election provision of CONCUR BY: Brian K. Zahra the Compact. This conflict, in my view, is easily resolved because the Legislature in 2011 also expressly CONCUR supplemented the [***44] Compact. This new provision is not "the same as those of prior laws" and is a "new ZAHRA, J. (concurring). enactment," which expressly provides that a taxpayer could elect to apportion its income under article IV of the I agree with the lead opinion's holding that IBM was Compact entitled to use the Compact's elective three-factor apportionment and allocation formula for its 2008 except that beginning January 1, 2011 Michigan taxes. I also agree with both the lead opinion any taxpayer subject to the Michigan and the dissenting opinion that the tax bases at issue here business tax act, 2007 PA 36, MCL are "income taxes" within the meaning of the Compact. 208.1101 to 208.1601, or the income tax Whether the Legislature repealed the Compact's election act of 1967, 1967 PA 281, MCL 206.1 to provision by implication when it enacted the BTA is a 206.697, shall, for purposes of that act, very close question. I would not reach that question apportion and allocate in accordance with because the Legislature made clear that taxpayers are the provisions of that act and shall not entitled to use the Compact's election provision for the apportion or allocate in accordance with 2008, 2009, and 2010 tax years. article IV.3 Assuming that the Legislature impliedly repealed the Compact's election provision in 2008 by enacting the BTA, IBM could nonetheless avail itself of the Compact's 3 2011 PA 40. [***43] election provision for tax years 2008 through 2010 because the Legislature, in 2011, clearly intended to [**882] There can be no dispute given this provide multistate taxpayers the benefit of the Compact's language that the Legislature specifically intended to election provision for these tax years. Specifically, on retroactively repeal the Compact's election provision May 25, 2011, the Legislature necessarily re-enacted all beginning January 1, 2011. Further, I conclude that this the provisions of the Compact, and ordered that act to language contemplates that any taxpayer could avail itself Page 18 496 Mich. 642, *669; 852 N.W.2d 865, **882; 2014 Mich. LEXIS 1282, ***44 of the Compact's election provision for tax years 2008 constitutional barrier that prevents the Legislature from through 2010. This is because the Legislature, either making the Compact's alternative election provision under the [*670] original enactment of the Compact4 unavailable to taxpayers. I would affirm the judgment of (assuming the Legislature did not repeal the Compact's the Court of Appeals. election provision by implication when it enacted the BTA) or under the above re-enactment and I. AN IRRECONCILABLE CONFLICT OF STATUTES supplementation of the Compact5 (assuming the The threshold issue is, at its core, one of statutory Legislature [***45] repealed the Compact's election interpretation. When the language of a statute is provision by implication when it enacted the BTA), chose unambiguous, we give effect to its plain meaning. Ter to commence its express repeal of the Compact's election Beek v City of Wyoming, 495 Mich 1, 8; 846 NW2d 531 provision on January 1, 2011, even though the conflict (2014). It is hard to imagine a more unambiguous between the BTA and the Compact had existed from the command than the mandatory directive found in § 301 of 2008 tax year. Simply put, the contrapositive of the the BTA: "Except as otherwise provided in this act, each Compact's supplemental provision must mean that before tax base established under this act shall be apportioned in January 1, 2011, a taxpayer could, "for purposes of that accordance with this chapter." MCL 208.1301(1). act [the ITA or the BTA], apportion and allocate in [***47] There is no "otherwise provided" exception in accordance with the provisions of [the ITA or the BTA] the BTA that would aid IBM in its [**883] attempt to and [may] apportion or allocate in accordance with article avoid the statute's sales-only apportionment requirement. IV" of the Compact. This is, in my opinion, the most And, within Chapter 208 of the Michigan Compiled reasonable understanding of this legislation. Laws, it is the BTA alone that provides the formula by 4 1969 PA 343. which taxpayers are to apportion their multistate income. 5 2011 PA 40. See MCL 208.1301(2); MCL 208.1303(1). Neither the Compact nor its apportionment provisions are referred to In sum, the Legislature in 2011 created a window in anywhere in the BTA. which it intended the Compact's election provision to apply. In this case, IBM sought to "apportion and I share the lead opinion's view that we must make allocate" its taxes under the BTA well before January 1, every attempt "to construe statutes, claimed to be in 2011, and therefore may apportion or allocate its taxes in conflict, harmoniously[.]" Wayne Co Prosecutor v Dep't accordance with article IV of the Compact. For this of Corrections, 451 Mich 569, 577; 548 NW2d 900 reason, I concur in the result reached in the lead opinion. (1996).1 When later enacted legislation irreconcilably [*672] conflicts with a prior act, however, "the last Brian K. Zahra expression of the legislative will must control." Jackson v Mich Corrections Comm, 313 Mich 352, 356; 21 N.W.2d DISSENT BY: Bridget M. McCormack 159 (1946). DISSENT 1 The lead opinion implies that if the Compact is found to irreconcilably conflict with the BTA, the MCCORMACK, J. (dissenting). Compact, as the earlier enacted statute, will necessarily have been repealed by implication. I respectfully dissent because I conclude that the Our caselaw does not demand such a result. See [***46] Michigan Business Tax Act (BTA), MCL Metro Life Ins Co v Stoll, 276 Mich 637, 641; 268 208.1101 et seq., requires taxpayers to apportion their NW 763 (1936) ("It is the rule that where multistate income in accordance with the BTA's [***48] two laws in pari materia are in sales-only apportionment formula and without resort to irreconcilable conflict, the one last enacted will the Multistate Tax Compact's election provision. I reach control or be regarded as an exception to or this result because the Legislature's [*671] qualification of the prior statute.") In any event, command--"each tax base established under this act shall regardless of whether the BTA impliedly repealed be apportioned in accordance with this chapter," MCL the Compact beginning January 1, 2008, the issue 208.1301(1) (emphasis added)--is plain, unambiguous, remains the same--whether the Compact election and permits only one interpretation. Further, there is no was available for tax years 2008 through 2010. Page 19 496 Mich. 642, *672; 852 N.W.2d 865, **883; 2014 Mich. LEXIS 1282, ***48 Section 301(1) of the BTA directs that taxes interpreting § 301 as permitting taxpayers to make the established under the BTA be apportioned "in accordance Compact election, the lead opinion has not, as it claims, with this chapter." "[T]his chapter" requires taxpayers to settled on a harmonious construction of the BTA and the use a sales-only apportionment formula.2 The Compact, Compact. Rather, it has resolved the conflict in favor of however, provides that "[a]ny taxpayer subject to an the Compact, the earlier enacted statute. But our income tax3 . . . may elect to apportion" its income in precedent is clear: when an irreconcilable conflict exists, accordance with the Compact's three-factor as in this case, the later enacted legislation controls. apportionment formula. MCL 205.581, Art III(1). Jackson, 313 Mich at 356; see also Washtenaw Co Rd Reading these provisions side by side, I see two, and only Comm'rs v Pub Serv Comm, 349 Mich. 663, 680; 85 two, possible results: either taxes established under the N.W.2d 134 (1957). Because I am not convinced that the BTA need not be apportioned "in accordance with this two statutes can be read harmoniously, I believe that, for chapter," as § 301 demands, or taxpayers may not elect to tax years 2008 through 2010, the enactment of the BTA use the Compact formula to apportion tax bases impliedly repealed the Compact's election provision. established under the BTA. While I agree with the lead opinion that statutes that appear to be conflict should be The lead opinion tries to give some effect to § 301 by read together and reconciled, [***49] if reasonably stating that a taxpayer "must use the apportionment possible, Rathbun v State of Michigan, 284 Mich 521, formula set forth in" the BTA if it does not [***51] 544; 280 NW 35 (1938), I disagree that this is a case make the [*674] Compact election. Ante at 15. This where reconciliation is possible. The differing opinions construction does not make § 301's mandatory directive offered [*673] by this Court here make the underlying "mandatory" at all. When a taxpayer is given a choice as conflict undeniably plain. The Compact and the BTA are to whether they will apportion their income in accordance irreconcilably in conflict; one statute--either the Compact with the BTA's sales-only formula, the number of or the BTA--must prevail over the other. And neither alternative options--a single one, or more--is irrelevant. alternative is easily dismissed. Traditional rules of As long as an alternative option exists, the taxpayer may, construction lead me to resolve the conflict in favor of the not must, use the apportionment formula set forth in the later enacted and more specific legislation. See BTA. And once the lead opinion's "mandatory" Kalamazoo v KTS Indus, Inc, 263 Mich App 23, 38-39; construction is revealed to be anything but that, I do not 687 NW2d 319 (2004) (resolving a direct conflict believe that the lead opinion has persuasively explained between two statutes in favor of the subsequently enacted why the BTA did not impliedly amend or repeal the legislation). Compact's election provision. Rather, the lead opinion, relying on the fact that the Legislature has expressly 2 Taxpayers may petition the Treasury to use an repealed and amended tax statutes in the past, simply alternative apportionment method if the states that "[h]ad the Legislature believed that the apportionment provisions of the BTA "do not Compact's election provision no longer had a place in fairly represent the extent of the taxpayer's Michigan's tax system . . . , it could have taken the business activity in this state[.]" MCL necessary action to eliminate the election provision." 208.1309(1). Ante at 14-15. Because it did not, the lead opinion 3 I agree with the lead opinion that the tax bases "proceed[s] [***52] under the assumption that the at issue here are "income taxes" within the Legislature intended for [the Compact's election meaning of the Compact. MCL 205.581, Art II(4). provision] to remain in effect." Ante at 15. This, of course, simply assumes the lead opinion's conclusion that The lead opinion agrees that the plain language of § there was no repeal. Yes, repeals by implication are 301 is mandatory. But it asserts that § 301 can disfavored, and that the Legislature knows how to affect nevertheless [***50] be interpreted as permitting an express repeal is irrefutable. But by demanding that taxpayers to make the Compact election. I do not see how the Legislature take "the necessary action"--i.e., expressly this interpretation of the BTA is reasonable. If a taxpayer amend or repeal the Compact--the lead opinion has can elect an alternative apportionment formula, then § elevated the presumption against implied repeals into an 301 is [**884] in no sense mandatory. Quite the absolute bar. opposite: § 301's mandatory apportionment "in accordance with this chapter" becomes optional. By Having failed to adequately explain why the Page 20 496 Mich. 642, *674; 852 N.W.2d 865, **884; 2014 Mich. LEXIS 1282, ***52 statutory language itself permits the result it reaches, the it intended when it enacted the Compact forty years lead opinion anchors its analysis in a historical overview earlier or amended it three years later. While in of business taxation in Michigan. While informative, I answering this question the 2011 amendment may be find this approach ultimately unpersuasive. The lead considered "with some care, so far as it throws light on opinion argues that because the Compact was enacted at a doubtful language," Baxter, 57 Mich at 132, that light time when Michigan law applied the same three-factor does not shine on the lead opinion's argument. apportionment [*675] formula as that provided in the Compact, the Legislature, in enacting it, must have In my view the BTA made the Compact election anticipated the future enactment of a tax act requiring a unavailable. Because the statutes are irreconcilably in different apportionment formula and intended for the conflict, the latter, as the more [***55] specific and later Compact to prevail should a conflict arise. But even enacted statute, must be given effect over the former. For assuming that the lead [***53] opinion is correct, that this reason, I disagree with the lead opinion that the interpretation reads into the Compact a policy choice by BTA's mandatory directive can be interpreted so as to the 1970 Legislature that the 2008 Legislature was free to allow BTA taxpayers to make the Compact election disagree with, either by enacting an income tax with a instead. As a result, I find it necessary to address IBM's different, mandatory apportionment formula, as it did in argument that the Legislature was not constitutionally 2008, or by repealing the election provision outright, as it permitted to make the BTA's sales-only apportionment did in 2011. See Studier v Mich Pub Sch Employees' formula exclusive and mandatory without first repealing Retirement Bd, 472 Mich 642, 661; 698 NW2d 350 the Compact in its entirety. (2005) ("[A] fundamental principle of the jurisprudence II. THE LEGISLATURE WAS NOT BARRED FROM [**885] of both the United States and this state is that UNILATERALLY AMENDING THE COMPACT one legislature cannot bind the power of a successive legislature."). IBM asks this Court to invoke the authority of "compact law" and hold that the Legislature, even had it The lead opinion underscores its error by attaching intended to alter the Compact's election provision when it particular significance to 2011 PA 40, which expressly enacted the BTA, was prohibited from doing so.4 I would amended the Compact to make the election unavailable to decline that invitation. BTA taxpayers beginning January 1, 2011. The effect of this amendment on tax years 2011 and beyond is plain to 4 To the extent that IBM is separately arguing see, but whether the amendment lends force to IBM's that the Compact is a binding contract among its position in this dispute is not. In enacting this member states and that unilateral amendment of amendment, the 2011 Legislature may have simply been the Compact offends the Contract Clause, that acting expressly to confirm what the 2007 Legislature argument is discussed later in this opinion. believed it had already done implicitly. And even if the 2011 Legislature was expressing its view that the BTA The California First District Court of Appeal did not, in fact, repeal [***54] the election provision, recently decided this very issue in Gillette Co v this Court is not bound by the prior Legislature's Franchise Tax Bd, 209 Cal App 4th 938; 147 Cal construction of the earlier enactment. See Robertson v Rptr 3d 603 (2012), review [***56] granted and Baxter, 57 Mich 127, 132; 23 NW 711 (1885) opinion superseded sub nom Gillette v Franchise ("Legislative construction of past legislation has no Tax Bd, 151 Cal Rptr 3d 106; 291 P3d 327 judicial force except for the future. But it is always (2013). The Gillette Court held that "under entitled to be considered with some care, so far as it established compact law, the [Multistate Tax] throws light on doubtful language, and for future cases it Compact superseded subsequent conflicting state has authority."); Frey v Mitchie, 68 Mich. 323, 327; law . . . [and] the federal and state Constitutions McGrath 1185, 36 N.W. 184 (1888) ("It is unnecessary to prohibit states from passing laws that impair the say more than that a [*676] legislative interpretation of obligations of contracts." Gillette, 147 Cal Rptr 3d old laws has no judicial force. Whether right or wrong at 615. For the reasons stated herein, I believe that must be determined by the statutes themselves."). The Gillette was wrongly decided. question we must answer in this case concerns what the Legislature intended when it enacted the BTA--not what [*677] The United States Constitution provides that Page 21 496 Mich. 642, *677; 852 N.W.2d 865, **885; 2014 Mich. LEXIS 1282, ***56 "[n]o State shall, without the [**886] Consent of parental home in Philadelphia, where the abuse occurred. Congress . . . enter into any Agreement of Compact with Plaintiff argued that the Virginia court order, in another State[.]" US Const, art I, § 10, cl 3. As the conjunction with the Interstate Compact for Placement of Supreme Court explained in US Steel Corp v Multistate Children (ICPC), a compact to which Pennsylvania and Tax Comm, 434 U.S. 452; 98 S Ct 799; 54 L Ed 2d 682 Virginia are parties that had not been congressionally (1978), the clause is not to be read strictly, but only as approved, extended the jurisdiction of the Virginia court requiring congressional consent for compacts that tend to into Pennsylvania and thereby imposed a legal duty on increase the political power of the states in a way that the Philadelphia social workers. The United States Court "may encroach upon or interfere with the just supremacy of Appeals for the Third Circuit rejected this argument, of the United States." Id. at 471 (quotation marks and ultimately [***59] concluding that the ICPC did not citation omitted). Those compacts that receive apply when a child is returned by the [*679] sending congressional authorization and fall within the scope of state to a natural parent residing in another state. the Compact Clause are treated [***57] as federal law. McComb, 934 F2d at 482. Cuyler v Adams, 449 U.S. 433, 440; 101 S Ct 703; 66 L Ed 2d 641 (1981). Compacts without congressional IBM cites the Third Circuit's discussion of the scope approval, however, are not transformed into federal law; of the ICPC for its argument here: thus their construction is a matter of state statutory law. Because Congressional consent was Notwithstanding the fact that the Multistate Tax neither given nor required, the [ICPC] Compact, as a compact without congressional approval, does not express federal law. does not carry the supreme force of federal law, IBM Consequently, this Compact must be believes that the Legislature could not impose an construed as state law. . . . exclusive apportionment formula because the Compact supersedes conflicting state law in any event. This is Nevertheless, uniformity of contrary to our well-established rule that a statute can be interpretation is important in the amended, repealed, or superseded, in whole or in [*678] construction of a Compact because in part, expressly or impliedly, by a subsequently enacted some contexts it is [**887] a contract statute. LeRoux v Secretary of State, 465 Mich. 594, 615; between the participating states. Having 640 N.W.2d 849 (2002) ("Absent the creation of contract entered into a contract, a participant state rights, the later Legislature is free to amend or repeal may not unilaterally change its terms. A existing statutory provisions."). The essence of IBM's Compact also takes precedence over argument is that because a compact is an agreement statutory law in member states. [McComb, between Michigan and the other member states, it is not 934 F2d at 479 (citations omitted; like any other state law subject to traditional principles of emphasis added).] statutory construction, but rather it has some greater force and authority. As a result, any variation [***58] from the The McComb court did not cite any authority for the Compact's terms is strictly prohibited. In support of this above emphasized rule--that compacts without proposition, IBM cites as persuasive authority McComb v congressional approval cannot be unilaterally amended Wambaugh, 934 F2d 474, 479 (CA 3, 1991), and CT and must take precedent over conflicting state law--and I Hellmuth & Assoc, Inc v Washington Metro Area Transit have found none. Moreover, the unsupported statement Auth, 414 F Supp 408, 409 (D Md, 1976). Neither case, contradicts the one that precedes it. Either the compact in my view, supports such a rule. must be construed as state law or it must be construed as something with greater authority [***60] than state law, In McComb, the plaintiff, as guardian ad litem for a but the McComb court said both. Finally, this statement minor child, brought a suit against the city of was dictum, because the court did not identify any Philadelphia and its employees under 42 USC 1983. The potential conflict between the ICPC and Pennsylvania suit sought damages for injuries the child suffered as a law and the court ultimately determined that the ICPC did result of parental abuse. Before he was injured the child not apply. Id. at 482. was under the protective custody of a Virginia court. The Virginia court ordered that the child be returned to his In CT Hellmuth, the plaintiff sought to compel Page 22 496 Mich. 642, *679; 852 N.W.2d 865, **887; 2014 Mich. LEXIS 1282, ***60 disclosure of documents under Maryland law. The 205.581, ART III(2) DOES NOT VIOLATE THE defendant, an interstate agency formed by an interstate STATE OR FEDERAL CONTRACTS CLAUSE compact between Maryland, Virginia, and the District of Columbia, argued that its status as an interstate agency In evaluating whether § 301 of the BTA exempted it from the Maryland law. In granting the unconstitutionally impairs a contract, the threshold defendant's motion for summary judgment, the court question is whether the Compact did, in fact, create a remarked that contractual relationship in the first instance. I do not believe [**888] that it did. Two factors weigh heavily in [*680] when enacted, a compact this conclusion. First, the member states' courses of constitutes not only law, but a contract conduct indicate that there is no contractual obligation to which may not be amended, modified, or strictly adhere to Articles III and IV of the Compact. otherwise altered without the consent of Second, the Compact is silent regarding a member state's all parties. It, therefore, appears settled authority to enact exclusive apportionment formulas that that one party may not enact legislation differ from the Compact's formula. which would impose burdens upon the Starting with the obvious: taxpayers like IBM were compact absent the concurrence of the not parties to the Compact. To the extent that the other signatories. [CT Hellmuth, 414 F Compact can be viewed as a contract, it is an agreement Supp at 409.] between its member states, not between taxpayers and the states.5 The Compact member states' courses of CT Hellmuth and the cases it relied upon, however, performance are critical to understanding the nature of involved congressionally approved compacts, which, as the agreement. As the Supreme Court recently explained, explained, supersede subsequent state law by virtue of the a party's course of performance is "highly significant" Supremacy Clause. Cuyler, 449 U.S. at 440. evidence of the party's understanding [***63] of the IBM's [***61] claim that the Compact trumps the Compact's terms. Tarrant Regional Water Dist v BTA simply because of its status as a compact relies on Hermann, U.S. ; 133 S Ct 2120, 2135; 186 L Ed 2d the faulty premise that the distinction between compacts 153 (2013) (citation and quotation marks omitted).6 Here, that have congressional approval and those that do not is it is plain that the member states did not view [*682] unimportant, and that all compacts are immune to strict adherence to Articles III and IV as a binding unilateral modification by their member states because contractual obligation, as Compact members have "[a] Compact . . . takes precedence over statutory law in deviated from the Compact's election provision and member states." McComb, 934 F2d at 479. This assumes apportionment formula without objection from other too much. Any immunity, if it exists, is a result of a members. Arkansas, for example, has retained the compact's dual nature as both state law and a contract Compact's election provision but changed the Compact among its member states. See Green v Biddle, 21 U.S. (8 formula to place additional emphasis on the sales factor. Wheat) 1; 5 L Ed 547 (1832) (recognizing that an Ark Code 26-5-101, Art IV(9). Nondeviating members interstate compact can be a contract). As a result the have not pursued actions against those states that have Legislature is free to amend or repeal an existing deviated, and no member state has intervened on IBM's statutory provision as long as it does not impair a behalf in this case. Further, the Multistate Tax contractual obligation. LeRoux, 465 Mich at 615; see US Commission--the organization charged with Const, art I, § 10, cl 1; Const 1963, art 1, § 10. In other administering the Compact--has urged us to reject IBM's words, the Legislature is prohibited from unilaterally rigid interpretation of the Compact. These facts weigh amending the Compact only if that amendment impairs heavily in favor of rejecting IBM's argument that the contractual obligations created by the Compact itself. Compact creates a binding contractual obligation on its When viewed as a matter of contract law, I believe that it member states to refrain from amending the election was within the Legislature's power to require BTA provision.7 taxpayers to apportion [***62] their multistate income 5 While the Treasury has not made the argument solely in accordance with § 301. in its brief on appeal, it is not entirely [***64] [*681] III. UNILATERAL AMENDMENT OF MCL clear to me why IBM has standing to enforce the Page 23 496 Mich. 642, *682; 852 N.W.2d 865, **888; 2014 Mich. LEXIS 1282, ***64 Compact as a contract, given that IBM is neither the member states did not intend to be contractually a party to the Compact nor is it clear that they bound, as it demonstrates [***66] the member states' were intended as a third-party beneficiary. See desire to retain control over their sovereignty with respect Schmalfeldt v North Pointe Ins Co, 469 Mich 422; to taxation. Moreover, if continued participation in the 670 NW2d 651 (2003); MCL 600.1405. In any Compact is, essentially, completely voluntary, I fail to event, because I conclude that no such contractual see how its terms can be construed as creating binding relationship was formed, I find it unnecessary to contractual obligations, especially in light of the address this issue sua sponte. presumption against such an interpretation. Studier, 472 6 Michigan law recognizes a similar principle. Mich at 661.8 See Klapp v United Ins Group Agency, Inc, 468 Mich 459, 478-479; 663 NW2d 447 (2003). 8 In arguing that unilateral amendment of the 7 It bears emphasizing that Compact members Compact would offend the state and federal have not only refrained from bringing legal action constitutions, IBM cites Green, 21 U.S. 1; 5 L. against one another for deviating from Articles III Ed. 547, in which the Supreme Court analyzed an and IV, they have endorsed the Commissioner's interstate compact under the Contract Clause, US interpretation of the Compact: in the Gillette Const, art I, § 10, cl 1. While I conclude that the litigation, all of the member states jointly filed an Compact did not create a contractual obligation amicus brief urging the Supreme Court of that precluded Michigan from unilaterally California to reject the lower court's construction amending its election provision, it is important to of the Compact as a binding contract. note that the Supreme Court has since retreated from the "any deviation" standard it applied in Deference to principles of state sovereignty leads me Green. See US Trust Co v New Jersey, 431 U.S. to the same conclusion. As this Court explained in 1, 21; 97 S Ct 1505; 52 L Ed 2d 92 (1977). Studier, 472 Mich at 661, there is a "strong presumption Because IBM does not engage these post-Green that statutes do not create contractual rights." This developments, it has failed to explain how a presumption is [***65] grounded in the principle that constitutional violation arises under a modern "surrenders of legislative power are subject to strict analysis. limitations that have developed in order to protect the sovereign prerogatives of state governments." Id. IBM IV. CONCLUSION has not overcome this presumption here. The Compact's I would affirm the judgment of the Court of Appeals silence on the effect of a member state's ability to elect an because the Legislature [***67] expressly provided that exclusive apportionment formula indicates that Michigan taxes [*684] established under the BTA "shall be in did not contract away its right to do exactly [*683] that. accordance with" the BTA's sales-only apportionment Id. at 662. While it is true that the Compact [**889] formula. Allowing taxpayers to apportion their multistate does not expressly allow Michigan to adopt a different income in accordance with the Compact's formula apportionment formula, neither does the Compact violates this unambiguous directive. And because the surrender the state's right to do so. When the state's state was not contractually obligated to allow taxpayers to sovereign power of taxation is implicated, as it is here, make the Compact election, the BTA does not offend the any uncertainty should be resolved in favor of concluding state or federal constitutions. that the state did not cede that power. See Tarrant, 133 S Ct at 2132 (recognizing that states "do not easily cede Bridget M. McCormack their sovereign powers"). Admittedly, any sovereignty concerns are abated by the fact that a member state may Robert P. Young, Jr. withdraw from the Compact, unilaterally and without repercussion, at any time. MCL 205.581, Art X(2). But Mary Beth Kelly this withdrawal provision is equally strong evidence that Page 1 STATE OF KANSAS, PLAINTIFF v. STATE OF COLORADO No. 105, Orig. SUPREME COURT OF THE UNITED STATES 514 U.S. 673; 115 S. Ct. 1733; 131 L. Ed. 2d 759; 1995 U.S. LEXIS 3214; 63 U.S.L.W. 4387; 95 Cal. Daily Op. Service 3593; 95 Daily Journal DAR 6183; 9 Fla. L. Weekly Fed. S 15 March 21, 1995, Argued May 15, 1995, Decided DISPOSITION: Exceptions overruled, and case approach was the best method based on expert testimony remanded. offered by Kansas. The court held that (1) Kansas did not inexcusably delay well-pumping claim; (2) Colorado was CASE SUMMARY: not prejudiced and doctrine of laches did not apply, as Colorado did not prove lack of diligence and prejudice; (3) replacement of centrifugal with turbine pumps was PROCEDURAL POSTURE: Plaintiff State of Kansas proper; (4) reports by U.S. Geological Survey were not (Kansas) filed suit alleging violations of Arkansas River faulty; and (5) Colorado caused material depletions in Compact (Compact) against defendant State of Colorado post-compact pumping. (Colorado). A special master recommended the court find that post-compact pumping materially depleted usable OUTCOME: The court overruled exceptions filed by flow in violation of Compact art. IV-d, that Kansas did Kansas and Colorado and remanded the case to the not prove Winter Water Storage Program (WWSP) special master for determination of unresolved issues. violated compact, and that the Trinidad reservoir claims should be dismissed. Exceptions were filed. CORE TERMS: compact, river, usable, reservoir, pumping, depletion, acre-feet, stateline, laches, overrule, OVERVIEW: Kansas and Colorado filed exceptions to storage, state line, hydrological, materially, basin, failed the special master's report. The court determined that to prove, beneficial, winter, dam, border, well-pumping, Kansas did not prove Colorado violated Operating offset, divide, mile, coefficients, interstate, improved, Compact of the Trinidad Reservoir as Kansas did not depleted, annual, pumped demonstrate the two storage practices at the reservoir were a material depletion under Article IV-D. Kansas LexisNexis(R) Headnotes also failed to prove WWSP program resulted in material depletions of usable flow in violation of Article IV-D after examining computer models that indicated depletions were within the range of error. And, under Governments > State & Territorial Governments > Article IV-D of the compact, future development and Water Rights construction along the river basin was allowed if it did Transportation Law > Water Transportation > not materially deplete state-line flow in usable quantity or Waterways availability and the special master concluded the Page 2 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 [HN1] The Arkansas River Compact's primary purposes SUMMARY: are to settle existing disputes and remove causes of future controversy concerning the waters of the Arkansas River The Arkansas River rises in Colorado and flows and to equitably divide and apportion the waters of the through Kansas and some other states until emptying into Arkansas River, as well as the benefits arising from the another river. The states of Colorado and Kansas construction, operation and maintenance by the United approved an Arkansas River Compact, which Congress States of John Martin Reservoir. ratified in 1949 (63 Stat 145). The Compact generally involved the apportionment of the river's waters and related matters. Among other provisions, Article IV-D of Governments > State & Territorial Governments > the Compact stated that (1) the Compact was not intended Water Rights to impede or prevent future beneficial development of the [HN2] The Arkansas River Compact (compact) is not Arkansas River basin in Colorado and Kansas by federal intended to impede or prevent future beneficial or state agencies, private enterprise, or combinations development of the Arkansas River basin in Colorado and thereof, and (2) such development might involve Kansas by federal or state agencies, by private enterprise, construction of dams, reservoirs, and other works for the or by combinations thereof, which may involve purposes of water utilization and control, as well as the construction of dams, reservoir, and other works for the improved or prolonged functioning of existing works, purposes of water utilization and control, as well as the provided that the river's waters would not be materially improved or prolonged functioning of existing works: depleted in usable quantity or availability for use to the Provided, that the waters of the Arkansas River shall not water users in Colorado and Kansas under the Compact be materially depleted in usable quantity or availability by such development or construction. While Article VIII for use to the water users in Colorado and Kansas under of the Compact created a joint Arkansas River Compact this compact by such future development or construction. Administration, every decision by the Administration required a unanimous vote by the representatives of both states. In 1985, the state of Kansas brought an original Civil Procedure > Equity > Maxims > General Overview action in the United States Supreme Court against the Civil Procedure > Pleading & Practice > Defenses, state of Colorado to resolve disputes arising under the Demurrers & Objections > Affirmative Defenses > Compact. In 1986, the Supreme Court granted Kansas Laches leave to file the complaint (475 US 1079, 89 L Ed 2d Governments > State & Territorial Governments > 712, 106 S Ct 1454). After the death of the case's first Water Rights Special Master, the court appointed another Special [HN3] Doctrine of laches, is based upon maxim that Master (484 US 910, 98 L Ed 2d 212, 108 S Ct 254). The equity aids the vigilant and not those who slumber on disputes in the case basically involved a fertile their rights. It is defined as neglect to assert a right or agricultural reach of the Arkansas River in Colorado and claim which, taken together with lapse of time and other Kansas that was affected by three federal projects: (1) the circumstances causing prejudice to the adverse party, operates as bar in court of equity. John Martin Reservoir, which was on the river and had been completed in 1948; (2) the Pueblo Reservoir, which was on the river and had been substantially completed in Governments > State & Territorial Governments > 1975; and (3) the Trinidad Reservoir, which (a) was on a Water Rights major tributary, (b) had been approved by Congress in [HN4] The ultimate responsibility for deciding what are 1958, and (c) had been completed in 1977. The Special correct findings of fact remains with the court. Master bifurcated the trial of the action into a liability phase and a remedy phase. Eventually, the Special Master DECISION: filed a report with some findings and recommendations concerning the liability phase. In original action brought in Supreme Court by Kansas against Colorado to resolve disputes arising under On exceptions to the report of the Special Master, the two states' Arkansas River Compact, exceptions by both Supreme Court overruled the exceptions filed by Kansas states to report of Special Master overruled. and Colorado and remanded the case to the Special Master for determination of the unresolved issues. In an Page 3 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 opinion by Rehnquist, Ch. J., expressing the unanimous interstate dispute -- Arkansas River Compact -- view of the court, it was held that (1) Kansas' claim review -- remand -- ; concerning the Trinidad Reservoir Operating Principles, which had been approved by the Administration in 1967, Headnote:[1A][1B][1C][1D][1E][1F][1G][1H was properly dismissed, because Kansas--in order to ][1I][1J][1K] establish a Compact violation based upon failure to obey In an original action brought in the United States the Operating Principles--was required to demonstrate Supreme Court by the state of Kansas against the state of that this failure had resulted in a material depletion under Colorado to resolve disputes arising under the two states' Article IV-D, but Kansas had not established, and had not Arkansas River Compact (ratified by Congress in 1949 at attempted to establish, such injury; (2) Kansas had failed 63 Stat 145), the Supreme Court will overrule the to prove its claim that the operation of the Winter Water exceptions filed by both Kansas and Colorado to the Storage Program at the Pueblo Reservoir had resulted in findings and recommendations of a report by a Special material depletions of usable flows at stateline in Master who was appointed by the court, and the Supreme violation of Article IV-D; (3) for purposes of the Court will remand the case to the Special Master for requirement that Kansas establish that development in determination of the unresolved issues in a manner not Colorado had resulted in material depletions of "usable" inconsistent with the court's opinion, where (1) the river flow at stateline in violation of Article IV-D, the Special Master bifurcated the trial of the action into a Special Master had properly rejected the method liability phase and a remedy phase; (2) the report in eventually chosen by Kansas in favor of another method; question concerns the liability phase; (3) the Supreme (4) even if the equitable defense of laches was available Court adopts the Special Master's recommendations, to in the action, Colorado had failed to prove an element which Colorado did not file exceptions, to grant Kansas' necessary to the recognition of that defense--that is, lack motion to dismiss two counterclaims by Colorado; and of diligence on the part of Kansas--with respect to (4) the Supreme Court agrees with the Special Master's Kansas' claim to the effect that increases in well pumping resolution of the liability issues as to which the parties in Colorado had caused a significant decline in the river's filed exceptions, with respect to (a) the dismissal of usable flow at stateline in violation of Article IV-D; (5) Kansas' claim concerning some operating principles for pre-Compact wells in Colorado were limited to the the Trinidad Reservoir, (b) Kansas' failure to prove its highest amount pumped in the years during which the claim concerning the operation of the Winter Water Compact had been negotiated and the highest amount of Storage Program at the Pueblo Reservoir, (c) the choice such pumping was 15,000 acre-feet per year; (6) with of a method for Kansas' establishing that development in respect to the Administration's adoption of the 1980 Colorado had resulted in material depletions of "usable" Operating Plan for the John Martin Reservoir, the Special river flow at stateline in violation of the Compact's Master had properly determined that the 1980 Operating Article IV-D, (d) the rejection of Colorado's attempt to Plan was separately bargained for and therefore should assert the defense of laches concerning Kansas' claim to not offset any depletions caused by post-Compact well pumping in Colorado, for purposes of deciding Kansas' the effect that increases in well pumping in Colorado had caused a significant decline in the river's usable flow at well-pumping claim; and (7) regardless of which burden stateline in violation of Article IV-D, (e) the existence of proof was applicable to Kansas' well-pumping claim, and extent of a limit on pumping by pre-Compact wells there was no difficulty in concluding that post-Compact in Colorado, (f) the effect of the adoption of the 1980 pumping in Colorado had caused material depletions of Operating Plan for the John Martin Reservoir, and (g) the the usable stateline flows of the river, in violation of the causation by post-Compact well pumping in Colorado of Compact. a violation of the Compact. LAWYERS' EDITION HEADNOTES: EVIDENCE §962 REFERENCE §19 STATES, TERRITORIES, AND POSSESSIONS SUPREME COURT OF THE UNITED STATES §58; §58; Arkansas River Compact -- what constitutes Page 4 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 violation -- proof -- ; Headnote:[3A][3B] Headnote:[2A][2B] In an original action brought in the United States Supreme Court by the downstream state of Kansas In an original action brought in the United States against the upstream state of Colorado to resolve disputes Supreme Court by the downstream state of Kansas arising under the two states' Arkansas River Compact against the upstream state of Colorado to resolve disputes (ratified by Congress in 1949 at 63 Stat 145), Kansas fails arising under the two states' Arkansas River Compact to prove its claim that the operation of the Winter Water (ratified by Congress in 1949 at 63 Stat 145), Kansas' Storage Program (WWSP) at the Pueblo Reservoir, a claim concerning the Trinidad Reservoir Operating federal project on the river, resulted in material Principles, which were approved by the Arkansas River depletions of usable flows at stateline in violation of the Compact Administration in 1967, is properly dismissed, Compact's Article IV-D, where (1) under the WWSP, because Kansas--in order to establish a Compact Colorado and the United States Bureau of Reclamation violation based upon failure to obey the Operating used excess capacity at the Pueblo Reservoir to store a Principles--was required to demonstrate that this failure portion of the river's winter-time flow for beneficial use resulted in a material depletion under the Compact's at other times; (2) a Special Master appointed by the Article IV-D, but Kansas has not established, and did not Supreme Court has examined the computer models attempt to establish, such injury, where (1) the Trinidad submitted by Kansas and Colorado and has determined Reservoir (a) is a federal project on a major tributary of that (a) the depletions shown by the Kansas model were the Arkansas River, (b) was approved by Congress in well within the model's range of error, and (b) as a result, 1958, and (c) was completed in 1977; (2) even though one could not be sure whether impact or error was being Kansas claimed that any departure from the Operating shown; and (3) the Supreme Court believes that the Principles constituted a violation of the Compact Special Master gave Kansas every reasonable opportunity regardless of injury, the theory advocated by Kansas is to meet its burden of proving the WWSP claim. inconsistent with Article IV-D, which allows for the development and operation of dams and reservoirs so long as there is no resultant material depletion of usable EVIDENCE §962; flow at stateline; (3) Kansas offered no evidence, apart Arkansas River Compact -- establishing violation -- ; from some United States Bureau of Reclamation studies which initially proposed the Operating Principles and Headnote:[4A][4B] later concluded that some practices constituted a departure from the intent of the Operating Principles, to In an original action brought in the United States show that the project's actual operation caused Kansas to Supreme Court by the downstream state of Kansas receive less water than under historical without-project against the upstream state of Colorado to resolve disputes conditions; (4) for Kansas to prevail in its contention, it arising under the two states' Arkansas River Compact would have to show that the Operating Principles had the (ratified by Congress in 1949 at 63 Stat 145), for effect of amending the Compact by granting either party purposes of the requirement that Kansas establish that the right to sue the other for violation of the Operating development in Colorado resulted in material depletions Principles even though the violation resulted in no of "usable" river flow at stateline in violation of the material depletion of usable flow at stateline; and (5) Compact's Article IV-D, a Special Master appointed by under Article VIII of the Compact, although the the Supreme Court properly rejects the method eventually Administration is empowered to prescribe procedures for chosen by Kansas in favor of another method, where (1) the administration of the Compact, the Administration the Compact does not define the term "usable"; (2) the must do so consistent with the provisions of the Compact. Special Master's chosen method is a modification of a third method to correct some errors resulting from the use of the third method; (3) each of the three methods EVIDENCE §962; requires two steps: (a) a calculation of total depletions Arkansas River Compact -- failure to prove violation using a hydrological model presented by Kansas, and (b) -- ; an application of "usability" criteria; and (4) Kansas' chosen method is less compatible with the hydrological Page 5 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 model than the other methods proposed, in that Kansas' The defense of laches requires proof of (1) lack of chosen method requires the model to do something which diligence by the party against whom the defense is the model was not designed to do, that is, to predict asserted, and (2) prejudice to the party asserting the accurately depletions on a monthly basis. defense. EVIDENCE §966.5; STATES, TERRITORIES, AND POSSESSIONS §58; failure to prove laches -- ; Arkansas River Compact -- limit on well pumping -- Headnote:[5A][5B][5C] ; Even if the equitable defense of laches is available in Headnote:[7A][7B] an original action brought in 1985 in the United States Supreme Court by the downstream state of Kansas In an original action brought in the United States against the upstream state of Colorado to resolve disputes Supreme Court by the downstream state of Kansas arising under the two states' Arkansas River Compact against the upstream state of Colorado to resolve disputes (ratified by Congress in 1949 at 63 Stat 145), Colorado arising under the two states' Arkansas River Compact fails to prove an element necessary to the recognition of (ratified by Congress in 1949 at 63 Stat 145), a Special that defense with respect to Kansas' claim to the effect Master appointed by the Supreme Court properly that increases in well pumping in Colorado had caused a determines that pre-Compact wells in Colorado are significant decline in the river's usable flow at stateline in limited to the highest amount pumped in the years during violation of the Compact's Article IV-D, because in light which the Compact was negotiated and that the highest of the vague and conflicting evidence available to amount of such pumping was 15,000 acre-feet per year, Kansas, Colorado fails to demonstrate lack of diligence, where (1) both parties agree that a certain amount of that is, inexcusable delay, on the part of Kansas, where post-Compact well pumping is allowable under the (1) a Special Master appointed by the Supreme Court Compact, as (a) the Compact's Article IV-D prohibits concludes that while Kansas, prior to 1984, made no "future" beneficial development of the river basin that formal complaint to the Arkansas River Compact materially depletes the river's usable flows, and (b) some Administration regarding post-Compact well pumping in wells in Colorado were in existence prior to the Compact; Colorado, Colorado's evidence does not (a) deal with the (2) while Colorado argues that the Compact does not issue of impact on usable flow at stateline, or (b) limit pumping by pre-Compact wells to the highest demonstrate that Kansas officials were aware of the amount actually pumped in pre-Compact years, the clear number of wells, the extent of Colorado's pumping, or the language of Article IV-D refutes Colorado's legal impact or even potential impact of pumping on usable challenge, as (a) regardless of subsequent practice by the stateline flows; (2) the Special Master explains the parties, improved and increased pumping by existing difficulty, due to changing conditions during the 1970's wells clearly falls within Article IV-D's prohibition and early 1980's, of assessing the impact of increases in against improved or prolonged functioning of existing post-Compact well pumping on usable stateline flows; works, (b) although Article VI-A(2) of the Compact and (3) as late as 1985, Colorado officials refused to generally supports the rights of Colorado appropriators of permit an investigation by the Administration of well river waters, Article VI-A(2) begins with the phrase, development in Colorado because the officials claimed "Except as otherwise provided," and must be read in that the evidence produced by Kansas did not suggest that conjunction with and as limited by Article IV-D, and (c) such development had an impact on usable stateline new wells, the replacement of centrifugal with turbine flows. pumps, and increased pumping from pre-Compact wells all come within Article IV-D; and (3) contrary to a factual argument by Colorado as to the figure of 15,000 LIMITATION OF ACTIONS §16; acre-feet, the Special Master properly concludes that (a) there is no precise answer to the amount of such defense of laches -- ; pre-Compact well pumping, (b) that amount must remain Headnote:[6] as an estimate, and (c) he will rely on two reports by the Page 6 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 United States Geological Survey and the Colorado concludes that (a) there is no evidence to support the legislature, which reports were responsible, reached assertion that the benefits to Kansas under the 1980 similar conclusions as to the amounts of Colorado Operating Plan were in settlement of Kansas' pumping during the 1940's, and had since been used by well-pumping claims, and (b) Colorado received ample Colorado's state engineer. consideration under the agreement for the 1980 Operating Plan without a waiver of Kansas' well-pumping claims. REFERENCE §23 REFERENCE §20 SUPREME COURT OF THE UNITED STATES §58; SUPREME COURT OF THE UNITED STATES §58; interstate dispute -- water rights -- facts -- ; interstate dispute -- water rights -- proof of violation Headnote:[8] -- review -- ; On exceptions to a report of a Special Master in an Headnote:[10A][10B] original action brought in the United States Supreme Court by the state of Kansas against the state of Colorado On exceptions to a report of a Special Master in an to resolve disputes arising under the two states' Arkansas original action brought in the United States Supreme River Compact (ratified by Congress in 1949 at 63 Stat Court by the downstream state of Kansas against the 145), the ultimate responsibility for deciding what are upstream state of Colorado to resolve disputes arising correct findings of fact remains with the Supreme Court. under the two states' Arkansas River Compact (ratified by Congress in 1949 at 63 Stat 145), the Supreme Court will overrule Colorado's exception as to the burden of proof STATES, TERRITORIES, AND POSSESSIONS applicable to Kansas' claim concerning post-Compact §58; well pumping in Colorado, where the Supreme Court holds that it need not resolve the burden-of-proof issue, Arkansas River Compact -- offset -- separate bargain as the court agrees with the Special Master's conclusion -- ; that regardless of which burden of proof applies, there is Headnote:[9A][9B] no difficulty in concluding that post-Compact pumping in Colorado had caused material depletions of the usable In an original action brought in the United States stateline flows of the river, in violation of the Compact. Supreme Court by the downstream state of Kansas against the upstream state of Colorado to resolve disputes SYLLABUS arising under the two states' Arkansas River Compact (ratified by Congress in 1949 at 63 Stat 145), with respect Kansas and Colorado negotiated the Arkansas River to the adoption by the joint Arkansas River Compact Compact to settle disputes and remove causes of future Administration of the 1980 Operating Plan for the John controversies over the river's waters and to equitably Martin Reservoir on the river, a Special Master appointed divide and apportion those waters and the benefits arising by the Supreme Court properly determines that the 1980 from the United States' construction, operation, and Operating Plan was separately bargained for and maintenance of John Martin Reservoir. Under Article therefore should not offset any depletions caused by IV-D, the Compact is not intended to impede or prevent post-Compact well pumping in Colorado, for purposes of future beneficial development -- including construction of deciding Kansas' claim that such pumping violated the dams and reservoirs and the prolonged or improved Compact's Article IV-D, where (1) the Administration functioning of existing works -- provided that such resolution adopting the 1980 Operating Plan (a) did not development does not "materially deplete" stateline flows state that post-Compact well pumping in Colorado or "in usable quantity or availability for use." In this action, Kansas was a cause of changes in the regime of the the Special Master recommended that the Court, among Arkansas River, and (b) expressly reserved the parties' other things, find that post-Compact well pumping in rights under the Compact; and (2) the Special Master Colorado has resulted in a violation of Article IV-D of Page 7 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 the Compact; find that Kansas has failed to prove that the maximum amount of pumping possible using wells operation of Colorado's Winter Water Storage Program existing prior to the Compact. Regardless of the parties' (WWSP) violates the Compact; and dismiss Kansas' subsequent practice, such improvements to and increased claim that Colorado's failure to abide by the Trinidad pumping by existing wells clearly fall within Article Reservoir Operating Principles (Operating Principles) IV-D's prohibition. In making the factual determination violates the Compact. Both Kansas and Colorado have that 15,000 acre-feet per year is the appropriate limit, the filed exceptions. Special Master properly relied on reports by the United States Geological Survey and the Colorado Legislature, Held: The exceptions are overruled. Pp. 681-694. reports that have since been used by the Colorado State Engineer. Pp. 689-691. (a) Article IV-D permits development of projects so long as their operation does not result in a material (f) The Court agrees with the Special Master's depletion of usable flow to Kansas users. Kansas' conclusion that the 1980 Operating Plan for the John exception to the dismissal of its Trinidad Reservoir claim Martin Reservoir (Plan) was separately bargained for and fails because Kansas has not established that Colorado's thus there is no evidence to support the claim raised in failure to obey the Operating Principles resulted in such a Colorado's exception that the benefits to Kansas from the violation. Pp. 681-683. Plan were in settlement of its well claims. The Plan does not state that post-Compact well pumping in Colorado or (b) Because Kansas failed to meet its burden of Kansas was a cause of changes in the river's regime, and proving its WWSP claim despite being given every it expressly reserves the parties' rights under the reasonable opportunity to do so by the Special Master, Compact. Pp. 691-693. there is no support for its exception to the Special Master's conclusion on that claim. P. 684. (g) The Special Master concluded that, regardless whether the burden of proof applied to Kansas' (c) In selecting what method should be used to well-pumping claim is clear and convincing evidence or determine depletions of "usable" flow, the Special Master preponderance of the evidence, the post-Compact well properly rejected the Spronk method -- which Kansas' pumping in Colorado had caused material depletions of exception proposes is correct -- as less compatible with usable river flows in violation of the Compact. Thus, this Kansas' hydrological model than the method ultimately Court need not resolve the issue raised by Colorado's adopted by the Special Master. Pp. 684-687. exception: that clear and convincing evidence is the correct standard. Pp. 693-694. (d) In ruling on Colorado's exception to the Special Master's conclusion that laches does not bar Kansas' COUNSEL: John B. Draper, Special Assistant Attorney well-pumping claim, it is not necessary to decide whether General of Kansas, argued the cause for plaintiff. With the laches doctrine applies to a case involving the him on the briefs were Robert T. Stephan, Attorney enforcement of an interstate compact because Colorado General, John W. Campbell, Deputy Attorney General, has failed to prove that Kansas lacked due diligence in and Leland E. Rolfs and Mary Ann Heckman, Assistant bringing its claim. Colorado errs in arguing that Kansas Attorneys General. officials had sufficient evidence about increased well pumping in Colorado to determine that a Compact David W. Robbins, Special Assistant Attorney General of violation existed in 1956. The evidence available through Colorado, argued the cause for defendant. With him on 1985 was vague and conflicting. Pp. 687-689. the briefs were Gale Norton, Attorney General, Stephen K. Erkenbrack, Chief Deputy Attorney General, Timothy (e) This Court disagrees with both the legal and M. Tymkovich, Solicitor General, and Dennis M. factual claims Colorado raises in its exception to the Montgomery, Special Assistant Attorney General. Special Master's finding that the Compact limits annual pumping by pre-Compact wells to 15,000 acre-feet, the Jeffrey P. Minear argued the cause for the United States. highest amount actually pumped in those years. Kansas' With him on the brief were Solicitor General Days, failure to object to the replacement of pumps or increased Assistant Attorney General Schiffer, Deputy Solicitor pumping by pre-Compact wells does not support General Kneedler, and Patricia L. Weiss. * Colorado's legal argument that the limit should be the Page 8 514 U.S. 673, *; 115 S. Ct. 1733, **; 131 L. Ed. 2d 759, ***; 1995 U.S. LEXIS 3214 * Joseph B. Meyer, Attorney General of east and enters the Royal Gorge. As it flows through the Wyoming, Donald M. Gerstein, Assistant Royal Gorge, the Arkansas River is at some [***768] Attorney General, and Dennis C. Cook, Special points half a mile below the summit of the bordering Assistant Attorney General, filed a brief for the cliffs. The Arkansas River thence descends gradually State of Wyoming as amicus curiae. through the high plains of eastern Colorado and western Kansas; its elevation at the Colorado-Kansas border is JUDGES: REHNQUIST, C. J., delivered the opinion for 3,350 feet. It then makes its great bend northward a unanimous Court. through Kansas, and from there flows southeasterly through northeastern Oklahoma and across Arkansas. OPINION BY: REHNQUIST The Arkansas River covers about 1,450 miles from its source in the Colorado Rockies to the point in OPINION southeastern Arkansas where it flows into the Mississippi River. It is the fourth longest river in the United States, [*675] [**1736] [***767] CHIEF JUSTICE and it drains in an area of 185,000 square miles. REHNQUIST delivered the opinion of the Court. The first Europeans to see the Arkansas River were [***LEdHR1A] [1A]This original action involves a members of the expedition of Francisco Coronado, in the dispute between Kansas, Colorado, and the United States course of their search for the fabled Seven Golden Cities over alleged violations of the Arkansas River Compact. of Cibola. In 1541, they crossed the Arkansas River near The Special Master has filed a report (Report) detailing what is now the Colorado-Kansas border. One year later, his findings and recommendations concerning the those in the expedition of Hernando DeSoto would see liability phase of the trial. Both Kansas and Colorado the Arkansas River 1,000 miles downstream at its mouth. have filed exceptions to those findings and The western borders of the Louisiana Purchase, acquired recommendations. We agree with the Special Master's from France in 1803, included within them most, if not disposition of the liability issues. Accordingly, we all, of the Arkansas River drainage basin. Zebulon Pike, overrule the parties' exceptions. in his expedition of 1805-1806, in the course of which he sighted the mountain peak named after him, traveled up I the Arkansas River. [*677] John C. Fremont traversed The Continental Divide in the United States begins at the river in the other direction in his expedition of the Canadian border in the mountains of northwestern 1843-1844. Montana. From there, it angles southeast through Today, as a result of the Kerr McClellan Project, the Montana [**1737] and Wyoming until it enters Arkansas River is navigable for oceangoing vessels all Colorado. It then runs roughly due south through the way from its mouth to Tulsa, Oklahoma. The Colorado, following first the crest of the Front Range of Arkansas River is unique in that the pronunciation of its the Rocky Mountains, and then shifting slightly west to name changes from State to State. In Colorado, follow the crest of the Sawatch Range. The Arkansas Oklahoma, and Arkansas, it is pronounced as is the name River rises on the east side of the Continental Divide, of the State of Arkansas, but in Kansas, it is pronounced [*676] between Climax and Leadville, Colorado. Thence Ar-KAN-sas. it flows south and east through Colorado, Kansas, Oklahoma, and Arkansas, emptying into the Mississippi The reach of the Arkansas River system at issue here River, which in turn flows into the Gulf of Mexico. As if is a fertile agricultural region that extends from Pueblo, to prove that the ridge that separates them is indeed the Colorado, to Garden City, Kansas. This region has been Continental Divide, a short distance away from the developed in Colorado by 23 major canal companies and source of the Arkansas, the Colorado River rises and in Kansas by 6 canal companies, which divert the surface thence flows southwest through Colorado, Utah, and flows of the Arkansas River and distribute them to Arizona, and finally empties into the Gulf of Baja, individual farmers. Report 35-38. Also relevant to this California. dispute, the United States has constructed three large water storage projects in the Arkansas River basin. Id., at The Arkansas River flows at a steep gradient from its 43-48. The John Martin Reservoir, located on the source south to Canon City, Colorado, whence it turns Page 9 514 U.S. 673, *677; 115 S. Ct. 1733, **1737; 131 L. Ed. 2d 759, ***768; 1995 U.S. LEXIS 3214 Arkansas River about 60 miles west of the Kansas border, responsibility for administering the Compact. Id., at was authorized by Congress in 1936, 49 Stat. 1570, and 11-15. The Administration is composed of a nonvoting was completed in 1948. It is the largest of the federal presiding officer designated by the President of the reservoirs, and initially it had a storage capacity of about United States, and three voting representatives from each 700,000 acre-feet. 1 Report 45. The Pueblo Reservoir, State. Each State has one vote, and every decision, located on the Arkansas River about 150 miles west of authorization, or other action by the Administration the Kansas border, was authorized by Congress in 1962, requires a unanimous vote. Id., at 12-13 (Article VIII-D). and was substantially completed in 1975. Id., at 44. In 1977, the storage capacity of the Pueblo Reservoir was [HN1] The Compact's primary purposes are to "settle estimated to be about 357,000 acre-feet. Ibid. Finally, the existing disputes and remove causes of future controversy Trinidad Reservoir, located on the Purgatoire River (a . . . concerning the waters of the Arkansas River" and to major tributary of the Arkansas River) was approved by "equitably divide and apportion" the waters of the Congress in 1958, and was completed in 1977. Id., at 43. Arkansas River, "as well as the benefits arising from the [**1738] The total capacity of the Trinidad Reservoir is construction, operation [*679] and maintenance by the about 114,000 acre-feet. Ibid. United States of John Martin Reservoir." Id., at 1-2 (Articles I-A, I-B). Article IV-D, the provision of the 1 An acre-foot is equivalent to 325,900 gallons Compact most relevant to this dispute, states: of water; it represents the volume of water necessary to cover one acre of land with one foot [HN2] "This Compact is not intended to of water. Report xvii. impede or prevent future beneficial development of the Arkansas River basin [*678] Twice before in this century, the States of in Colorado and Kansas by Federal or Kansas and Colorado have [***769] litigated in this State agencies, by private enterprise, or by Court regarding their respective rights to the waters of the combinations thereof, which may involve Arkansas River. See Kansas v. Colorado, 206 U.S. 46, 51 construction of dams, reservoir, and other L. Ed. 956, 27 S. Ct. 655 (1907); Colorado v. Kansas, works for the purposes of water utilization 320 U.S. 383, 88 L. Ed. 116, 64 S. Ct. 176 (1943). In the and control, as well as the improved or first suit, the Court denied Kansas' request to enjoin prolonged functioning of existing works: diversions of the Arkansas River by Colorado because the Provided, that the waters of the Arkansas depletions alleged by Kansas were insufficient to warrant River . . . shall not be materially depleted injunctive relief. Kansas v. Colorado, supra, at 114-117. in usable quantity or availability for use to In the second suit, Colorado sought to enjoin lower court the water users in Colorado and Kansas litigation brought against Colorado water users, while under this Compact by such future Kansas sought an equitable apportionment of the development or construction." Id., at 5 Arkansas River. Colorado v. Kansas, supra, at 388-389. (emphasis added). The Court granted Colorado an injunction, but concluded that Kansas was not entitled to an equitable apportionment. 320 U.S. at 400. The Court suggested In 1983, Kansas conducted an independent that the States resolve their differences by negotiation and investigation of possible violations of the Compact agreement, pursuant to the Compact Clause of the arising from the impact of increases in post-Compact well Constitution. Id., at 392. See U.S. Const., Art. I, § 10, cl. pumping in Colorado and the operation of two of the 3. federal reservoirs. Report 9-10. In December 1985, Kansas brought this original action against the State of In 1949, after three years of negotiations, Kansas and Colorado to resolve disputes arising under the Compact. Colorado approved, and Congress ratified, the Arkansas [***770] Id., at 10. The Court granted Kansas leave to River Compact (Compact). See 63 Stat. 145; see also file its complaint, Kansas v. Colorado, 475 U.S. 1079, 89 Report 5-6; App. to Report 1-17 (reprinting text of L. Ed. 2d 712, 106 S. Ct. 1454 (1986), and appointed Compact). Article VIII of the Compact creates the Judge Wade H. McCree, Jr., to serve as Special Master, Arkansas River Compact Administration Kansas v. Colorado, 478 U.S. 1018, 92 L. Ed. 2d 736, (Administration) and vests it with the power and 106 S. Ct. 3330 (1986). Upon Judge McCree's death, the Page 10 514 U.S. 673, *679; 115 S. Ct. 1733, **1738; 131 L. Ed. 2d 759, ***770; 1995 U.S. LEXIS 3214 Court appointed Arthur L. Littleworth as Special Master. 291-305. Colorado excepts to the Special Master's Kansas v. Colorado, 484 U.S. 910, 98 L. Ed. 2d 212, 108 determination that: (1) Kansas was not guilty of S. Ct. 254 (1987). inexcusable delay in making its post-Compact well-pumping claim and that Colorado was not Kansas advanced three principal claims, each prejudiced by this [*681] delay, see id., at 147-170; (2) involving an alleged Compact violation. See Report 58. pre-Compact wells in Colorado are limited to pumping First, Kansas alleged that increases in groundwater well the highest amount pumped in the years during which the pumping in Colorado in the years following adoption of Compact was negotiated and that the highest amount of the Compact have caused a significant decline in the such pumping was 15,000 acre-feet per year, see id., at Arkansas River's surface [*680] flow [**1739] in 182-200; (3) increases in usable state line flows resulting violation of Article IV-D of the Compact. Second, from the operating plan for the John Martin Reservoir Kansas claimed that Colorado's Winter Water Storage adopted by the Administration in 1980 (1980 Operating Program (WWSP) -- a program whereby the Bureau of Plan) were "separately bargained for" and, therefore, Reclamation of the Department of the Interior (Bureau of should not offset depletions caused by post-Compact well Reclamation) and Colorado use excess capacity at the pumping in Colorado, see id., at 171-181; and (4) Pueblo Reservoir to store a portion of the winter flow of [***771] Kansas need only meet the "preponderance of the Arkansas River -- violates the Compact. Third, the evidence" standard to prove a breach of Article IV-D Kansas claimed that Colorado's failure to abide by the of the Compact, see id., at 65-70. Trinidad Reservoir Operating Principles (Operating Principles) constituted a violation of the Compact. Ibid. We turn to the parties' exceptions. [***LEdHR1A] [1B]The Special Master bifurcated II the trial into a liability phase and a remedy phase. At the conclusion of the liability phase, the Special Master filed A his Report, outlining his findings and recommendations. [***LEdHR2A] [2A]In 1958, Congress authorized In his Report, the Special Master recommended, among construction of the Trinidad Project, a dam and a other things, that the Court: (1) find that post-Compact reservoir system on the Purgatoire River slightly well pumping in Colorado has "materially depleted" the upstream from the city of Trinidad, Colorado. See id., at "usable" flow at the Colorado-Kansas border (state line) 382-388. Recognizing that Article IV-D of the Compact in violation of Article IV-D of the Compact, Report 336; prohibited any development of the Arkansas River basin (2) find that "Kansas has failed to prove that operation of that resulted in a material depletion of usable river flow, the [WWSP] program has violated the Compact," ibid.; the Bureau of Reclamation conducted studies regarding and (3) "dismiss the Kansas claim arising from the the future operation of the Trinidad Project. Id., at operation of Trinidad Reservoir," ibid. 2 388-390. The Bureau of Reclamation established 2 [***LEdHR1A] [1C] Operating Principles whereby the Trinidad Project could be administered "without adverse effect on downstream Colorado presented two counterclaims water users and the inflow to John Martin Reservoir." Id., against Kansas. The Special Master recommended at 390 (internal quotation marks omitted). The Governor that the Court grant Kansas' motions to dismiss of Kansas reviewed the Bureau of Reclamation's those counterclaims. Report 337. Colorado has proposed Operating Principles and indicated that if five not filed exceptions to those recommendations. additional conditions were accepted, then "Kansas would We adopt the Special Master's recommendations be in a position to approve the amended Operating on Colorado's counterclaims. Principles and to support completion of the project." Id., at 392-393. In June 1967, the [*682] Administration Both Kansas and Colorado have filed exceptions to approved the Operating Principles as well as Kansas' five the Special Master's Report. Kansas excepts to the additional conditions. Id., at 395. Special Master's rejection of its (1) Trinidad Reservoir claim, see id., at 373-433; (2) WWSP claim, see id., at In 1979, Colorado began storage of water at the 306-335; and (3) preferred method for determining the Trinidad Reservoir. Id., at 396. Kansas immediately usability of depletions of state line flows, see id., at complained that the Operating Principles were being Page 11 514 U.S. 673, *682; 115 S. Ct. 1733, **1739; 131 L. Ed. 2d 759, ***LEdHR2A; 1995 U.S. LEXIS 3214 violated. Id., at [**1740] 397. In 1988, at the request of to "prescribe procedures for the administration of the the Administration, the Bureau of Reclamation conducted Compact," App. to Report 11 (Article VIII-B(2)), it must a study of the Trinidad Reservoir. It concluded that two do so "consistent with the provisions of the Compact," storage practices at the Trinidad Reservoir constituted a ibid. (Article VIII-B(1)) (emphasis added); see also "'departure from the intent of the operating principles.'" Report 416 ("The Compact Administration was not Ibid. delegated power to change the Compact"). The theory advocated by Kansas is inconsistent with Article IV-D, At trial, Kansas argued that the Operating Principles which allows for the development and operation of dams were binding on the State of Colorado and that any and reservoirs so long as there is no resultant material departure from them constituted a violation of the depletion of usable flows at stateline. Compact "regardless of injury." Id., at 408 (internal quotation marks omitted). Kansas, however, "offered no 3 The Special Master did "not address the evidence, apart from the Bureau studies, to show that the possible question of whether Kansas has a claim actual operation of the Trinidad project caused it to for violation of the Operating Principles that is receive less water than under historical, without-project independent of the Compact, that is, a cause of conditions." Id., at 412. Instead, Kansas sought to action based upon a separate agreement with quantify depletions by "comparing the flows into John Colorado, or as a third party beneficiary under the Martin Reservoir 'as they would have occurred under the repayment contract, or otherwise." Report 408, n. Operating Principles with the flows that occurred under 6. We express no view as to that question. actual operations.'" Id., at 409. The Special Master concluded that in order to prove a violation of the [***LEdHR1A] [1D] [***LEdHR2A] [2B]Thus Compact, Kansas was required to demonstrate that "the Kansas, in order to establish a Compact violation based Trinidad operations caused a material depletion within upon failure to obey the Operating Principles, was the meaning of Article IV-D." Id., at 431. The Special required to demonstrate that this failure resulted in a Master recommends that we dismiss Kansas' Trinidad material depletion under Article IV-D. Kansas "has not claim because "Kansas has not established, and did not established, and did not attempt to establish, such injury." attempt to establish, such injury." Ibid. Id., at 431. We overrule Kansas' exception to the Special Master's dismissal of its Trinidad Reservoir claim. Kansas argues that "departure from the Operating Principles is ipso facto a violation of the Compact, and it [*684] B [is] entirely sufficient, for purposes of quantifying the [***LEdHR3A] [3A]In 1964, the Bureau of effects of the violation, to compare the actual operation Reclamation and Colorado began planning a program to with simulated operation as it should have been under the use excess capacity at Pueblo Reservoir in order to store a Operating Principles." Kansas' Exceptions to Special portion of the winter-time flow of the Arkansas River for Master's Report 12. But, it must be recalled, this is an beneficial use at other times. Under the WWSP, original action to [***772] enforce [*683] the terms of winter-time flow -- much of which was used previously the Compact. 3 Article IV-D provides that the Compact is to flood uncultivated cropland -- is instead stored at the not intended to prevent future beneficial development of Pueblo Reservoir. Kansas contends that the Special the Arkansas River basin -- including dams and reservoirs Master erred in finding that it had failed to prove that the -- provided that the river flow shall not be materially [**1741] WWSP had "materially depleted" usable state depleted. The Compact thus permits the development of line flows. We disagree. projects such as Pueblo Reservoir so long as their operation does not result in a material depletion of usable In his Report, the Special Master concluded: flow to Kansas users. For Kansas to prevail in its contention, it would have to show that the Operating "Kansas has not proved that the WWSP Principles had the effect of amending the Compact by has caused material Stateline depletions. granting either party the right to sue the other for Kansas' case has not been helped by its violation of the Operating Principles even though the own contradictions in quantifying impacts violation resulted in no material depletion of usable flow to usable flow -- ranging during this trial at stateline. Although the Administration is empowered from 255,000 acre-feet initially, to 44,000 Page 12 514 U.S. 673, *684; 115 S. Ct. 1733, **1741; 131 L. Ed. 2d 759, ***LEdHR3A; 1995 U.S. LEXIS 3214 to 40,000; nor by the fact that depletions not usable. Id., at 293. With respect to the winter months, are essentially eliminated if accretions are November through March, Durbin concluded that (1) taken into account." Report 335. 24% of the winter flow was diverted; (2) flows greater than 7,500 acre-feet per month were not usable; and (3) The Special Master examined the computer models flows greater than 40,000 acre-feet for the whole period submitted by Kansas and Colorado and determined that were not usable. Id., at 293-294. "the depletions shown by the Kansas model are well within the model's range of error." Id., at 334-335. As a After Colorado isolated errors in Durbin's analysis, result, "one [could not] be sure whether impact or error Kansas presented a replacement case. Kansas' second [was] being shown." Id., at 335. group of experts, led by Stephen P. Larson, adopted the same methodology but revised certain exhibits and made [***773] [***LEdHR1A] [1E] [***LEdHR3A] minor corrections in data. As a result, Larson modified [3B]We believe that the Special Master gave Kansas Durbin's coefficients, using 72% for the summer months every reasonable opportunity to meet its burden of and 25% for the winter months. Id., at 295. proving its WWSP claim. Kansas, however, failed to prove that operation of the WWSP program resulted in [*686] Later, well after trial had begun, Kansas material depletions of usable flows in violation of Article enlisted the aid of Brent Spronk, who proposed yet IV-D. See ibid. Therefore, we overrule Kansas' exception another method to quantify depletions of "usable" state to the Special Master's conclusion that Kansas had failed line flow. Id., at 300-305. Spronk attempted to determine to prove its WWSP claim. the "percentage of days in each month when flows were being fully used in Kansas." Id., at 301. Instead of C seasonal averages, the Spronk approach yielded coefficients that varied from month to month. Spronk [***LEdHR4A] [4A]Article IV-D of the Compact then multiplied these monthly coefficients by the permits future development and construction along the estimated depletions in flow predicted by Kansas' Arkansas River Basin provided [*685] that it does not hydrological model. Id., at 301-302. materially deplete state line flows "in usable quantity or availability." App. to Report 5 (Article IV-D) (emphasis [***LEdHR1A] [1F] [***LEdHR4A] [4B]The added). In order to establish a violation of Article IV-D, Special Master concluded that "the Durbin approach, Kansas was required to establish that development in using Larson's coefficients, is the best of the several Colorado resulted in material depletions of "usable" river methods presented for determining usable flow" and that flow. The Compact does not define the term "usable." Cf. it provided "a reasonable way in which [***774] to Colorado v. Kansas, 320 U.S. at 396-397 ("The critical determine depletions of usable flow." Id., at 305. matter is the amount of divertible flow at times when [**1742] We agree. Each of the three methods that water is most needed for irrigation. Calculations of Kansas proposed for calculating usable depletions average annual flow, which include flood flows, are, required two steps: (1) a calculation of total depletions therefore, not helpful in ascertaining the dependable using the Kansas hydrological model, and (2) an supply of water usable for irrigation"). At trial, Kansas application of "usability" criteria. See Brief for United presented three methods for determining depletions of States in Response to Exeptions of Kansas and Colorado "usable" flow. 30. Each of the three methods proposed by Kansas was dependent on the Kansas hydrological model to estimate Kansas' first expert, Timothy J. Durbin, analyzed total depletions. The Spronk method required the Kansas flow data for the period between 1951 and 1985 by hydrological model to predict accurately depletions for plotting actual river diversions in Kansas against actual each and every month. Report 303. But as Durbin, stateline flows. Report 293-294. Using these data, Durbin Kansas' first expert, testified, Kansas' hydrological model developed criteria to determine what river flows were was only a "'good predictor' when 'looking at long usable. Durbin concluded that during the summer periods of time.'" Id., at 303, n. 130 (quoting Durbin's months, April through October, (1) 78% of the stateline testimony). Thus, the Spronk method required the Kansas flows were diverted; (2) flows greater than 40,000 hydrological model to do something it was not designed acre-feet per month were not usable; and (3) flows to do, i. e., predict accurately depletions on a monthly greater than 140,000 acre-feet for the whole period were Page 13 514 U.S. 673, *686; 115 S. Ct. 1733, **1742; 131 L. Ed. 2d 759, ***774; 1995 U.S. LEXIS 3214 basis. Id., at 303 ("The Spronk analysis assumes that the [requested]. But, [***775] in any event, they [*688] H-I model can accurately predict changes of Stateline gravely add to the burden [the plaintiff] would otherwise flow on a monthly basis"). Because the Spronk method bear"). We need not, however, foreclose the applicability for determining "usable" river flows was less compatible of laches in such cases, because we conclude that with Kansas' hydrological model than the other methods Colorado has failed to prove an element necessary to the proposed, we conclude that the Special Master properly recognition of that defense. See Costello, supra, at 282. rejected [*687] the Spronk method in favor of the Durbin approach, as modified by the Larson coefficients. Colorado argues that Kansas knew or should have known by 1956, or at the latest, before 1968, that both the III number of post-Compact wells and the amount of post-Compact pumping in Colorado had increased A substantially. Colorado's Exceptions 37, 39. Colorado argues that by 1956 Kansas had sufficient information [***LEdHR5A] [5A]The Special Master concluded about increased well pumping in Colorado and its that Kansas was not guilty of inexcusable delay in potential impact on usable stateline flows to call for an making its well-pumping claim, and that Colorado had investigation to determine if a Compact violation existed. not been prejudiced by Kansas' failure to press its claim Id., at 46. earlier. Id., at 170. Colorado has excepted to this determination. Colorado argues that the equitable [***LEdHR1A] [1G] [***LEdHR5A] [5C]The doctrine of laches should bar Kansas' claim for relief. See Special Master concluded that prior to 1984, Kansas had Colorado's Exceptions to Special Master's Report made no formal complaint to the Administration (Colorado's Exceptions) 24-64. We overrule Colorado's regarding post-Compact [**1743] well pumping in exception. Colorado. Report 155-156. Nevertheless, the Special Master concluded that Colorado's evidence did not "deal [***LEdHR5A] [5B] [***LEdHR6] [6]The with the issue of impact on usable flow at the Stateline," defense of laches "requires proof of (1) lack of diligence id., at 161, and did "not demonstrate that [the Kansas by the party against whom the defense is asserted, and (2) officials] were aware of the number of wells, the extent prejudice to the party asserting the defense." Costello v. of Colorado's pumping, or the impact or even potential United States, 365 U.S. 265, 282, 5 L. Ed. 2d 551, 81 S. impact of pumping on usable Stateline flows," id., at 164. Ct. 534 (1961); see also Black's Law Dictionary 875 (6th The Special Master explained the difficulty of assessing ed. 1990) [HN3] ("'Doctrine of laches,' is based upon the impact of increases in post-Compact well pumping on maxim that equity aids the vigilant and not those who usable stateline flows because of changing conditions slumber on their rights. It is defined as neglect to assert a during the 1970's and early 1980's: right or claim which, taken together with lapse of time and other circumstances causing prejudice to the adverse "The 1970s were generally dry years and party, operates as bar in court of equity"). This Court has some reduction in flow was to have been yet to decide whether the doctrine of laches applies in a expected. Pueblo Dam came on line in case involving the enforcement of an interstate compact. 1976 and began to reregulate native flows. Cf. Illinois v. Kentucky, 500 U.S. 380, 388, 114 L. Ed. Transmountain imports increased, which 2d 420, 111 S. Ct. 1877 (1991) (in the context of an to some extent provided an offset to interstate boundary dispute, "the laches defense is pumping. The 1980 Operating Plan was generally inapplicable against a State"); Block v. North placed into effect, which Colorado alleges Dakota ex rel. Board of Univ. and School Lands, 461 offset the impacts of increased pumping U.S. 273, 294, 75 L. Ed. 2d 840, 103 S. Ct. 1811 (1983) downstream from John Martin Reservoir. (O'CONNOR, J., dissenting) ("The common law has long The Winter Water Storage Program was accepted the principle 'nullum tempus occurrit regi' -- instituted. Moreover, there was no neither laches nor statutes of limitations will bar the quantitative [*689] or specific sovereign"); Colorado v. Kansas, supra, at 394 (In the entitlement against which depletions to context of a suit seeking an equitable apportionment of usable flow could be judged. Nor were river flows, facts demonstrating a delay in filing a there any agreed upon criteria for complaint "might well preclude the award of the relief Page 14 514 U.S. 673, *689; 115 S. Ct. 1733, **1743; 131 L. Ed. 2d 759, ***LEdHR5A; 1995 U.S. LEXIS 3214 establishing what flows were usable." Id., 4 Article VI-A(2) provides: "Except as otherwise at 162-163. provided, nothing in this Compact shall be construed as supplanting the administration by As late as 1985, Colorado officials refused to permit an Colorado of the rights of appropriators of waters investigation by the Administration of well development of the Arkansas River in said State as decreed to in Colorado because they claimed that the evidence said appropriators by the courts of Colorado, nor produced by Kansas did not "'suggest that well as interfering with the distribution among said development in Colorado has had an impact on usable appropriators by Colorado, nor as curtailing the stateline flows.'" Id., at 163 (quoting memorandum of J. diversion and use for irrigation and other William McDonald, chief of the Colorado delegation to beneficial purposes in Colorado of the waters of the Administration). In light of the vague and conflicting the Arkansas River." App. to Report 10 (emphasis evidence available to Kansas, we conclude that Colorado added). has failed to demonstrate lack of diligence, i. e., inexcusable delay, on the part of Kansas. We conclude that the clear language of Article IV-D refutes Colorado's legal challenge. Article IV-D permits Accordingly, we overrule Colorado's exception to "future beneficial development of the Arkansas River the Special Master's conclusion that the defense of laches basin . . . which may involve construction of dams, should not bar Kansas' well-pumping claim. reservoir, and other works for the purposes of water utilization and control, as well as the [**1744] improved B or prolonged functioning of existing works: Provided, that the waters of the Arkansas River . . . shall not be [***LEdHR7A] [7A]The Compact prohibits "future materially depleted in usable quantity or availability . . . beneficial development of the Arkansas River basin" that ." App. to Report 5 (emphasis added). Regardless of "materially deplete[s]" the usable flows of the Arkansas subsequent practice by the parties, improved and River. App. to Report 5 (Article IV-D) (emphasis added). increased pumping by existing wells clearly falls within Because some wells in Colorado were in [***776] Article IV-D's prohibition against "improved or existence prior to the Compact, both parties agree that a prolonged functioning of existing works," if such action certain amount of post-Compact well pumping is results in "material depletions in usable" river flows. allowable under the Compact. Report 182. Kansas and Ibid.; see Texas v. New Mexico, 462 U.S. 554, 564, 77 L. Colorado, however, dispute the extent of this allowance. Ed. 2d 1, 103 S. Ct. 2558 (1983) ("Unless the compact to The Special Master determined that the "highest annual which Congress has consented is somehow amount shown to have been pumped during the unconstitutional, no court may order relief inconsistent negotiations, namely 15,000 acre-feet, should be allowed with its express terms"). Article VI-A(2) of the Compact, under the Compact." Id., at 200. Colorado makes both a which begins with the phrase, "Except as otherwise legal and a factual challenge to this determination. provided," App. to [*691] Report 10, must be read in Colorado's Exceptions 66-73, 73-84. conjunction with and as limited by Article IV-D. We agree with the Special Master that "new wells, the Colorado argues as a legal matter that the Compact replacement of centrifugal with turbine pumps, and does not limit the pumping by pre-Compact wells to the increased pumping from [pre-Compact] wells all come highest amount actually pumped in pre-Compact years; within [Article IV-D]." Report 194. rather, Colorado [*690] claims that the limit on its pre-Compact pumping is the maximum amount that [***LEdHR1A] [1H] [***LEdHR7A] [7B] Colorado law permitted or the maximum amount of [***LEdHR8] [8]Second, Colorado argues as a factual pumping possible using wells existing prior to the matter that the Special Master unreasonably relied upon Compact. Id., at 69-70. In support of its position, faulty reports by the United States Geological Survey Colorado argues that the Special Master failed to consider (USGS) and the Colorado Legislature to conclude that the the subsequent practice of the parties, i. e., Kansas' failure greatest amount of annual pre-Compact pumping in to object to replacement of centrifugal pumps with Colorado was 15,000 acre-feet. Colorado's Exceptions turbine pumps or increased pumping by pre-Compact 73-74. The Special Master concluded: wells, and that Article VI-A(2) of the Compact supports its position. 4 Page 15 514 U.S. 673, *691; 115 S. Ct. 1733, **1744; 131 L. Ed. 2d 759, ***LEdHR8; 1995 U.S. LEXIS 3214 [***777] "There is no precise answer because of changes in the regime of the Arkansas River," to the amount of [pre-Compact] pumping. id., at 91, "including [post-Compact] well pumping in . . . That amount must simply remain as an Colorado and Kansas," ibid.; see also App. to Report 107 estimate of water use that affected the (Resolution Concerning an Operating Plan for John general allocation of water between the Martin Reservoir) ("WHEREAS, the Arkansas River states when the Compact was being Compact Administration . . . recognizes that, because of negotiated. Two responsible reports, one changes in the regime of the Arkansas River, the present published by the USGS and one prepared operation of the conservation features of John Martin for the Colorado legislature, reached Reservoir does not result in the most efficient utilization similar conclusions as to the amounts of possible of the water under its control"). We disagree. Colorado pumping during the 1940s. . . . They have since been used by the [***LEdHR1A] [1I] [***LEdHR9A] [9B]As Colorado State Engineer. I have relied on Colorado acknowledges, the resolution adopting the 1980 these reports and recommend that the Operating Plan "does not state that [post-Compact] well highest annual amount shown to have been pumping in [**1745] Colorado or Kansas was a cause pumped during the negotiations, namely of changes in the regime of the Arkansas River." 15,000 acre-feet, should be allowed under Colorado's Exceptions 88. In fact, Colorado argues in a the Compact." Report 199-200. separate part of its brief that "Kansas had made no complaint about well pumping in Colorado to the Although [HN4] the ultimate responsibility for deciding Compact Administration . . . before 1984." Id., at 32. The what are correct findings of fact remains with the Court, 1980 Operating Plan expressly reserves the parties' rights Colorado v. New Mexico, 467 U.S. 310, 317, 81 L. Ed. under the Compact, stating that "adoption of this 2d 247, 104 S. Ct. 2433 (1984), in this instance, we are in resolution does not prejudice the ability of Kansas or of full agreement with the Special Master. Accordingly, we any Colorado ditch to object or to otherwise represent its overrule Colorado's exception. [*693] interest in [***778] present or future cases or controversies before the Administration or in a court of C competent jurisdiction." App. to Report 116. The Special Master concluded: [***LEdHR9A] [9A]In April 1980, the Administration adopted a resolution concerning the "The 1980 Operating Plan provided method for operating John Martin Reservoir (1980 benefits to both Kansas and Colorado Operating Plan). Report 47. The 1980 Operating [*692] which were separately bargained for. Plan divides the water conserved in John Martin There is no evidence to support the claim Reservoir into separate accounts. Kansas is allocated 40% that benefits to Kansas were in settlement of the conservation storage, with the remaining 60% of its well claims. Colorado received being divided in specified percentages among the nine ample consideration under the agreement canal companies in Colorado Water District 67. Id., at for the 1980 plan without a waiver of 173. The Special Master concluded that the 1980 Kansas' well claims. The benefits received Operating Plan for the John Martin Reservoir was by Kansas under the plan should not be "separately bargained for" and therefore should not offset offset against compact violations, and depletions caused by post-Compact well pumping in should not be a bar to any of the Kansas Colorado. Id., at 180-181. Colorado takes exception to claims in this case." Report 180-181. this ruling. We agree with the Special Master's resolution of Colorado argues that increases in usable state line Colorado's claim. Accordingly, we overrule Colorado's flows resulting from the 1980 Operating Plan should exception. offset depletions to usable state line flows. Colorado's Exceptions 85. Colorado maintains that the D Administration adopted the 1980 Operating Plan "for more efficient utilization of water under its control [***LEdHR10A] [10A]Finally, Colorado argues Page 16 514 U.S. 673, *693; 115 S. Ct. 1733, **1745; 131 L. Ed. 2d 759, ***LEdHR10A; 1995 U.S. LEXIS 3214 that Kansas is required to prove its well-pumping claim [***LEdHR1A] [1K]For these reasons, we by clear and convincing evidence. Colorado's Exceptions overrule the exceptions filed by the States of Kansas and 91. The Special Master, relying upon Nebraska v. Colorado. We remand the case to the Special Master for Wyoming, 507 U.S. 584, 123 L. Ed. 2d 317, 113 S. Ct. determination of the unresolved issues in a manner not 1689 (1993), concluded that the proper burden of proof inconsistent with this opinion. for enforcing an interstate compact is the preponderance of the evidence standard. Report 70. The Special Master It is so ordered. noted that the Nebraska Court had drawn a distinction between actions seeking to "modify" a judicial decree and REFERENCES actions seeking to "enforce" a judicial decree. See 32A Am Jur 2d, Federal Practice and Procedure 556, 572, Nebraska, supra, at 592 ("We find merit in [the] 574; 78 Am Jur 2d, Waters 309-311, 314, 340 contention that, to the extent that Nebraska seeks 7A Federal Procedure, L Ed, Courts and Judicial System modification of the decree rather than enforcement, a 20:294, 20:310, 20:312 higher standard of proof applies"). The Special Master concluded that an action seeking to enforce an interstate L Ed Digest, Evidence 962, 966.5; Reference 19, 29; compact stood on the same footing as an action enforcing States, Territories, and Possessions 58; Supreme Court of a judicial decree, and therefore was subject to the the United States 58 "preponderance of the evidence" standard. Report 70. L Ed Index, Reservoir; Rivers and Streams; Special [***LEdHR1A] [1J] [***LEdHR10A] [10B]We Masters; Supreme Court of the United States; Waters and need not, however, resolve this issue. The Special Master Watercourses concluded that "regardless of which burden of proof [*694] applies" he had "no difficulty in concluding that ALR Index, Masters; Original Jurisdiction; Reservoirs; [post-Compact] pumping in Colorado had caused Rivers and Streams; Supreme Court of United States; material depletions of the usable Stateline flows of the Waters and Watercourses Arkansas River, in violation of the Arkansas River Compact." Id., at 263. We agree with this determination, Annotation References: and thus overrule Colorado's exception. Original jurisdiction of United States Supreme Court in IV suits between states. 68 L Ed 2d 969. Page 1 MEMPHIS & LITTLE ROCK RAILROAD COMPANY v. RAILROAD COMMISSIONERS. SUPREME COURT OF THE UNITED STATES 112 U.S. 609; 5 S. Ct. 299; 28 L. Ed. 837; 1884 U.S. LEXIS 1930 Submitted November 25, 1884. December 22, 1884 Decided PRIOR HISTORY: IN ERROR TO THE SUPREME subscribers were authorized to organize by the election of COURT OF THE STATE OF ARKANSAS. a board of directors. The 9th section of the act is as follows: This was a bill in equity filed in the Chancery Court of Pulaski County, Arkansas, seeking to enjoin the Board "SEC. 9. The said company may at any time of Railroad Commissioners of the State from appraising, increase its capital to a sum sufficient to complete the for the purposes of taxation, any part of the property of said road, and stock it with anything necessary to give it the plaintiff in error, on the ground that it is exempted full operation and effect, either by opening books for new from taxation by a contract with the State contained in its stock or by selling such new stock, or by borrowing charter of incorporation. The Supreme Court of the State, money on the credit of the company, and on the mortgage on appeal, affirmed the decree of the Chancery Court of its charter and works; and the manner in which the dismissing the bill. That decree of the Supreme Court same shall be done, in either case, shall be prescribed by was brought here by writ of error, for review, on the the stockholders at a general meeting," &c. Laws of allegation that it enforced a law of the State impairing the Arkansas, 1852-3, 132-3. obligation of a contract in violation of the rights of the plaintiff in error under the Constitution of the United It also contains the following: States. "SEC. 28. The capital stock of said company shall The question arises and is to be determined upon the be exempt from taxation until the road pays a dividend of following case: six per cent., and the road, with all its fixtures and appurtenances, including workshops, warehouses and The Memphis and Little Rock Railroad Company vehicles of transportation, shall be exempt from taxation was chartered by an act of the General Assembly of the for the period of twenty years from and after the State of Arkansas, approved January 11, 1853. This act completion of said road." Ib. 136. authorized the formation of a company to be a body corporate for the purpose of establishing communication The company was organized under this act, and by a railroad between the city of Memphis in Tennessee afterwards, in order to borrow money for the prosecution and Little Rock in Arkansas, and commissioners were of the enterprise, issued its bonds to the amount named therein to open books for subscriptions to its $1,300,000, dated May 1, 1860, having thirty years to capital stock.This was fixed for the purpose of run, with interest at eight per cent. per annum, and, to organization at $400,000, to be increased to $2,000,000 at secure the payment of the same, executed and delivered a the pleasure of the company. When the necessary mortgage to Tate, Brinkley and Watkins, as trustees for amount of capital stock had been subscribed, the the bondholders, whereby it conveyed to them, in trust, Page 2 112 U.S. 609, *; 5 S. Ct. 299, **; 28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930 the Memphis and Little Rock Railroad, its road-bed, right provisions of the act of January 11, 1853, for the of way, and all works and rolling stock of or belonging to incorporation of the original company; and afterwards, on the company, "together with the charter by which said April 30, 1877, Pierson, Matthews and Dow conveyed to company was incorporated and under which it is said company the property and franchises, including the organized, and all the rights and privileges and franchises charter of January 11, 1853; and thereupon the bill thereof," and also all the lands, &c., belonging to said proceeds: company. "Complainant submits that, having thus duly Subject thereto, a second mortgage was made by the purchased said charter of the Memphis and Little Rock company on March 1, 1871, conveying all its property Railroad Company under the power therein contained, and franchises to Henry F. Vail, in trust for the holders of and having organized thereunder, it is the owner and bonds secured thereby, amounting to $1,000,000.Default holder thereof, and that it has and is entitled to all the having been made by the company in the payment of privileges and benefits in said act of the General interest on this loan, Vail, the trustee, in execution of the Assembly mentioned and set forth, among others to the power conferred in the mortgage, sold and conveyed the contract contained in said section 28, by which the road, mortgaged property, the title to which became vested in with all the franchises and appurtenances, including Stillman Witt and his associate bondholders, who workshops, warehouses, and vehicles of transportation, organized the Memphis and Little Rock Railway shall be exempt from taxation for the period of twenty Company, to which, on November 17, 1873, the said years from and after the date of the completion of said property was conveyed. This railway company, on road. Complainant further states that said road was not December 1, 1873, issued its bonds to the amount of completed till the 15th day of November, 1874, and that $2,600,000, and, to secure the same, by a deed of that the time of the exemption thereafter from taxation has not date, conveyed all the franchises, privileges and property expired. It further states that the defendant herein first so acquired by it to trustees, of whom Pierson, Matthews mentioned, acting as a Board of Railroad Commissioners and Dow became successors, in trust for the bondholders. for this State, have demanded from the complainant a The Memphis and Little Rock Railroad Company, the detailed inventory of all the rolling stock belonging to the original corporation, made default in the payment of company, and the valuation thereof, as provided in interest accruing upon the bonds secured by the mortgage section 48 of an act of the General Assembly of the State of May 1, 1860, and its successor, the Memphis and of Arkansas, approved March 31, 1883, entitled 'An Act Little Rock Railway Company also made default in the to revise and amend the revenue laws of the State of payment of interest maturing on the bonds secured by the Arkansas,' and have also demanded from the complainant deed of December 1, 1873. Afterwards, on November a statement or schedule showing the length of the main 12, 1876, a bill in chancery was filed, in the Circuit Court and all the side tracks, switches and turn-outs in each of the United States for the Eastern District of Arkansas, county in which the road is located, and the value of all by the trustees against the two companies, to foreclose improvements, stations and structures, including the those mortgages, in which suit a final decree was railroad track, as provided in section 46 of the same act. rendered ordering a sale of the property described in the same, embracing the property and franchises of the said "Complainant being willing, so far as it may without companies, and the charter of the Memphis and Little injury to itself, to comply with the laws of this said State, Rock Railroad Company; and a sale thereof was made has, in compliance with the demand made upon it, made and confirmed, and a conveyance of the same executed to and returned said schedule to the said board, Pierson, Matthews and Dow, in trust for the holders of accompanying the same with a protest against any of the the bonds of the Memphis and Little Rock Railway property in said schedule contained being assessed for Company, secured by the deed of trust executed by that taxation, in which protest complainant stated the grounds company. On April 28, 1877, the holders of these bonds upon which said property was exempt from taxation. executed certain articles of association, by which after "Complainant states and submits that all this reciting the premises, they organized themselves into a property contained in the said schedules, [copies] of company, claiming to become a corporation, under the which it herewith files, marked 'I' and 'J,' and all the name of "The Memphis and Little Rock Railroad property described in said sections 46 and 48 of said act, Company as re-organized," under and by virtue of the Page 3 112 U.S. 609, *; 5 S. Ct. 299, **; 28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930 are the identical property which is exempt from taxation Arkansas was adopted and took effect. Among its by the contract in said charter contained." provisions are these: That the General Assembly shall pass no special act conferring corporate powers (art. 12, On December 9, 1874, an act was passed by the sec. 2); that corporations may be formed under general General Assembly of Arkansas, whereby the purchasers laws, which laws may, from time to time, be altered or of a railroad of any corporation of the State, and their repealed (art. 12, sec. 6); that all property subject to associates, acquiring title thereto by virtue of a judicial taxation shall be taxed according to its value; that the sale, or of a sale under a power contained in a mortgage following property shall be exempt from taxation: public or deed of trust, were authorized to organize themselves property used exclusively for public purposes, churches into a body corporate, vested with all the corporate rights, used as such, cemeteries used exclusively as such, school liberties, privileges, immunities, powers and franchises of buildings and apparatus, libraries and grounds used and concerning the railroad so sold, not in conflict with exclusively for school purposes, and buildings and the provisions of the Constitution of the State, as fully as grounds and materials used exclusively for public charity the same were held, exercised and enjoyed by the (art. 16, sec. 5); that all laws exempting property from corporation before such sale. A certificate of such taxation, other than as above provided, shall be void (art. organization was required to be filed in the office of the 16, sec. 6); that the power to tax corporations and Secretary of State within six months, specifying certain corporate property shall not be surrendered or suspended particulars. Laws of Arkansas, 1874-5, p. 57. Prior to by any contract or grant to which the State may be a party the passage of that act there seems to have been no statute (art. 16, sec. 7); and that the General Assembly shall not authorizing the formation of such corporations, or remit the forfeiture of the charter of any corporation then prescribing a mode for their organization. existing, or alter or amend the same, or pass any general or special law for the benefit of such corporation, except In 1853, when the Memphis and Little Rock Railroad upon condition that such corporation should thereafter Company was chartered and organized as a corporation, hold its charter subject to the provisions of the the Constitution of Arkansas then in force permitted the Constitution (art. 17, sec. 8). enactment of special acts of incorporation, and without any restriction upon the power to exempt corporations It was in April, 1877, that the plaintiff in error was and their property from taxation. In 1868 a new organized as a corporation deriving its authority for that Constitution was adopted by the people of the State, purpose, as it claimed, under the special act of January which provided (art. 5, sec. 48), that, "the General 11, 1853. On behalf of the defendant in error, it is Assembly shall pass no special act conferring corporate claimed that the plaintiff in error had no power to powers. Corporations may be formed under general organize as a corporation, except as enabled by the act of laws; but all such laws may, from time to time, be altered December 9, 1874. or repealed. . . . The property of corporations, now existing or hereafter created, shall forever be subject to CASE SUMMARY: taxation the same as the property of individuals;" and in art. 10, sec. 2, that, "laws shall be passed taxing by a uniform rate all moneys, credits, investment in bonds, PROCEDURAL POSTURE: Plaintiff railroad filed a joint stock companies, or otherwise; and also all real and bill in equity seeking to enjoin defendant railroad personal property, according to its true value in money." commissioner from appraising, for the purposes of taxation, any part of the railroad's property. The railroad It was decided by the Supreme Court of Arkansas in alleged that it was exempt from taxation by a contract the case of Oliver v. Memphis and Little Rock Railroad with the State of Arkansas, the terms of which were Co., 30 Ark. 128, that the 28th section of the act of contained in its charter of incorporation. January 11, 1853, incorporating that company, already quoted, was a contract between it and the State, which OVERVIEW: The act of incorporation of the railroad could not be impaired by these provisions of the State empowered it to borrow money on the credit of the Constitution, because it was protected by the Constitution company and on the mortgage of its charter and works. of the United States. The railroad claimed that the assignment of the railroad's charter, by way of mortgage and subsequent judicial sale, On October 13, 1874, the present Constitution of Page 4 112 U.S. 609, *; 5 S. Ct. 299, **; 28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930 resulted in another corporation in lieu of the original one Tax Law > State & Local Taxes > Franchise Tax > that was entitled to all the provisions of the charter as General Overview though it had been originally organized under it. The [HN3] The franchise of becoming and being a Court held that the exemption from taxation contained in corporation, in its nature, is incommunicable by the act of the act of incorporation for the original railroad applied the parties and incapable of passing by assignment. The only to the original corporation organized under it. The franchise to be a corporation clearly cannot be transferred Constitution of Arkansas that was adopted in 1874 by any corporate body of its own will. Such a franchise is provided that the power to tax corporations and corporate not, in its own nature, transmissible. property should not be surrendered or suspended by any contract or grant to which the state may be a party. The Tax Law > Federal Income Tax Computation > Sales & Court held that because the present railroad did not Exchanges > Intangible Property (IRC secs. 1234-1235, become a corporate body until after the restrictions in the 1241, 1253) > Franchise, Trademark & Trade Name Constitution took effect, it was, therefore, incapable in Transfers law of having or enjoying the privilege of holding its Tax Law > State & Local Taxes > Franchise Tax > property exempt from taxation. General Overview OUTCOME: The Court affirmed the decision of the [HN4] The franchise to be a corporation is not a subject state supreme court that held that the corporate body that of sale and transfer, unless the law, by some positive was the railroad could not claim the same exemption provision, has made it so, and pointed out the modes in from taxation that was given to its predecessor. which such sale and transfer may be effected. CORE TERMS: franchise, charter, mortgage, purchaser, LAWYERS' EDITION HEADNOTES: railroad, corporate existence, corporate bodies, corporators, exemption, organize, confer, judicial sale, Exemption of railroad from taxation -- does not pass successor, taxation, foreclosure sale, mortgage by mortgage and judicial sale -- what passes by such sale bondholders, way of mortgage, abandonment, -- Arkansas Constitution. -- bondholders, conveyance, incapable, surrender, becoming, railway, vested, conferred, act of Headnote: incorporation, general law, foreclosure, acquiring 1. The exemption from taxation contained in the 28th LexisNexis(R) Headnotes section of the Arkansas Act of 1853, was intended to apply only to the Memphis and Little Rock Railroad Company, as the original Corporation organized under it. 2. Such exemption did not pass by the mortgage of Mergers & Acquisitions Law > General Overview its charter and works, as included in the transfer of the Tax Law > State & Local Taxes > Franchise Tax > franchise to be a Corporation, to the mortgagees or Limitations purchasers at the judicial sale. [HN1] The exemption from taxation must be construed to have been the personal privilege of the very corporation 3. The franchises embraced in that conveyance were specifically referred to, and to have perished with that, limited to those which had been granted as appropriate to unless the expressed clear intention of the law requires the construction, maintenance, operation and use of the the exemption to pass as a continuing franchise to a railroad as a public highway, and the right to make profit successor. therefrom. 4. The appellant not having become a corporate body Governments > Legislation > Interpretation until after the restrictions in the Arkansas Constitution of [HN2] It is an unbending rule that a grant of corporate 1874 took effect, was thereby incapable in law of having existence is never implied. In the construction of a or enjoying the privilege of holding its property exempt statute, every presumption is against it. from taxation. Page 5 112 U.S. 609, *; 5 S. Ct. 299, **; 28 L. Ed. 837, ***; 1884 U.S. LEXIS 1930 SYLLABUS 25 Ark. 625; White v. Hart, 13 Wall. 646. The contract here was that the company created by the act of 1853 A statute exempting a corporation from taxation might "mortgage its charter." Not mortgage the confers the privilege only on the corporation specially "franchise." Not mortgage the "right to build and operate referred to, and the right will not pass to its successor a railroad." Not mortgage the "exemption from taxation," unless the intent of the statute to that effect is clear and but mortgage the charter. The words "charter," and "act express. Morgan v. Louisiana, 93 U.S. 217; Wilson v. of incorporation" are used "convertibly," and mean the Gaines, 103 U.S. 417; and Louisville & Nashville same thing. Humphrey v. Pegues, 16 Wall. 244. The Railroad Company v. Palmes, 109 U.S. 244, affirmed. grant of a power grants everything necessary to give it beneficial effect; United States v. Fisher, 2 Cranch, 358; The franchise to be a corporation is not a subject of McCulloch v. Maryland, 4 Wheat. 316, 428; Fletcher v. sale and transfer, unless made so by a statute, which Oliver, 25 Ark. 289, 299; N.W. Fertilizing Co. v. Hyde provides a mode for exercising it. Park, 70 Ill. 634. The power to pledge the franchises and rights of a corporation implies, as incident thereto, the A franchise to be a corporation is distinct from a power to pledge everything that may be necessary to the franchise, as a corporation, to maintain and operate a enjoyment of the franchise, and upon which its real value railway: the latter may be mortgaged, without the former, depends. Phillips v. Winslow, 18 B. Mon. 431. Either the and may pass to a purchaser at a foreclosure sale. whole charter passed or nothing. There is no middle A mortgage of the charter of a corporation, made in ground. The exemption from taxation was not separable the exercise of a power given by statute, confers no right from the body of the charter. This court has held that, upon purchasers at a foreclosure sale to exist as the same with legislative permission, any privilege or immunity corporation: if it confers any right of corporate existence may pass. Humphrey v. Pegues, cited above; Tomlinson upon them, it is only a right to reorganize and a v. Branch, 15 Wall. 460; Pacific Railroad Co. v. corporation, subject to laws, constitutional and otherwise, McGuire, 20 Wall. 36. In the cases of Morgan v. existing at the time of the reorganization. Louisiana, 93 U.S. 217, and Louisville & Nashville Railroad Co. v. Palmes, 109 U.S. 244, relied upon by the COUNSEL: Mr. B. C. Brown for plaintiff in error. -- other side, there was no such permission. Under the statutes of Arkansas the pleadings amount to an admission that the original charter contained on Mr. U. M. Rose, for defendants in error. exemption from taxation, that there was authority to OPINION BY: MATTHEWS mortgage that charter, that it was mortgaged, that the mortgage was foreclosed, and that the mortgaged charter OPINION was acquired by the plaintiff in error under the foreclosure sale. We admit that a corporation takes only [*617] [**302] [***840] MR. JUSTICE so much as is granted in express words, or by fair MATTHEWS delivered the opinion of the court. He implication; that an exemption from taxation is not to be recited the facts as above stated, and continued: presumed; that the party claiming the exemption must show his right. But there is another proposition -- which The case of the plaintiff in error rests entirely upon the court overlooked -- that a status or right shown to the words of the ninth section of the act of incorporation have been once established or existing is presumed to of the Memphis and Little Rock Railroad Company of continue, and it is for him who alleges that it has ended or January 11, 1853, by which it was empowered to borrow changed to show when and how the end or change money "on the credit of the company and on the occurred. It is conceded that the property held by mortgage of its charter and works." It is argued that these plaintiff and now sought to be taxed was at one time words confer power upon the company to convey to its exempt. This was established by the Supreme Court of bondholders, by way of mortgage and on foreclosure, to the State itself, in The State v. Oliver, 30 Ark. 129. purchasers absolutely, all the property of the company, Before this cause was instituted, both the Supreme Court and all its franchises, including the franchise of becoming of Arkansas and this court had held that "a State can no and being a corporation, in the sense of acquiring the more impair the obligation of a contract by adopting a right to organize as such under the act as successor to, Constitution than by passing a law." Jacoway, v. Denton, and substitute for, the original company, precisely as if Page 6 112 U.S. 609, *617; 5 S. Ct. 299, **302; 28 L. Ed. 837, ***840; 1884 U.S. LEXIS 1930 the act had named them as corporators and endowed them bondholders or other purchasers at a sale under a with the corporate faculty. And this being assumed, it is foreclosure of the mortgage, nor is there any mode or thence inferred that the exemption contained in section 28 machinery prescribed in the act for such an organization. of the act applies to the substituted corporation as though The desired conclusion rests entirely on the inference no change of corporate existence had taken place; and deduced from the mortgage of the charter, and is an thus, it is insisted, the case is taken out of rule of decision attempt to create a corporation by a judicial established in Morgan v. Louisiana, 93 U.S. 217; Wilson implication.But, as was said by this court in Central v. Gaines, 103 U.S. 417, and Louisville & Nashville Railroad and Banking Co. v. Georgia, 92 U.S. 665, 670, Railroad Company v. Palmes, 109 U.S. 244. According [HN2] "it is an unbending rule that a grant of corporate to the principle of those decisions, [HN1] the exemption existence is never implied. In the construction of a from taxation must be construed to have been the statute every presumption is against it." personal privilege of the very corporation specifically referred to, and to have perished with that, unless the The application of this rule is not avoided by the express the clear intention of the law requires the claim that the present is not the case of an original exemption to pass as a continuing franchise to a creation of a corporate body, but the transfer, by successor. This salutary rule of interpretation is founded assignment of a previously existing charter, and of the upon an obvious public policy, which regards such right to exist as a corporation [***841] under it. [*619] exemptions as in derogation of the sovereign authority The difference is one of words merely. [HN3] The and of common right, and, therefore, not to be extended franchise of becoming and being a corporation, in its beyond the [*618] exact and express requirement of the nature, is incommunicable by the act of the parties and grants, construed strictissimi juris. incapable of passing by assignment. "The franchise to be a corporation," said Hoar, J., in Commonwealth v. Smith, It is not claimed that the assignment of the charter, 10 Allen, 448, 455, "clearly cannot be transferred by any by way of mortgage and subsequent judicial sale, corporate body of its own will. Such a franchise is not, in constituted the purchasers to be the identical corporation its own nature, transmissible." In Hall v. Sullivan that the mortgagor had been; for that would involve an Railroad Co., 21 Law Reporter, 138 (2 Redfield's Am. assumption of its obligations and debts as well as an Railway Cases, 621; 1 Brunner's Collected Cases, 613), acquisition of its privileges and exemptions; but, it is Mr. Justice Curtis said: [HN4] "The franchise to be a insisted, that it resulted in another corporation in lieu of corporation, is, therefore, not a subject of sale and the original one, entitled to all the provisions of the transfer, unless the law, by some positive provision, has charter, by relation to its date, as though it had been made it so, and pointed out the modes in which such sale originally organized under it. and transfer may be effected." No such positive provision is contained in the act under consideration, and no mode But such a construction of the words authorizing a for effecting the organization of a series of corporations mortgage of the charter and works of the company, is, in under it is pointed out, either in the act itself or in any our opinion, beyond the intention of the law and other statute prior to that of December 9, 1874. altogether inadmissible. The franchise of being a corporation need not be There is no express grant of corporate existence to implied as necessary to secure to the mortgage any new body. At the time when this charter was bondholders, or the purchasers at a foreclosure sale, the granted, in 1853, there was no general law in existence in substantial rights intended to be secured. They acquire Arkansas authorizing the formation of corporations. All the ownership of the railroad, and the property incident to such grants were by special act. Neither was there any it, and the franchise of maintaining and operating it as law authorizing the purchasers of railroads at judicial sale such; and the corporate existence is not essential to its use under mortgages of the property and franchises of the and enjoyment. All the franchises necessary or important company, to organize themselves into corporate bodies, to the beneficial use of the railroad could as well be such as was first passed in 1874. There is not in the act exercised by natural persons. The essential properties of of January 11, 1853, for the incorporation of the corporate existence are quite distinct from the franchises Memphis and Little Rock Railroad Company, [**303] of the corporation. The franchise of being a corporation any reference to such a right, as vested in the mortgage belongs to the corporators, while the powers and Page 7 112 U.S. 609, *619; 5 S. Ct. 299, **303; 28 L. Ed. 837, ***841; 1884 U.S. LEXIS 1930 privileges, vested in and to be exercised by the corporate relating to the subject. It finally was displaced by the body as such, are the franchises of the corporation. The judicial sale, under which the plaintiff in error organized latter has no power to dispose of the franchise of its as successor to both. In the mean time, the original members, which may survive in the mere fact of corporation has never been dissolved, and for all corporate existence, after the corporation has parted with purposes not covered by the [*621] mortgage, still all its property and all its franchises.If, in the present maintains an existence as a corporate body, capable of instance, we suppose that a mortgage and sale of the contracting, and of suing and being sued. A conception charter of the railroad company created a new which leads to such incongruities must be essentially corporation, what becomes of the old one? If it abides for erroneous. the purpose of responding to obligations not satisfied by the [*620] sale, or of owning property not covered by If we concede to the argument for the plaintiff in the mortgage nor embraced in the sale, as it may well do, error the position, that the language used, which and as it must if such debts or property exist, then there authorizes the mortgage of the charter, may be taken in a will be two corporations co-existing under the same literal sense, still the assignment would transfer it, in the charter. For, "after an act of disposition which separates very state in which it might be at the date of the transfer. the franchise to maintain a railroad and make profit from But at that date the only corporation which the charter its use, from the franchise of being a corporation, though provided for had already been organized.The only powers a judgment of dissolution may be authorized yet, until conferred upon corporators to that end had already been there be such judgment, the rights of the corporators and exercised and exhausted. The bondholders under the of third persons may require that the corporation be mortgage, and their assignees, the purchasers at the sale, considered as still existing." Coe v. Columbus, Piqua & therefore took, and could take, nothing else than the Indiana Railroad Co., 10 Ohio St. 372, 386, per Gholson, charter, so far as it remained unexecuted, with such J. franchises and powers as were capable of future enjoyment and activity, and not such as, having already If, as required by the argument for the plaintiff in spent their force by having been fully exerted, could not error, we regard and treat the franchise of being a be revived by a conveyance. This would include, by the corporation as an incorporeal hereditament, and an estate necessity of the case, the franchise to organize a capable of passing between parties by deed, or of being corporation, which can only be exerted once for all; for charged by way of mortgage and of being sold under a the simple act of organization exhausts the authority, and power or by virtue of judicial process, the logical having once been effected, is legally incapable of consequences will be found to involve insuperable repetition. difficulties [**304] and contradictions. In the present case, for example, after the execution of the first It is a mistake, however, to suppose that the mortgage, we should have the railroad company mortgage and sale of a charter by a corporation, in any continuing as a corporation in esse, and the trustees for proper sense which can be legally imputed to the words, the bondholders, or their beneficiaries, or assigns, a necessarily conveys every power and authority conferred corporation in posse; and, after condition broken, the by it, so far, at least, as to vest a title in them, as company would hold the title to its own existence as a franchises, irrevocable by reason of the obligation of a mere equity of redemption. That equity it makes the contract. In many, if not in most, acts of incorporation, subject of a second mortgage, and, in default, the however special in their nature, there are various beneficiaries under the power of sale became purchasers provisions which are matters of general law and not of of the franchise, and organize themselves, by virtue of it, contract, and are, therefore, subject to modification or into the Memphis and Little Rock Railway Company. repeal. The latter can hardly claim the status of a corporation at Such, in our opinion, would be the character of the law, as the legal title to the franchise of being a right in the mortgage bondholders, or the purchasers at corporation has never passed to it, on the supposition that the sale under the mortgage, to organize as a corporation, it might pass by a private grant; and, if a corporation at after acquiring title [***842] to the mortgaged property, all, it could only be regarded as the creature of equity, by sale under the mortgage, if, in the charter under according to the analogy of equitable estates, a consideration, it had been conferred in express terms, and nondescript class hitherto unknown in any system of law Page 8 112 U.S. 609, *621; 5 S. Ct. 299, **304; 28 L. Ed. 837, ***842; 1884 U.S. LEXIS 1930 particular provision had been made as to the mode of authorizing the transfer and declaring its effect, is the procedure to effect the purpose. It would be matter grant of a new charter [*623] couched in few words, and [*622] of law and not of contract. At least, it would be to take effect upon condition of the surrender or construed as conferring only a right to organize as a abandonment of the old charter; and the deed of transfer corporation, according to such laws as might be in force is to be regarded as mere evidence of the surrender or at the time when the actual organization should take abandonment." place, and subject to such limitations as they might impose. It cannot, we think, be admitted that a statutory It is, of course, the law in force at the time the provision for becoming a corporation in futuro can transaction is consummated and made effectual, that must become a contract, in the sense of that clause of the be looked to as determining its validity and effect. This Constitution of the United States which prohibits State is the principle on which this court proceeded in deciding legislation impairing its obligation, until it has become the case of Railroad Co. v. Georgia, 98 U.S. 359. The vested as a right by an actual organization under it; and franchise to be a corporation remained in, and was then it takes effect as of that date, and subject to such exercised by, the old corporation, notwithstanding the laws as may then be in force. Such a [**305] contract, mortgage of its charter, until the new corporation was so far as it seems to assume that form, is a provision formed and organized; it was then surrendered to the merely that, at the time, or on the happening of the event State, and by a new grant then made passed to the specified, the parties designated may become a corporators of the new corporation, and was held and corporation according to the laws that may then be exercised by them under the constitutional restrictions actually in force. The stipulation, whatever be its form, then existing. must be construed as subject and subordinate to the Our conclusions, then, are, that the exemption from paramount policy of the State, and to the sovereign taxation contained in the 28th section of the act of prerogative of deciding, in the mean time, what shall January 11, 1853, was intended to apply only to the constitute the essential characteristics of corporate Memphis and Little Rock Railroad Company as the existence. The State does not part with the frachise until original corporation organized under it; that it did not it passes to the organized corporation; and, when it is thus pass by the mortgage of its charter and works, as included imparted, it must be what the government is then in the transfer of the franchise to be a corporation, to the authorized to grant and does actually confer. mortgagees or purchasers at the judicial sale; that the It is immaterial that the form of the transaction is that franchises embraced in that conveyance were limited to of a mortgage, sale, or other transfer inter partes of the those which had been granted as appropriate to the franchise to be a corporation. "The real transaction, in all construction, maintenance, operation, and use of the such cases of transfer, sale, or conveyance," as was said railroad as a public highway and the right to make profit by the Supreme Court of Ohio in the case of The State v. therefrom; and that the appellant, not having become a Sherman, 22 Ohio St. 411, 428, "in legal effect, is corporate body until after the restrictions in the nothing more or less, and nothing other, than a surrender Constitution of 1874 took effect, was thereby incapable or abandonment of the old charter by the corporators, and in law of having or enjoying the privilege of holding its a grant de novo of a similar charter to the so-called property exempt from taxation. transferees or purchasers.To look upon it in any other The decree of the Supreme Court of Arkansas is light, and to regard the transaction as a literal transfer or accordingly sale of the charter, is to be deceived, we think, by a mere figure or form of speech. The vital part of the Affirmed. transaction, and that without which it would be a nullity, is the law under which the transfer is made. The statute Page 1 NATIONAL RAILROAD PASSENGER CORPORATION v. ATCHISON, TOPEKA & SANTA FE RAILWAY CO. ET AL. No. 83-1492 SUPREME COURT OF THE UNITED STATES 470 U.S. 451; 105 S. Ct. 1441; 84 L. Ed. 2d 432; 1985 U.S. LEXIS 65; 53 U.S.L.W. 4285 January 15, 1985, Argued March 18, 1985, Decided * * Together with No. 83-1633, Atchison, Topeka & Santa Fe Railway Co. et al. v. National Railroad Passenger Corporation, also on appeal from the same court. SUBSEQUENT HISTORY: As Amended. reimburse national railroad for the pass travel of their employees, former employees, and dependents. The PRIOR HISTORY: APPEAL FROM THE UNITED district court granted summary judgment to national STATES COURT OF APPEALS FOR THE SEVENTH railroad. The court of appeals reversed in part, finding CIRCUIT. that the agreements provided railroads with a contractual right to be free from having to finance these aspects of DISPOSITION: 723 F.2d 1298, reversed. operations. On appeal, the Court found that the agreements in no respect relieved railroads of the CASE SUMMARY: "responsibility" to provide their employees with pass privileges, for no state or federal law imposed that "responsibility" on them, in connection with intercity rail PROCEDURAL POSTURE: Appellant national passenger operations, when the contracts were executed. railroad sought review of the decision of the United Therefore, the Court concluded that § 405(f) in no respect States Court of Appeals for the Seventh Circuit which altered railroads' existing contractual rights and duties. held that appellee private railroads could be compelled to reimburse national railroad for the incremental cost of OUTCOME: The Court held that the statutory provision carrying pass riders, but that this "windfall" to national was constitutional, and reversed the court of appeals railroad violated the Due Process Clause. insofar as it held that the 1979 and 1981 amendments to the statute contravened the Due Process Clause. OVERVIEW: The Rail Passenger Service Act of 1970 (Act), 45 U.S.C.S. § 501 et seq., established national CORE TERMS: railroad, passenger service, intercity, railroad and outlined a procedure under which private contractual right, reimbursement, passenger, relieved, railroads could obtain relief from their passenger-service incremental, rider, reimburse, common carriers, obligations by transferring those responsibilities to transportation, cross-appeal, pass-rider, contractual national railroad by signing basic agreements. Private obligation, impairment, impaired, fare, travel, trains, railroads challenged the constitutionality of § 405 of the passenger train, contractual, impair, repeal, formula, Act, 45 U.S.C.S. § 565(f), which required them to unconstitutionally, contractually, rationally, reserved, Page 2 470 U.S. 451, *; 105 S. Ct. 1441, **; 84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65 covenant service. 45 U.S.C.S. § 565(a). LexisNexis(R) Headnotes Transportation Law > Carrier Duties & Liabilities > Duty to Provide Service Transportation Law > Rail Transportation > Amtrak Transportation Law > Rail Transportation > Safety Transportation Law > Rail Transportation > Amtrak Appliance Act > Couplers Transportation Law > Rail Transportation > Rates & [HN3] See 45 U.S.C.S. § 541. Tariffs [HN1] The Rail Passenger Service Act of 1970 (the Act), 45 U.S.C.S. § 501 et seq., established the National Governments > Legislation > Interpretation Railroad Passenger Corporation, a private, for-profit [HN4] Absent some clear indication that the legislature corporation that has come to be known as Amtrak. The intends to bind itself contractually, the presumption is corporation is not "an agency or establishment" of the that a law is not intended to create private contractual or government but is authorized by the government to vested rights but merely declares a policy to be pursued operate or contract for the operation of intercity rail until the legislature shall ordain otherwise. This passenger service. The Act outlined a procedure under well-established presumption is grounded in the which private railroads could obtain relief from their elementary proposition that the principal function of a passenger-service obligations by transferring those legislature is not to make contracts, but to make laws that responsibilities to Amtrak; the Act authorized the new establish the policy of the state. Thus, the party asserting corporation to enter into standardized contracts with the the creation of a contract must overcome this private railroads, under which a railroad would be well-founded presumption, and the court proceeds relieved of all its responsibilities as a common carrier of cautiously both in identifying a contract within the passengers by rail in intercity rail passenger service under language of a regulatory statute and in defining the Subtitle IV of Title 49 or any state or other law relating to contours of any contractual obligation. the provision of intercity passenger service. 45 U.S.C.S. § 561(a)(1). Governments > Legislation > Interpretation [HN5] In determining whether a particular statute gives Transportation Law > Carrier Duties & Liabilities > rise to a contractual obligation, it is of first importance to Duty to Provide Service examine the language of the statute. Where the claim is Transportation Law > Rail Transportation > that the state's policy embodied in a statute is to bind its Abandonment instrumentalities by contract, the cardinal inquiry is as to Transportation Law > Rail Transportation > Amtrak the terms of the statute supposed to create such a [HN2] To obtain relief from their common carrier contract. If it provides for the execution of a written obligations, the railroads had to agree to several contract on behalf of the state the case for an obligation conditions in the Rail Passenger Service Act of 1970 (the binding upon the state is clear. But absent an adequate Act), 45 U.S.C.S. § 501 et seq. First, in consideration of expression of an actual intent of the state to bind itself, being relieved of this responsibility, a railroad was to pay the court will not lightly construe that which is Amtrak an amount equal to one-half of that railroad's undoubtedly a scheme of public regulation to be, in financial losses from intercity passenger service during addition, a private contract to which the state is a party. 1969. 45 U.S.C.S. § 561(a)(2). Participating railroads also were to provide Amtrak with the use of tracks, other Contracts Law > Formation > Tender & Delivery facilities, and services at rates to be agreed upon by the Transportation Law > Carrier Duties & Liabilities > parties or, in the event of disagreement, to be set by the Duty to Provide Service Interstate Commerce Commission. 45 U.S.C.S. §§ 561, Transportation Law > Rail Transportation > Amtrak 562. The Act also includes a labor protection provision [HN6] 45 U.S.C.S. § 501 et seq., expressly established requiring the railroads to provide fair and equitable the National Railroad Passenger Corporation as a arrangements to protect the interests of employees nongovernmental entity, 45 U.S.C.S. § 541, and it used affected by discontinuances of intercity rail passenger Page 3 470 U.S. 451, *; 105 S. Ct. 1441, **; 84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65 the term "contract" not to define the relationship of the their dependents, held constitutional. United States to the railroads, but instead that of the new, nongovernmental corporation to the railroads. The statute SUMMARY: states clearly that the Corporation is authorized to contract and, upon written request therefor from a These cases presented the question whether 405(f) of railroad, shall tender a contract. 45 U.S.C.S. § 561(a), and the Rail Passenger Service Act (45 USCS 565(f)), that, upon its entering into a valid contract, the railroad requiring that private railroads reimburse Amtrak for rail shall be relieved of all its responsibilities. travel privileges that Amtrak provides to the railroads' employees and former employees, and their dependents, violates the due process clause of the Fifth Amendment. Constitutional Law > Congressional Duties & Powers > In an action by five railroads against Amtrak, in which Contracts Clause > General Overview the United States intervened as a defendant, the United Constitutional Law > Bill of Rights > Fundamental States District Court for the Northern District of Illinois Rights > Procedural Due Process > General Overview granted summary judgment in favor of Amtrak and the [HN7] To prevail on a claim that federal economic United States, ruling that the Rail Passenger Service Act legislation unconstitutionally impairs a private (45 USCS 501 et seq.) which relieved participating contractual right, the party complaining of railroads of the obligation to provide intercity passenger unconstitutionality has the burden of demonstrating, first, service, did not constitute a contract between the United that the statute alters contractual rights or obligations. If States and the railroads and that, therefore, 405(f) did not an impairment is found, the reviewing court next impair an obligation of the United States under a contract, determines whether the impairment is of constitutional nor any private contractual obligations between the dimension. If the alteration of contractual obligations is railroads and Amtrak (577 F Supp 1046). The United minimal, the inquiry may end at this stage, if the States Court of Appeals for the Seventh District affirmed impairment is substantial, a court must look more closely in part and reversed in part, holding that the railroads at the legislation. When the contract is a private one, and could be compelled to reimburse Amtrak for the when the impairing statute is a federal one, this next incremental cost of carrying the pass riders, but that the inquiry is especially limited, and the judicial scrutiny reimbursement scheme in the 1979 and 1981 quite minimal. The party asserting a Fifth Amendment amendments to the Act requiring the railroads to pay due process violation must overcome a presumption of more than the incremental cost violated the due process constitutionality and establish that the legislature has clause by unreasonably and illegally impairing the rights acted in an arbitrary and irrational way. of the railroads under the Basic Agreements with Amtrak (723 F2d 1298). Constitutional Law > Congressional Duties & Powers > On appeal by Amtrak and cross appeal by the Contracts Clause > General Overview railroads, the United States Supreme Court reversed Constitutional Law > Bill of Rights > Fundamental insofar as the Court of Appeals ruled that the 1979 and Rights > Procedural Due Process > Scope of Protection 1981 amendments to the Act contravened the due process [HN8] Under the Fifth Amendment's Due Process clause. In an opinion by Marshall, J., expressing the Clause, Congress remains free to adjust the burdens and unanimous view of the eight participating members of the benefits of economic life, as long as it did so in a manner court, it was held that 405(f) is constitutional, and that that was neither arbitrary nor irrational. Moreover, in the even if the 1979 and 1981 amendments, by requiring the determination of whether economic legislation that payment by the railroads of more than the incremental substantially alters contractual rights and duties violates cost of pass privileges, indirectly subsidized Amtrak due process, the burden of proving irrationality rests operations in violation of a private contractual right, the squarely on the party asserting a due process violation. amendments in no respect offend the due process clause. DECISION: Powell, J., did not participate. Federal statute requiring private railroads to LAWYERS' EDITION HEADNOTES: reimburse Amtrak for rail travel privileges that Amtrak provides to railroads' past and present employees, and Page 4 470 U.S. 451, *; 105 S. Ct. 1441, **; 84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65 CONSTITUTIONAL LAW §212 expression of actual intent to create a contract, that which is undoubtedly a scheme of public regulation will not RAILROADS §6; lightly be construed to be, in addition, a private contract to which the state is a party. impairment of contracts -- congressional regulation of railroads -- ; CONSTITUTIONAL LAW §127 Headnote:[1A][1B][1C][1D] RAILROADS §6; The Rail Passenger Service Act (45 USCS 501 et seq.) establishing the National Railroad Passenger impairment of contracts -- by United States -- Corporation (Amtrak), a private corporation authorized to existence of contract -- ; contract with private railroads for the operation of intercity rail passenger service and relieving participating Headnote:[4] railroads of that obligation, is a regulatory policy and not The Basic Agreements into which private railroads a contractual arrangement between the United States and entered with the National Railroad Passenger Corporation the participating railroads; thus, 405(f) of the Act (45 (Amtrak), a private corporation formed pursuant to the USCS 565(f)) requiring participating railroads to Rail Passenger Service Act (45 USCS 501 et seq.) which reimburse Amtrak for rail travel privileges provided by relieved the railroads of the obligation to provide intercity Amtrak to the railroads' employees and former employees passenger service, do not grant the railroads any and their dependents violates no contractual obligation of contractual rights against the United States, including the the United States not to impose any passenger service right to be free from all obligations to provide intercity responsibilities on the railroads, and therefore does not passenger service. violate the due process clause of the Fifth Amendment on that account. CONSTITUTIONAL LAW §127; APPEAL §1262; unconstitutional impairment of contracts -- federal economic legislation -- burden of proof -- ; jurisdiction of Supreme Court -- cross appeal -- ; Headnote:[5] Headnote:[2A][2B] To prevail on a claim that federal economic On an appeal to the United States Supreme Court legislation unconstitutionally impairs a private pursuant to 28 USCS 1252 (from a judgment declaring an contractual right, the party complaining of act of Congress unconstitutional in an action to which the unconstitutionality has the burden of demonstrating, first United States is a party), cross appellants' filing of a jurisdictional statement on cross appeal within 30 days of that the statute alters contractual rights or obligations; if an impairment is found, a reviewing court next their receipt of appellants' jurisdictional statement, as determines whether the impairment is of constitutional required by Supreme Court Rule 12.4, is properly a cross dimension, and if the alteration is minimal, the inquiry appeal over which the Supreme Court has jurisdiction. may end at that stage, but if the impairment is substantial, a court must look more closely at the legislation; when CONSTITUTIONAL LAW §125; the contract is a private one, and when the impairing statute is a federal one, this inquiry is especially limited, impairment of contracts -- statute -- regulation -- ; and judicial scrutiny quite minimal; the party asserting a Fifth Amendment due process violation must overcome a Headnote:[3] presumption of constitutionality and establish that the Legislature has acted in an arbitrary and irrational way. In determining whether a particular statute gives rise to a contractual obligation subject to unconstitutional impairment, it is of first importance to examine the CONSTITUTIONAL LAW §212 language of the statute and, absent an adequate Page 5 470 U.S. 451, *; 105 S. Ct. 1441, **; 84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65 RAILROADS §6; cost to Amtrak--as the proper reimbursement amount. impairment of contracts -- reimbursement of Amtrak SYLLABUS by private railroads -- ; The Rail Passenger Service Act of 1970 (Act or Headnote:[6A][6B][6C] RPSA) was enacted in an attempt to revive the failing intercity passenger train industry. For this purpose the The 1979 and 1981 amendments to 405(f) of the Rail Act established the National Railroad Passenger Passenger Service Act (45 USCS 565(f)) requiring Corporation (Amtrak), a private, for-profit corporation, private railroads to reimburse the National Railroad authorized to operate, or contract with private railroads Passenger Corporation (Amtrak) for rail travel privileges for the operation of, intercity rail passenger service. Most Amtrak provides to the railroads' employees and former private railroads offering such service entered into "Basic employees, and their dependents, do not impair any Agreements" with Amtrak, and thereby, as provided by private contractual right the railroads obtained under the the Act, shed their intercity rail passenger obligations. Basic Agreements with Amtrak, which only relieved the Section 7.5 of each Basic Agreement, which concerned railroads of all pre-existing obligations to provide railroad employees' privileges to travel on Amtrak trains intercity passenger service. for free or at reduced fares, gave Amtrak discretion to determine such privileges. When a controversy arose CONSTITUTIONAL LAW §641 over Amtrak's decision to cut back on these privileges, Congress in 1972 added § 405(f) to the RPSA to restore RAILROADS §6; the privileges as they existed when Amtrak took over passenger rail service in 1971. But § 405(f) also required reimbursement of Amtrak by private railroads -- due the railroads to pay, at a reimbursement rate determined process -- ; by the Interstate Commerce Commission, for such costs as might be incurred by Amtrak in providing for the pass Headnote:[7A][7B][7C][7D] privileges. In 1979, Congress decided that the ICC's reimbursement rate resulted in inadequate compensation Even if the 1979 and 1981 amendments to 405(f) of to Amtrak, and accordingly amended § 405(f) to require the Rail Passenger Service Act (45 USCS 565(f)), by the railroads to reimburse Amtrak for pass-rider service at requiring private railroads to pay the National Railroad the rate of "25 percent of the systemwide average Passenger Corporation (Amtrak) more than the monthly yield per revenue passenger mile" for two years. incremental cost of pass privileges provided by Amtrak to In 1981, § 405(f) was again amended to provide that the employees and former employees of the railroads, and 25 percent reimbursement requirement remain in effect their dependents, indirectly subsidized Amtrak in indefinitely. Five railroads filed suit against Amtrak in violation of private contractual rights under the Basic Federal District Court, challenging the constitutionality Agreements between the railroads and Amtrak relieving of § 405(f) on the grounds that the reimbursement the railroads of pre-existing obligations to furnish requirement violated the Due Process Clause of the Fifth intercity passenger service, the amendments in no respect Amendment. The United States intervened in the suit as offend the due process clause; in passing 405(f), a defendant. The District Court granted summary Congress rationally required Amtrak to honor the judgment in favor of Amtrak and the United States, expectations of the railroads' past and present employees holding that the Act did not constitute a contract between and their dependents in order to maintain employee the United States and the railroads, that therefore § 405(f) morale and labor peace, and it rationally required the did not impair an obligation of the United States under a railroads to pay at least a portion of the cost of the contract, and that moreover § 405(f) did not impair the privileges both because the railroads were responsible for Basic Agreements. The Court of Appeals affirmed in the creation of the moral obligation to the railroad part and reversed in part, holding that the railroads could employees and because the railroads benefited from labor be compelled to reimburse Amtrak for the incremental peace and continued employee morale, and after cost of carrying the pass riders, but that the "windfall" to reasonably requiring the railroads to reimburse Amtrak Amtrak under the 1979 amendment, whereby the for benefits received, Congress acted wholly rational in railroads were required to pay more than the incremental selecting the value to the passholders--as opposed to the Page 6 470 U.S. 451, *; 105 S. Ct. 1441, **; 84 L. Ed. 2d 432, ***; 1985 U.S. LEXIS 65 cost, violated the Due Process Clause, because it appellant in No. 83-1492 and appellee in No. 83-1633. unreasonably and illegally impaired the railroads' rights With him on the briefs were William R. Perlik, David R. under the Basic Agreements. Johnson, and Andrea Timko Sallet. Held: Samuel A. Alito, Jr., argued the cause for the United States as appellee under this Court's Rule 10.4 in support 1. Section 405(f) is constitutional. Pp. 465-479. of appellant in No. 83-1492 and appellee in No. 83-1633. With him on the brief were Solicitor General Lee, Acting (a) The RPSA does not constitute a binding Assistant Attorney General Willard, Leonard Schaitman, obligation of Congress. Neither the language of the Act and Al J. Daniel, Jr. nor the circumstances surrounding its passage manifest any intent on Congress' part to bind itself contractually to George A. Platz argued the cause for appellees in No. the railroads. Pp. 465-470. 83-1492 and appellants in No. 83-1633. With him on the brief were Howard J. Trienens, Thomas W. Merrill, and (b) The Basic Agreements do not grant the railroads W. A. Brasher. a contractual right against the United States to be free from all obligation to provide passenger service. Those JUDGES: MARSHALL, J., delivered the opinion of the Agreements are not contracts between the railroads and Court, in which all other Members joined, except the United States but simply between the railroads and POWELL, J., who took no part in the decision of the Amtrak. Pp. 470-471. cases. (c) Section 405(f)'s payment obligation does not OPINION BY: MARSHALL unconstitutionally impair the railroads' private contractual rights under the Basic Agreements. Those Agreements OPINION relieved the railroads only of common carriage responsibilities and not of the responsibility to provide [*453] [***438] [**1445] JUSTICE their employees with pass privileges, for no state or MARSHALL delivered the opinion of the Court. federal law imposed that responsibility on them, as common carriers, when the Agreements were executed. [***LEdHR1A] [1A]The question presented in It was not until after the Agreements were signed and these cases is whether Congress violates the Due Process Amtrak operations were underway, that Congress Clause of the Fifth Amendment by requiring private imposed new obligations on both parties to the railroads to reimburse the National Railroad Passenger Agreements. Pp. 472-475. Corporation (Amtrak) for rail travel privileges that Amtrak provides to the railroads' employees and former (d) Even if the railroads have a private contractual employees, and their dependents. right not to pay more than the incremental cost of the pass privileges, the Due Process Clause does not limit I Congress' power to choose a different reimbursement scheme. Congress' decision to assess the railroads was A rational, and the railroads have not met their burden of proving irrationality and thus have not proved a due From the middle of the 19th century, the railroad process violation. Pp. 475-478. passenger coach played a significant and sometimes romantic role in American cultural and economic life. By 2. The railroads have no contractual right to be free the middle of this century, however, "this time-honored from the obligation to make any payments to Amtrak, vehicle" threatened to "take its place in the transportation even for incremental costs. Nothing in the RPSA or the museum along with the [*454] stagecoach, the Basic Agreements suggests that the railroads were sidewheeler, and the steam locomotive." 1 Whereas in relieved of the responsibility to reimburse Amtrak for the 1929 about 20,000 intercity trains operated in the pass privileges in question. Pp. 478-479. country, 2 by 1946, there were only about 11,000 such passenger trains; by 1971, fewer than 500 passenger COUNSEL: Paul F. Mickey, Jr., argued the cause for trains still operated. 3 As cars, buses, and airplanes Page 7 470 U.S. 451, *454; 105 S. Ct. 1441, **1445; 84 L. Ed. 2d 432, ***LEdHR1A; 1985 U.S. LEXIS 65 displaced the passenger railroads, those railroads that corporation was to be named "Railpax." The continued to provide passenger carriage incurred heavy corporation instead independently adopted the and continuing losses. At the same time, as common official nickname "Amtrak," which is a carriers these railroads were bound to continue providing contraction of "American" and "Track." N. Y. service until the Interstate Commerce Commission (ICC) Times, Apr. 20, 1971, p. 86, col. 7. or state regulatory authorities relieved them of this 6 H. R. Rep. No. 91-1580, at 5. responsibility. Given the tremendous operating losses, 7 Railroads that chose not to discontinue many of the remaining handful of railroads operating passenger service remained subject to the passenger coaches sought ICC permission to discontinue obligation to provide that service imposed on passenger train service. common carriers by the Interstate Commerce Act (ICA), 49 U. S. C. §§ 10908 and 10909. Section 1 Hosmer, Examiner, Report and Recommended 404 of the RPSA, 45 U. S. C. § 564 (1970 ed.), Order, Railroad Passenger Train Deficit, ICC declared a 5-year moratorium on the Docket No. 31954, p. 69 (1958) (as quoted in G. discontinuance of any intercity passenger train by Hilton, Amtrak: The National Railroad Passenger any railroad that had not transferred its Corporation 9 (1980)). responsibilities to Amtrak, but authorized those 2 P. Dorin, Amtrak: Trains & Travel 14 (1979). railroads to seek discontinuances, through the 3 H. R. Rep. No. 91-1580, pp. 2-3 (1970). procedures of the ICA, at the end of the 5-year period. See 49 U. S. C. § 13a (1970 ed.), [HN1] The Rail Passenger Service Act of 1970 (Act recodified at 49 U. S. C. §§ 10908, 10909. In or RPSA), 84 Stat. 1327, 45 U. S. C. § 501 et seq. (1970 addition, all railroads remained subject to ed.), which took effect on May 1, 1971, was Congress' common carrier obligations to transport freight. effort to "revive the failing intercity passenger train 49 U. S. C. § 10903 et seq. industry and retain a high-quality rail passenger service 8 The Act originally referred to the common for the Nation." 4 On concluding [**1446] that a carrier obligations under Part I of the ICA, see 84 reorganized and restructured rail passenger system could Stat. 1328, 1334; that provision of the ICA was be successful, Congress established the National recodified in 1978 as Subtitle IV (§ 10101 et seq.) [***439] Railroad Passenger Corporation, a private, of Title 49, which is entitled "Interstate for-profit corporation that has come to be known as Commerce." Amtrak. 5 The corporation is not "an agency or establishment" of the Government but is authorized by [HN2] To obtain relief from their common carrier the Government to operate or [*455] contract for the obligations, the railroads had to agree to several operation of intercity rail passenger service. 6 The Act conditions. First, "[in] consideration of being relieved of outlined a procedure under which private railroads could this responsibility," a railroad was to pay Amtrak an obtain relief from their passenger-service obligations by amount equal to one-half of that railroad's financial losses transferring those responsibilities to Amtrak; 7 the Act from intercity passenger service during 1969. § authorized the new corporation to enter into standardized 561(a)(2). Participating railroads also were to provide contracts with the private railroads, under which a Amtrak with the use of tracks, other facilities, and railroad would be relieved "of all [its] responsibilities as a services at rates to be agreed upon by the parties or, in the common carrier of passengers by rail in intercity rail event of disagreement, to be set by the ICC. §§ 561, 562. passenger service under [Subtitle IV of Title 49] or any The Act also included a labor protection provision State or other law relating to the provision of intercity requiring the railroads to "provide fair and equitable passenger service." 45 U. S. C. § 561(a)(1) (1970 ed.). 8 arrangements to [*456] protect the interests of employees affected by discontinuances of intercity rail 4 GAO, Comptroller General, Nos. B-196907, passenger service." § 565(a). Participating railroads were CED-80-83, Report to the Congress, How Much required to enter into "protective arrangements" with Should Amtrak Be Reimbursed for Railroad their unions, in which the railroads promised to protect Employees Using Passes to Ride Its Trains? dislocated employees and to preserve employee benefits, (GAO Report), App. 48. including pension rights and fringe benefits. §§ 5 H. R. Rep. No. 91-1580, at 5. Initially the 565(a)-(e). Page 8 470 U.S. 451, *456; 105 S. Ct. 1441, **1446; 84 L. Ed. 2d 432, ***439; 1985 U.S. LEXIS 65 Finally, in § 301 of the Act, [HN3] 45 U. S. C. § 541 assumed operation, the private railroads often permitted (1970 ed.), Congress "expressly reserved" its right to current and retired employees and their dependents to "repeal, alter or amend this Act at any time." travel on the employees' home lines for free or at reduced rates, and many railroads had reciprocal agreements All but five private railroads offering intercity permitting employees and dependents of other railroads passenger service took up the option provided by the Act to travel at reduced rates as well. 10 [***440] and entered into contracts, known as "Basic Agreements," with Amtrak. 9 The participating railroads 10 See GAO Report, App. 47. made the required payments to Amtrak and shed their intercity rail passenger obligations. On May 1, 1971, At the time Amtrak was created, between 1.4 million Amtrak began rail passenger service. and 2 million rail-travel passes were outstanding. 11 Exercising its discretion under § 7.5 of the Basic 9 The five nonparticipating railroads were Agreements, the corporation decided to confine pass Southern Railway Co., Denver & Rio Grande privileges to employees of the railroads that operated Western Railroad, Chicago, Rock Island & Pacific trains for Amtrak, and to limit those privileges to Railroad, Georgia Railroad, and Canadian Pacific half-rate fares. As a result, all railroad employees lost Railway Co.. GAO Report, App. 48. their pre-Amtrak access to completely free transportation, and employees of some railroads lost their pass privileges The Basic Agreements between the railroads and entirely. Amtrak then was faced with vehement protests Amtrak mirrored the provisions of the Act. For example, from the railroads, which continued to operate both § 2.1 of each Basic Agreement, entitled "Relief from freight trains and some passenger service, and which Responsibility," relieved the signatory railroad "of its asserted that the withdrawal of free transportation entire responsibility for the provision of Intercity Rail privileges for their employees threatened to produce Passenger Service." [**1447] App. 13. The Agreements severe labor problems for [***441] them. 12 The also required the railroads to make services, tracks, and corporation thereafter restored some, but not all of the facilities available and to protect employees who would canceled privileges. be affected by a discontinuance of passenger service. 11 Affidavit of Roger Lewis, App. 40. Section 7.5 of each Basic Agreement, entitled 12 Ibid. "Transportation Privileges," spelled out the rights of the railroads and their employees to make use of Amtrak [*458] The railroads continued to protest trains. The fifth paragraph, which concerned the rights of vigorously the Amtrak decision to cut back pass-rider railroad employees to travel on Amtrak trains for free or privileges. They also reaffirmed their concern about at reduced fares, provided that "[transportation] employee morale and the possibility of labor strikes if privileges, if any, with respect to business and personal privileges were not restored. Congress responded to this travel of Railroad personnel shall be as [*457] problem in 1972 by amending the RPSA to restore free or determined by [Amtrak]." The paragraph did not specify reduced-rate transportation to all people who had enjoyed which party was to bear the cost of the transportation. such privileges when Amtrak took over passenger rail service. Pub. L. 92-316, § 8, 86 Stat. 230-231. The new Shortly after Amtrak began operation, considerable § 405(f) of the Act, 45 U. S. C. § 565(f) (1976 ed.) (1972 controversy arose over Amtrak's decision to cut back amendment), required Amtrak to assure, "to the employee pass privileges pursuant to the discretion maximum extent practicable," that all employees and accorded in this provision. The result of that controversy dependents who had received free or reduced-rate has given rise to this action, and we turn to consider the transportation before Amtrak began operation would evolution of this dispute. continue to be eligible for such benefits. In their Committee Reports, both the Senate and the House B emphasized that railroad employees should not lose their longstanding pass privileges -- privileges they had earned Since the 1880's, railroad employees and retirees, through years of service -- simply on account of the and their dependents, have been able to ride passenger transfer of service to Amtrak. 13 Amtrak implemented trains for free or at reduced rates. Before Amtrak this amendment [**1448] by permitting pass riders to Page 9 470 U.S. 451, *458; 105 S. Ct. 1441, **1448; 84 L. Ed. 2d 432, ***441; 1985 U.S. LEXIS 65 travel free or at half fare depending on the length of an No. 27194, as amended, Dec. 21, 1972, App. employee's railroad employment, whether the employee 23-38 (unamended decision reported at 347 I. C. was retired, and whether he was traveling on or off the C. 325 (1972)). rail lines of his home railroad. 14 In addition, pass riders 16 GAO Report, App. 51. were eligible for travel on a space-available basis only; 17 723 F.2d 1298, 1300 (CA7 1983). they were permitted to make reservations only 24 hours in advance on trains requiring reservations; and they were In 1979, however, Congress decided that the ICC's not permitted to use the passes on Amtrak's special trains reimbursement rate resulted in inadequate compensation called Metroliners. to Amtrak. Accordingly, in the Amtrak Reorganization Act of 1979, Pub. L. 96-73, § 120 (a), 93 Stat. 547 13 See S. Rep. No. 92-756, pp. 11-12 (1972) (Reorganization Act), Congress amended the § 405(f) ("The Committee believes that employees who pass-rider provision to require that the railroads were entitled to free or reduced-rate transportation prospectively reimburse Amtrak for pass-rider service at before the advent of Amtrak should not lose such the rate of "25 percent of the systemwide average privileges on account of the transfer of passenger monthly yield per revenue passenger [*460] mile" -- a service from the railroads to Amtrak"); see also H. rate that amounted to approximately one-fourth of the R. Rep. No. 92-905, p. 11 (1972). normal fare for ticket-buying passengers. The new rate 14 See GAO Report, App. 53-54. was to remain in effect for two years. 18 The 1972 amendment also required the railroads to 18 After the amendment, Amtrak billed the pay for "such costs as may be incurred" by Amtrak in railroads at rates from .02067 cents to .02343 providing the pass privileges mandated by § 405(f). As cents per passenger mile. Ibid. In the first 10 the Senate [*459] Committee explained: "Because months of operation under the 1979 amendment, Congress is merely continuing pass policies which the the railroads represented to the Court of Appeals railroads themselves developed, it would appear that the that they paid the following additional sums: railroads and not Amtrak should bear the cost, if any." S. Santa Fe, $ 336,249.82; Burlington Northern, $ Rep. No. 92-756, p. 11 (1972). The amendment did not 490,344.72; Chesapeake & Ohio and Baltimore & specify how the costs were to be calculated but did Ohio, $ 76,345.34; and Union Pacific, $ provide that the ICC should resolve the issue if Amtrak 287,784.66. Id., at 1300, n. 2. Of course, as the and the railroads were unable to agree on the amount to years go by, the number of eligible pass riders be paid. The matter eventually was referred to the ICC, declines because of employee and retiree deaths. which set an interim reimbursement rate based on Whereas amendment of the RPSA in 1972 gave Amtrak's incremental operating costs of providing the free or reduced rate transportation to about 2.83 service -- that is, based on the additional cost to Amtrak million people, in December 1979 only about 1.05 to transport the riders. The initial rate was $ .00079 per million eligible pass riders remained. GAO passenger mile. This amount was to be offset by the Report, App. 56. revenue derived from the reduced-rate fares paid by pass riders riding pursuant to the 1972 amendment. 15 The At the same time, Congress also directed the railroads also were to pay Amtrak [***442] for the Comptroller General to conduct a study and, "taking into administrative costs of the program. When the offset account the value of the services being provided," § formula was applied, the revenue derived from the 120(b), to make recommendations on the appropriate way reduced-rate fares always exceeded the payments to reimburse Amtrak for the cost of providing pass-rider otherwise due from the railroads. As a result, the transportation. In 1980, the General Accounting Office railroads reimbursed Amtrak solely for the pass submitted a report to Congress that analyzed in detail two program's administrative costs. 16 From 1972 to 1979, methods of reimbursement. GAO Report, App. 42-86. Amtrak collected from the railroads only administrative The report first considered [**1449] reimbursing expenses amounting to about $ 500,000 per year. 17 Amtrak for its incremental cost in providing the service, and second, for the value to the pass rider of the service 15 Determination of Cost Reimbursement Under being provided, which would be less than the fare Section 405(f) of the Rail Passenger Service Act, charged a regular passenger, but which the report Page 10 470 U.S. 451, *460; 105 S. Ct. 1441, **1449; 84 L. Ed. 2d 432, ***442; 1985 U.S. LEXIS 65 otherwise declined to quantify. Neither approach was right to be free from the responsibility to provide pass necessarily the correct one, GAO decided: "Amtrak's privileges. Congress, they claimed, was impairing its costs to provide transportation to pass riders are contractual obligation through passage of § 405. Next, debatable, and we did not find adequate analytical the railroads claimed that even if the Act itself were not a evidence to support one position over another or to contractual obligation, the Basic [*462] Agreements, recommend a specific means to reimburse Amtrak." Id., with identical "relief from responsibility" language, were at 43. The report therefore concluded that the choice such a contractual obligation of the United States; that between the two cost reimbursement formulas was "a obligation, the railroads asserted, was unconstitutionally policy decision that the Congress should make," id., at impaired by the subsequent legislation. Third, they 80; instead of offering an answer, the report simply argued that, even if no contract existed between the outlined the available options. Ibid. United States and the railroads, the statutory requirement that the railroads pay Amtrak for allowing pass riders [*461] After receiving the report, Congress again constituted a deprivation of property without due process. amended § 405(f) of the Act and provided that the Finally, the railroads argued that, even if Congress might 25-percent [***443] reimbursement requirement would constitutionally require the railroads to reimburse Amtrak remain in effect indefinitely. Pub. L. 97-35, 95 Stat. 697 for the cost of the pass-rider program, the particular (1981 amendment). reimbursement formula set forth in the 1979 amendment exceeded the incremental cost to Amtrak of providing the C service and therefore constituted a deprivation of property without due process. After the 1981 amendment The cases we consider began in 1980 when five was passed, the railroads amended their complaint to railroads, each of which had taken advantage of the make their claims applicable to that amendment as well. RPSA and discontinued passenger service, filed suit against Amtrak in the United States District Court for the The railroads filed a motion for summary judgment, Northern District of Illinois challenging the and Amtrak filed a cross-motion for summary judgment. constitutionality of § 405(f) of the Act. 19 They argued The United States then intervened as a defendant under that the requirement that they reimburse Amtrak for the 28 U. S. C. § 2403 and filed a motion to dismiss or, in the pass travel of their employees, former employees, and alternative, for summary judgment. The District Court dependents violated the Due Process Clause of the Fifth entered an order [***444] [**1450] granting summary Amendment. judgment in favor of Amtrak and the United States. 577 F.Supp. 1046 (1982). It concluded that the Act, as 19 The five railroads are Atchison, Topeka, and amended, did not constitute a contract between the Santa Fe Railway Co., Burlington Northern, Inc., United States and the railroads. It then assumed that the Chesapeake and Ohio Railway Co., Baltimore and Basic Agreements were contracts between the United Ohio Railroad Co., and Union Pacific Railroad States and the railroads and held that § 405(f) did not Co. impair that contract. The District Court found that the The railroads based this claim on four theories. Agreements relieved the railroads of their responsibility First, they claimed they had a contractual right against the to provide intercity rail service, but that by the railroads' United States, derived from the RPSA and the Basic own admission they never had a legal or contractual Agreements, to be free from the obligation to provide responsibility to provide free or reduced rate intercity rail passenger service. They asserted that § transportation to employees and their families. The court 405(f), which had been added to the Act in 1972, also observed that the Basic Agreements gave to Amtrak therefore impaired an obligation of the United States the discretion to determine what pass privileges, if any, under this statutory contract because pass privileges the railroad employees should have. constituted the "intercity rail passenger service," from [*463] The District Court rejected the railroads' which the railroads had been relieved of their "entire argument that the requirement that they pay for their responsibility" in the RPSA. Thus, since Congress had employees' pass-rider privileges violated due process and contracted in the RPSA to relieve the railroads of ruled that the railroads had not overcome the firmly intercity rail passenger service, and the railroads had established presumption of constitutionality that attaches fulfilled their obligations under the contract, they had a Page 11 470 U.S. 451, *463; 105 S. Ct. 1441, **1450; 84 L. Ed. 2d 432, ***444; 1985 U.S. LEXIS 65 to legislative Acts "'adjusting the burdens and benefits of Amtrak and the railroads, or as the railroads economic life.'" Id., at 1052 (quoting Usery v. Turner maintained, a contract to which the United States Elkhorn Mining Co., 428 U. S. 1, 15 (1976)). Because was a party as well. the legislation at issue was neither arbitrary nor irrational, the District Court concluded that the reimbursement requirement of § 405 did not violate due process under the Turner Elkhorn standard. [***LEdHR2A] [2A]Amtrak appealed to this Court under 28 U. S. C. § 1252, arguing that the reimbursement Finally, the court rejected the railroads' argument formula in § 405(f) is constitutional, and we noted that Congress' reimbursement formula violated due probable jurisdiction. 469 U.S. 813 (1984). The railroads process by requiring the railroads to pay more than the cross-appealed, contending that any reimbursement incremental cost to Amtrak of transporting the pass violates due process. We deferred ruling on whether riders. "Having determined that the Congress acted jurisdiction [**1451] over the cross-appeal was proper constitutionally in requiring the railroads to reimburse until consideration of the cases on the merits. Ibid. 21 Amtrak for the pass rider service, this court will not second-guess the legislative branch on its selection of a [***LEdHR2A] [2B] particular mathematical formula for reimbursement, 21 We now find that jurisdiction over the absent a showing that the formula was selected in an cross-appeal is proper. The railroads filed their arbitrary or irrational manner." 577 F.Supp., at 1055. The jurisdictional statement on cross-appeal within 30 court then traced Congress' decisionmaking process to days of their receipt of appellant's jurisdictional demonstrate that the choice of reimbursement plans was a statement, as required by this Court's Rule 12.4. rational policy decision, particularly in light of the If the filing was properly a cross-appeal, then this conclusion in the GAO Report that the reimbursement procedure was jurisdictionally sound. We hold issue involved a policy choice for Congress. that the filing was properly a cross-appeal. The Court of Appeals for the Seventh Circuit Title 28 U. S. C. § 1252 provides that "[any] affirmed in part and reversed in part. 723 F.2d 1298 party may appeal to the Supreme Court from an (1983). The Court of Appeals rejected most of the interlocutory or final judgment, decree or order of railroads' arguments and held that the railroads could be any court of the United States . . . holding an Act compelled to reimburse Amtrak for the incremental cost of Congress unconstitutional in any civil action . . of carrying the pass riders. The panel held, however, that . to which the United States or any of its agencies the Basic Agreements provided the railroads with a . . . is a party." In Regan v. Taxation With contractual right to be free from having to "finance Representation of Washington, 461 U.S. 540, 543, aspects of [Amtrak] operations that were once part of the n. 3 (1983), this Court ruled that the language of § railroads' entire responsibility for the provision of 1252 was sufficiently broad to encompass the intercity rail passenger service." Id., at 1302. According cross-appeal, which would not otherwise have to the Court of Appeals, because the reimbursement been a proper appeal. This reading of § 1252 is [*464] scheme in the 1979 amendment required the buttressed by the fact that once we have properly railroads to pay more than the incremental cost to asserted jurisdiction under § 1252, "the whole Amtrak, these payments supported Amtrak's general case is to come before us." Heckler v. Edwards, intercity rail passenger service operations, and the statute 465 U.S. 870, 879 (1984). Since the railroads therefore impaired the railroads' right to be free from the correctly filed a cross-appeal in this case, the responsibility for providing intercity rail passenger procedures for taking a cross-appeal under this service. The court [***445] ruled that this "windfall" to Court's Rule 12.4 were properly invoked, the Amtrak violated the Due Process Clause, because it cross-appeal was timely, and we have jurisdiction unreasonably and illegally impaired the rights of the over the cross-appeal. railroads under the Basic Agreements. 20 [*465] II 20 The court did not expressly state whether the statute impaired a private obligation between The railroads argue that the RPSA and the Basic Page 12 470 U.S. 451, *465; 105 S. Ct. 1441, **1451; 84 L. Ed. 2d 432, ***LEdHR2A; 1985 U.S. LEXIS 65 Agreements created a contractual obligation on the part not clearly and unequivocally expressed would be to limit of the United States not to reimpose any rail passenger drastically the essential powers of a legislative body. service responsibilities on those railroads that entered Indeed, "'[the] continued existence of a government into Basic Agreements, and that the pass-rider [**1452] would be of no great value, if by implications amendments to the Act unconstitutionally impair the and presumptions, it was disarmed of the powers "contract" into which the United States entered. Thus, necessary to accomplish the ends of its creation.'" Keefe the railroads conclude, the Court of Appeals correctly v. Clark, 322 U.S. 393, 397 (1944) (quoting Charles held that the 1979 and 1981 amendments substantially River Bridge v. Warren Bridge, 11 Pet. 420, 548 (1837)). impaired their contractual rights and violated due process, Thus, the party asserting the creation of a contract must but incorrectly ruled that the 1972 amendment, which overcome this well-founded presumption, Dodge, supra, required only that the railroads pay for the incremental at 79, and we proceed cautiously both in identifying a cost to Amtrak of the pass riders, was constitutional. In contract within the language of a regulatory statute and in making these arguments, the railroads argue first that the defining the contours of any contractual obligation. United States entered into a contractual relationship with the railroads, either through the RPSA or the Basic [***LEdHR3] [3][HN5] In determining whether a Agreements, and second that the scope of the contractual particular statute gives rise to a contractual obligation, "it agreements encompassed reimbursement for pass-rider is of first importance to examine the language of the privileges. But, the railroads assert that, even if their statute." Dodge v. Board of Education, supra, at 78.See contractual rights were only private ones with Amtrak, also Indiana ex rel Anderson v. Brand, supra, at 104 those private contractual agreements created a right to be ("Where the claim is that the State's policy embodied in a free from paying for pass-rider privileges. They maintain statute is to bind its instrumentalities by contract, the that the 1979 and 1981 amendments, as well as the 1972 cardinal inquiry is as to the terms of the statute supposed assessment of incremental costs, therefore to create such a contract"). "If it provides for the unconstitutionally impaired those private contractual execution of a written contract on behalf of the state the [***446] rights. We consider, and reject, each of these case for an obligation binding upon the state is clear." arguments in turn. 302 U.S., at 78 (emphasis supplied). But absent "an adequate expression of [*467] an actual intent" of the A State to bind itself, Wisconsin & Michigan R. Co. v. Powers, 191 U.S. 379, 386-387 (1903), this Court simply [***LEdHR1A] [1B]The first question we address is will not lightly construe that which is undoubtedly a whether the RPSA constituted not merely a regulatory scheme of public regulation to be, in addition, a private policy but also a contractual arrangement between the contract to which the State is a party. United States and the railroads that entered into Basic Agreements. [HN4] For many decades, this Court has The language of the RPSA discloses [***447] maintained that absent some clear indication [*466] that absolutely no congressional intention to have the United the legislature intends to bind itself contractually, the States enter into a private contractual arrangement with presumption is that "a law is not intended to create the railroads. By its terms, the Act does not create or private contractual or vested rights but merely declares a speak of a contract between the United States and the policy to be pursued until the legislature shall ordain railroads, and it does not in any respect provide for the otherwise." Dodge v. Board of Education, 302 U.S. 74, execution of a written contract on behalf of the United 79 (1937).See also Rector of Christ Church v. County of States. [HN6] Quite to the contrary, the Act expressly Philadelphia, 24 How. 300, 302 (1861) ("Such an established the National Railroad Passenger Corporation interpretation is not to be favored"). This as a nongovernmental entity, 45 U. S. C. § 541, and it well-established presumption is grounded in the used the term "contract" not to define the relationship of elementary proposition that the principal function of a the United States to the railroads, but instead that of the legislature is not to make contracts, but to make laws that new, nongovernmental corporation to the railroads. The establish the policy of the state. Indiana ex rel. Anderson statute states clearly that "the Corporation is authorized to v. Brand, 303 U.S. 95, 104-105 (1938). Policies, unlike contract and, upon written request therefor from a contracts, are inherently subject to revision and repeal, railroad, shall tender a contract . . . ," 45 U. S. C. § and to construe laws as contracts when the obligation is 561(a), and that, "[upon] its entering into a valid contract Page 13 470 U.S. 451, *467; 105 S. Ct. 1441, **1452; 84 L. Ed. 2d 432, ***447; 1985 U.S. LEXIS 65 . . . , the railroad shall be relieved of all its This atmosphere of pervasive prior regulation leads responsibilities. . . ." Ibid. We simply cannot agree with to several conclusions. For one, Congress would have the railroads that the frequent usage in a statute of the struck a profoundly inequitable bargain if, in exchange language of contract, including the term "contract," for the equivalent of a half year's losses, it had entered evidences an intent to bind the Federal Government into a binding contract never to impose on the railroads -- contractually. Legislation outlining the terms on which which would continue to operate their potentially private parties may execute contracts does not on its own profitable freight services -- any rail passenger service constitute a statutory contract, but is instead an [***448] obligations at all. 23 Congress simply [*469] articulated policy that, like all policies, is subject to cannot be presumed to have nonchalantly shed this vitally revision or repeal. Indeed, lest there be any doubt in these important governmental power with so little concern for cases about Congress' will, Congress "expressly what it would receive in exchange. Cf. United States reserved" its rights to "repeal, alter, or amend" the Act at Trust Co. v. New Jersey, 431 U.S. 1, 21-25 (1977) any time. 45 U. S. C. § 541. This is hardly the language (considering reserved powers doctrine). Also, the of contract. 22 pervasiveness of the prior regulation in this area suggests that absent some affirmative indication to the contrary, 22 In the Sinking Fund Cases, 99 U.S. 700 the railroads had no legitimate expectation that regulation (1879), this Court recognized the effect of these would cease after 1971. Coupled with the statute's few simple words. In that case, railroads express reservation of the power to repeal, the heavy and challenged Congress' amendment of statutes that longstanding regulation of this area strongly cuts against governed their obligations to the Government on any argument that the statute created binding contractual securities issued to aid the initial construction of rights. Cf. Energy Reserves Group, Inc. v. Kansas Power the railways. The Court rejected the argument & Light Co., 459 U.S. 400, 413 (1983) (discussing that the amendment improperly interfered with implications of pervasive regulation for inquiry into vested rights and observed that through the substantial impairment of a contract). language of reservation "Congress not only retains, but has given special notice of its 23 The Act also required the railroads to enter intention to retain, full and complete power to into agreements with the new corporation to make such alterations and amendments of the provide operational assistance and facilities at charter as come within the just scope of legislative rates to be set by contract (or the ICC in the event power." Id., at 720. of disagreement), 45 U. S. C. § 562 (1970 ed.), and to enter into arrangements to protect the We also reject the railroads' argument that interests of employees disadvantaged by the this clause reserved only the power to repeal, discontinuance of passenger service. § 565(a). alter, or amend the National Railroad Passenger These requirements either were consistent with Corporation's corporate charter. The clause the railroads' continuing obligations as common expressly reserved the right to change "this Act," carriers, or easily might have been imposed as and we see no ground to support the railroads' conditions by the ICC if it granted the railroads' attempt to limit this term merely to a single aspect petition to discontinue rail passenger service. See of the Act. 49 U. S. C. §§ 10903(a)(2), 11101. Far from analogous to consideration, these ongoing [*468] [**1453] Moreover, the circumstances of regulatory obligations further demonstrate that the the Act's passage belie an intent to contract away RPSA was a legislative policy decision, not a governmental powers. Congress long had regulated the private contractual arrangement. railroads and had compelled them through the ICC to continue unprofitable service and undertake new service. The railroads argue nevertheless that the RPSA Indeed, the huge sums that the railroads insist they paid created a contractual obligation "closely analogous to the to Amtrak in "consideration" for the contractual right to statutory covenant" at issue in United States Trust, be free from their passenger service obligations "which this Court held to be a contractual obligation of a represented just one-half of the annual losses they State subject to the Contract Clause." Brief for Appellees suffered in one year under the prior regulatory scheme. in No. 83-1492, p. 18. Far from recognizing the Page 14 470 U.S. 451, *469; 105 S. Ct. 1441, **1453; 84 L. Ed. 2d 432, ***448; 1985 U.S. LEXIS 65 similarity, we find that the statute at issue in United with Amtrak grant the railroads a contractual right States Trust Co. v. New Jersey highlights the difference against the United States to be free from all obligation to between the RPSA and a true statutory contract. In provide passenger service. While there can be no doubt United States Trust, the Court held that New Jersey could that the Basic Agreements are contracts, they are not retroactively alter a statutory bond covenant relied contracts not between the railroads and the United States upon by bond purchasers. The covenant in that case was but simply between the railroads and the a part of the bistate legislation authorizing the Port non-governmental corporation, Amtrak. The United Authority of New York and New Jersey to acquire, States was [*471] not a party to the Basic Agreements; construct, and operate the Hudson & Manhattan Railroad by their terms, the agreements do not implicate the and the World Trade Center in New York City. The United States. The railroads do not point to any language statute read in part: "The 2 States covenant and agree in the RPSA authorizing Amtrak to bargain away any with each other and with the holders of any affected portion of Congress' Commerce Clause power, or to act bonds, as hereinafter defined, that so long as any of such as the Government's agent and confer upon the railroads bonds remain [*470] outstanding and unpaid . . . neither the right to be free of any obligation to provide passenger the States nor the port authority nor any subsidiary service, assuming even that Congress could make that corporation incorporated for any of the purposes of this delegation. The District Court asserted that the act will apply any of the rentals, tolls, fares, fees, charges, Agreements might constitute contracts between the revenues or reserves, which have been or shall be pledged United States and the railroads because they granted the in whole or in part as security for such bonds, for any railroads relief from their passenger service obligations, railroad purposes whatsoever other than permitted and because only the United States actually could grant purposes hereinafter set forth." 1962 N. J. Laws, ch. 8, § such relief. 577 F.Supp., at 1051. But a careful reading 6; 1962 N. Y. Laws, ch. 209, § 6. Resort [**1454] need of the RPSA indicates that the Act, and not the Basic not be had to a dictionary or case law to recognize the Agreements, actually removed that responsibility. language of contract. The States explicitly bound Accordingly, we find unpersuasive the railroads' efforts themselves in a covenant not to take [***449] certain to demonstrate that the United States is contractually actions now or in the future, and the intent to make a bound, either through the RPSA or the Basic Agreements, contract was, as a result, not even contested in that case. not to reimpose any rail passenger service obligations. Indeed, the Court found that the States had drafted this language in an effort to invoke the constitutional Because, as we have demonstrated, neither the Act protections of the Contract Clause as security against nor the Basic Agreements created a contract between repeal. railroads and the United States, our focus shifts from a case in which we confront an alleged impairment, by the To the contrary, here the statute does not contain a Government, of its own contractual obligations, to one in provision in which the United States "[covenants] and which we face an alleged legislative impairment of a [agrees]" with anyone to do anything, and in fact the private contractual right. We therefore have no need to United States expressly declined to offer assurances consider whether an allegation of a governmental breach about future activity when it reserved the right to revoke of its own contract warrants application of the more or repeal the Act. We therefore are not persuaded by the rigorous standard of review that the railroads urge us to railroads' proffered analogy. [***450] apply. 24 Instead, we turn [**1455] to consider [*472] whether the payment obligation in § [***LEdHR1A] [1C]Because neither the language 405(f) of the Act unconstitutionally impairs the private of the statute nor the circumstances surrounding its contractual rights of the railroads. passage manifest any intent on the part of Congress to bind itself contractually to the railroads, we hold that the 24 This Court once observed: RPSA does not constitute a binding obligation of Congress. "There is a clear distinction between the power of the Congress to control or interdict the B contracts of private parties when they interfere with the exercise of its constitutional authority, [***LEdHR4] [4]We turn next to consider whether and the power of the Congress to alter or the Basic Agreements into which the railroads entered Page 15 470 U.S. 451, *472; 105 S. Ct. 1441, **1455; 84 L. Ed. 2d 432, ***450; 1985 U.S. LEXIS 65 repudiate the substance of its own engagements. . 25 When the court reviews state economic . . To say that the Congress may withdraw or legislation the inquiry will not necessarily be the ignore that pledge is to assume that the same. As we made clear in Pension Benefit Constitution contemplates a vain promise, a Guaranty Corporation v. R. A. Gray & Co., 467 pledge having no other sanction than the pleasure U.S., at 732-733, we have never held that the and convenience of the pledgor. This Court has principles embodied in the Fifth Amendment's given no sanction to such a conception of the due process guarantee are coextensive with the obligations of our Government." Perry v. United prohibitions against state impairment of contracts States, 294 U.S. 330, 350-351 (1935). under the Contract Clause, and, we observed, to the extent the standards differ, a less searching Thus, the Court has observed that in order to inquiry occurs in the review of federal economic maintain the credit of public debtors, see Lynch v. legislation. See also n. 24, supra (discussing the United States, 292 U.S. 571, 580 (1934), and standard for reviewing claims of a government's because the "State's self-interest is at stake," impairment of its own contractual obligations). United States Trust Co. v. New Jersey, 431 U.S. 1, 26 (1977), the Government's impairment of its [*473] [***LEdHR6A] [6A]The starting point for own obligations perhaps should be treated our inquiry is therefore whether the 1979 and 1981 differently. See also Allied Structural Steel Corp. pass-rider amendments impaired the private contractual v. Spannaus, 438 U.S. 234, 244, n. 15 (1978). It is rights that the railroads obtained under the Basic clear that, where the Government is not a party to Agreements. 26 [***451] We must first consider what the contract at issue, these concerns are not rights vested in the railroads pursuant to the Basic implicated, and there is no reason to argue for a Agreements and then examine the way in which the 1979 heightened standard of review. and 1981 amendments altered those rights. 27 C 26 We address first the 1979 and 1981 amendments, the issue raised on appeal, and [***LEdHR5] [5][HN7] To prevail on a claim that postpone to Part III discussion of the 1972 federal economic legislation unconstitutionally impairs a amendment, the issue raised on cross-appeal. private contractual right, the party complaining of 27 The RPSA established that contracts entered unconstitutionality has the burden of demonstrating, first, into by the corporation would be governed by the that the statute alters contractual rights or obligations. law of the District of Columbia. In the District of See United States Trust Co. v. New Jersey, 431 U.S., at Columbia, courts determine as a matter of law 17-21. If an impairment is found, the reviewing court whether a contract or its provisions are ambiguous next determines whether the impairment is of -- that is, whether they are reasonably susceptible constitutional dimension. If the alteration of contractual of different interpretations. Kass v. William obligations is minimal, the inquiry may end at this stage, Norwitz Co., 509 F.Supp. 618, 623-624 (DC Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 1980). The Court of Appeals ruled that the Basic 245 (1978); if the impairment is substantial, a court must Agreement was not ambiguous. 723 F.2d, at look more closely at the legislation, ibid.; see also Energy 1301. As the following analysis makes clear, we Reserves Group, Inc., 459 U.S., at 411. When the agree. contract is a private one, and when the impairing statute is a federal one, this next inquiry is especially limited, [***LEdHR6A] [6B]The only right that the and the judicial scrutiny quite minimal. The party railroads obtained under the Basic Agreements was the asserting a Fifth Amendment due process violation must right to be relieved of the pre-existing responsibilities overcome a presumption of constitutionality and they had as regulated common carriers. The RPSA "'establish that the legislature has acted in an arbitrary expressly permitted the railroads to divest themselves of, and irrational way.'" Pension Benefit Guaranty and authorized Amtrak to assume, all the railroads' Corporation v. R. A. Gray & Co., 467 U.S. 717, 729 "responsibilities as a common carrier of passengers by (1984) (quoting Usery v. Turner Elkhorn Mining Co., rail in intercity rail passenger service under [Subtitle IV 428 U.S., at 15). 25 of Title 49] or any State or other law relating to the Page 16 470 U.S. 451, *473; 105 S. Ct. 1441, **1455; 84 L. Ed. 2d 432, ***LEdHR6A; 1985 U.S. LEXIS 65 provision of intercity rail passenger service." 45 U. S. C. the reimbursement issue completely open. It was not § 561(a)(1) (1970 ed.) (emphasis added). In turn, the until after the Basic Agreements were signed, and Basic Agreements relieved the railroads of their "entire Amtrak operations were under way, that Congress responsibility for the provision [**1456] of Intercity decided to impose new obligations on both parties to the Rail Passenger Service." § 2.1, App. 13. Thus the statute agreements. We therefore conclude that § 405(f) in no and the Basic Agreements together relieved the [*474] respect altered, substantially or otherwise, the railroads' railroads only of common carriage responsibilities they existing contractual rights and duties. had by virtue of federal or state law. Moreover, Amtrak had no independent authority to relieve the railroads of D obligations imposed by Congress, and it is readily The Court of Appeals concluded that, while the apparent that Congress limited its relief to the previously Basic Agreements might not expressly have relieved the imposed obligation to operate intercity rail passenger railroads of the obligation to reimburse Amtrak for pass trains. riders, they did relieve the railroads of all responsibility -- The railroads do not and could not allege that as both operational and financial -- for intercity rail common carriers they ever had the responsibility, by passenger service. 723 F.2d, at 1302. But because the statute or regulation, to provide free passes or reduced railroads were required by the 1979 and 1981 fares for their employees and their dependents. Here, as amendments to pay Amtrak more than its incremental in the lower courts, they describe the provision of passes costs, the court reasoned that some portion of the as a "gratuitous undertaking, like providing a 'Christmas railroads' payments might go to cover Amtrak's turkey.'" 577 F.Supp., at 1051. It plainly is not consistent operational expenses. In that way, the railroads would with the nature of relief provided the railroads under the indirectly be providing the rail passenger service from Basic Agreements to include, within the scope of the which they were to have been contractually freed, and contract, relief from the "gratuitous undertakings" of Congress' decision to require such payments might providing free and reduced-fare passes. Nor did the therefore violate the railroads' contractual right to be free provision of free or half-fare passes become a of the responsibility to provide intercity rail service. The "responsibility" within the meaning of the statute because court then considered whether the impairment was some railroads, although not the parties here, did not unconstitutional and concluded that Amtrak had failed to simply offer the passes as noncontractual fringe benefits, meet its burden of proving that the amendments were but instead were required to provide passes pursuant to "paramount to the rights of the railroads under the basic their collective-bargaining agreements. The Basic agreement." Id., at 1303. The court held that the 1979 and Agreements did not purport to relieve the railroads of 1981 amendments "unreasonably and illegally" impaired their employee obligations under collective-bargaining the rights of the railroads under the Basic Agreements by agreements, and in fact the Act expressly required the indirectly requiring the railroads to help Amtrak finance railroads to continue to assume their responsibilities aspects of [**1457] its operations that once were part of under collective-bargaining agreements. 45 U. S. C. § the railroads' responsibility. Ibid. 565(b) (1970 ed.) (a railroad shall make provision for Initially, it is far from evident that the railroads have "the preservation of rights, privileges, and benefits a private contractual right to be free from all obligations (including continuation of pension rights and benefits) to [*476] to make financial payments to subsidize Amtrak, such employees under existing collective-bargaining which is the way in which the railroads view any agreements"). payments in excess of Amtrak's incremental costs. The [***452] [***LEdHR6A] [6C]We therefore find railroads were unambiguously relieved only of that the Basic Agreements in no respect relieved the burdensome intercity rail responsibilities imposed by the railroads of the "responsibility" to provide their federal and state common carrier regulatory schemes. employees with pass privileges, for no state or federal But even if the Basic Agreements relieved the railroads law imposed that "responsibility" on them, in connection of the obligation to subsidize Amtrak, they surely did not with intercity rail passenger operations, when the exempt the railroads from financial obligations to Amtrak contracts were [*475] executed. The Basic Agreements of other kinds, and the railroads misdirect their attack did not address this payment obligation but instead left when they assert a right to be free from subsidizing Page 17 470 U.S. 451, *476; 105 S. Ct. 1441, **1457; 84 L. Ed. 2d 432, ***LEdHR6A; 1985 U.S. LEXIS 65 Amtrak. The issue in these cases is not whether the of the cost of the privileges, both because the railroads, railroads have a right against subsidizing Amtrak, for rather than the taxpayers, were responsible for the here Congress has simply required the railroads to pay for creation of the moral obligation to the railroad employees the value of a benefit their employees receive from and retirees, and because the railroads benefited from Amtrak. Nothing in the Basic Agreements lifted from the labor peace and continued employee morale. railroads the responsibility to pay Amtrak for the pass-rider privileges it accords their employees, [***LEdHR7A] [7C]Similarly, after reasonably [***453] and nothing gave the railroads a right to special requiring the railroads to reimburse Amtrak for benefits privileges in the pricing of Amtrak services. Whether at received, Congress acted wholly rationally in selecting some point the amount the railroads are required to pay the value to the passholders -- as opposed to the cost to might be so unreasonably high as to constitute a subsidy Amtrak -- as the proper reimbursement amount, and in we need not decide, for as we demonstrate infra Congress settling on the 25-percent figure to quantify the value acted rationally in setting the value of the pass to the received. It commissioned a study by the GAO, which employees. We therefore disagree with the Court of [**1458] concluded that several different computations Appeals' conclusion that Congress impaired a private of cost made sense, and that the selection of no one contractual right simply by passing amendments that cost-spreading scheme was more inherently rational or required the railroads to pay for a service rendered. fair than any other. App. 80-81. At this point, the Having reached this conclusion, we of course need not decision was uniquely one for Congress, which had consider whether the impairment is substantial. absolutely no obligation to select the scheme that a court later would find to be the fairest, but simply one that was [***LEdHR7A] [7A]Even were the Court of Appeals rational and not arbitrary. Congress [*478] placed a correct that the railroads have a private contractual right value on the free passes [***454] that reasonably relates not to pay more than the incremental cost of the passes, to the normal fares of the public, and "[we] are unwilling we disagree with the Court of Appeals' conclusion that to assess the wisdom of Congress' chosen scheme . . . . It the Due Process Clause limited Congress' power to is enough to say that the Act approaches the problem of choose a different reimbursement scheme in these cases. cost spreading rationally; whether a [different] [HN8] Under the Fifth Amendment's Due Process cost-spreading scheme would have been wiser or more Clause, Congress remained free to "'[adjust] the burdens practical under the circumstances is not a question of and benefits of economic life,'" as long as it did so in a constitutional dimension." Turner Elkhorn, supra, at manner [*477] that was neither arbitrary nor irrational. 18-19. We therefore conclude that the 1979 and 1981 Pension Benefit Guaranty Corporation v. R. A. Gray & amendments in no respect offend the Due Process Clause. Co., 467 U.S., at 729 (quoting Usery v. Turner Elkhorn Having concluded that the Basic Agreements Mining Co., 428 U.S., at 15). Moreover, in the relieved the railroads only of the direct and onerous determination of whether economic legislation that responsibilities they had borne as common carriers, and substantially alters contractual rights and duties violates due process, the burden of proving irrationality rests having further concluded that the provision of free and partial-fare passes was not among those responsibilities, squarely on the party asserting a due process violation. we conclude that the 1979 and 1981 amendments to the 467 U.S., at 729.When it performed this due process Act did not impair private contractual rights acquired by inquiry, the court below erred both in placing the burden the railroads as parties to the Basic Agreements. The of proof on Amtrak to defend the legislation and in amendments imposed new obligations on the railroads defining the standard of review as rigorously as it did. and in no respect infringed the railroads' existing [***LEdHR7A] [7B]Had it applied the correct contractual rights. But even if the payment of more than standard, the Court of Appeals would have found that the the incremental cost of pass privileges indirectly railroads have not met their burden of proof. In passing § subsidizes Amtrak operations in violation of a private 405(f), Congress rationally required Amtrak to honor the contractual right, Congress' decision to assess the expectations of the railroads' past and present employees railroads is rational and reasoned, and the railroads have and their dependents. It rationally took this step to failed to demonstrate a due process violation. We maintain employee morale and labor peace, and it therefore reverse the Court of Appeals insofar as it ruled rationally required the railroads to pay at least a portion to the contrary. Page 18 470 U.S. 451, *478; 105 S. Ct. 1441, **1458; 84 L. Ed. 2d 432, ***454; 1985 U.S. LEXIS 65 III 13 Am Jur 2d, Carriers 24.5 (Supp); 16A Am Jur 2d, Constitutional Law 595 The foregoing analysis a fortiori requires us to reject the railroads' argument on cross-appeal that they have a 45 USCS 565(f); Constitution, 5th Amendment contractual right to be free from the obligation to make any payments to Amtrak, even for incremental costs. US L Ed Digest, Appeal 1262; Constitutional Law 125, Absolutely nothing in the RPSA or the Basic Agreements 127, 212, 641; Railroads 6 suggests that the railroads were relieved of the L Ed Index to Annos, Carriers; Constitutional Law; responsibility to reimburse Amtrak for the costs of Contracts; Impairment of Contract Obligations; providing to the railroads' employees [*479] and Railroads; United States. retirees, and their dependents, the free passes that the railroads had traditionally provided to them. ALR Quick Index, Carriers; Due Process of Law; Fifth Amendment; Impairment of Contracts; Railroads; United IV States [***LEdHR1A] [1D] [***LEdHR7A] Federal Quick Index, Carriers; Constitutional Law; Due [7D]Accordingly we hold that § 405(f) of the RPSA is Process of Law; Fifth Amendment; Impairment of constitutional, and we reverse the Court of Appeals Contract Obligations; Railroads; United States insofar as it held that the 1979 and 1981 amendments to the Act contravened the Due Process Clause. Annotation References: It is so ordered. State's exercise of police power as constituting impairment of obligation of private contract in violation JUSTICE POWELL took no part in the decision of of contract clause (Article 1 10, Clause 1) of Federal these cases. Constitution--Supreme Court cases. 57 L Ed 2d 1279. REFERENCES Page 1 NORTHEAST BANCORP, INC., ET AL. v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM ET AL. No. 84-363 SUPREME COURT OF THE UNITED STATES 472 U.S. 159; 105 S. Ct. 2545; 86 L. Ed. 2d 112; 1985 U.S. LEXIS 126; 53 U.S.L.W. 4699 April 15, 1985, Argued June 10, 1985, Decided PRIOR HISTORY: CERTIORARI TO THE bank holding companies. The board approved the UNITED STATES COURT OF APPEALS FOR THE acquisitions, and the court of appeals affirmed the board's SECOND CIRCUIT. orders. On certiorari, the court affirmed, holding that the state statutes were the kind contemplated by the Douglas DISPOSITION: 740 F.2d 203, affirmed. Amendment to lift its bar against interstate acquisitions. The court further held that the statutes did not violate the CASE SUMMARY: Commerce, Compact, or Equal Protection Clauses. OUTCOME: The court affirmed the judgment. PROCEDURAL POSTURE: Petitioner prospective competitors sought a writ of certiorari to the United CORE TERMS: acquisition, Douglas Amendment, States Court of Appeals for the Second Circuit, which banking, compact, out-of-state, regional, ban, acquire, upheld orders issued by the Federal Reserve Board state statutes, region, lift, interstate banking, branch approving respondent bank holding companies' banking, McFadden Act, interstate, approving, applications for interstate acquisitions. commerce, local banks, dormant, specifically authorized, interstate bank, legislative history, national banks, OVERVIEW: Respondents applied to the Federal partially, authorize, local concern, political power, Reserve Board to obtain approval for acquisition of banks reciprocal, competitors, supremacy in the New England states other than the ones in which they were principally located. Petitioners challenged the LexisNexis(R) Headnotes applications, contending that the Douglas Amendment to the Bank Holding Company Act of 1956, 12 U.S.C.S. § 1842(d), did not authorize the proposed interstate acquisitions. Petitioners also argued that the state statutes permitting the regional acquisitions, Mass. Gen. Laws Banking Law > Bank Holding Companies > Regulation Ann., ch. 167A, § 2 (1984), and 1983 Conn. Pub. Acts Banking Law > Federal Acts > Bank Holding Company 83-411, violated the Commerce Clause, U.S. Const. art. I, Act § 8, cl. 3, the Compact Clause, U.S. Const. art. I, § 10, cl. Banking Law > Federal Acts > Financial Institutions 3, and the Equal Protection Clause, U.S. Const. amend. Regulatory & Interest Rate Control Act XIV, § 2, by discriminating against non-New England [HN1] The Bank Holding Company Act (BHCA) Page 2 472 U.S. 159, *; 105 S. Ct. 2545, **; 86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126 regulates the acquisition of state and national banks by provided that the other New England state accords bank holding companies. The Act generally defines a equivalent reciprocal privileges to Massachusetts banking bank as any institution organized under state or federal organizations. Mass. Gen. Laws Ann., ch. 167A, § 2 law which: (1) accepts deposits that the depositor has a (1984). Connecticut has adopted a substantially similar legal right to withdraw on demand, and (2) engages in the statute. 1983 Conn. Pub. Acts 83-411. business of making commercial loans. 12 U.S.C.S. § 1841(c). The Act defines a bank holding company as any Administrative Law > Judicial Review > Reviewability > corporation, partnership, business trust, association, or Standing similar organization that owns or has control over a bank Banking Law > Federal Acts > Bank Holding Company or another bank holding company. 12 U.S.C.S. §§ Act 1841(a)(1), (b), 12 U.S.C.S. § 1841(a)(5). Before a Mergers & Acquisitions Law > Antitrust > General company may become a bank holding company, or a Overview bank holding company may acquire a bank or [HN4] Pursuant to 12 U.S.C.S. § 1848, which provides substantially all of the assets of a bank, the Act requires it that: any party aggrieved by an order of the Federal to obtain the approval of the Federal Reserve Board. 12 Reserve Board may seek review in a federal court of U.S.C.S. § 1842. appeals, and § 1850, permits prospective competitors to be aggrieved parties under § 1848. Banking Law > Federal Acts > Bank Holding Company Act Antitrust & Trade Law > Industry Regulation > Banking Law > Federal Acts > Financial Institutions Financial Institutions > General Overview Regulatory & Interest Rate Control Act Banking Law > Federal Acts > Bank Holding Company Mergers & Acquisitions Law > General Overview Act [HN2] The Federal Reserve Board will evaluate the Mergers & Acquisitions Law > General Overview acquisition of state and national banks by bank holding [HN5] The Douglas Amendment to the Bank Holding companies for anticompetitive effects, financial and Company Act of 1956 prohibits the Federal Reserve managerial resources, community needs, and the like. 12 Board from approving the application of a bank holding U.S.C.S. § 1842(c). In addition, The Bank Holding company or a bank located in one state to acquire a bank Company Act § 3(d), 12 U.S.C.S. § 1842(d), known as located in another state, or substantially all of its assets, "the Douglas Amendment," prohibits the Board from unless the acquisition is specifically authorized by the approving an application of a bank holding company or statute laws of the state in which such bank is located, by bank located in one state to acquire a bank located in language to that effect and not merely by implication. 12 another state, or substantially all of its assets, unless the U.S.C.S. § 1842(d). acquisition is specifically authorized by the statute laws of the State in which such bank is located, by language to that effect and not merely by implication. Banking Law > Federal Acts > General Overview Banking Law > Regulatory Agencies > U.S. Federal Reserve Board of Governors Antitrust & Trade Law > Industry Regulation > [HN6] The Federal Reserve Board is an authoritative Financial Institutions > General Overview voice on the meaning of a federal banking statute. Banking Law > Bank Holding Companies > Formation Business & Corporate Law > Foreign Businesses > General Overview Antitrust & Trade Law > Industry Regulation > [HN3] Massachusetts law specifically provides that an Financial Institutions > Bank Holding Company Act out-of-state bank holding company with its principal Banking Law > Bank Activities > Securities > Nonbank place of business in one of the other New England States Banks (Connecticut, Maine, New Hampshire, Rhode Island, and Banking Law > Federal Acts > Bank Holding Company Vermont), which is not directly or indirectly controlled Act by another corporation with its principal place of business [HN7] The broader purposes underlying the Bank located outside of New England, may establish or acquire Holding Company Act of 1956 as a whole, 12 U.S.C.S. § a Massachusetts-based bank or bank holding company, Page 3 472 U.S. 159, *; 105 S. Ct. 2545, **; 86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126 1841 et seq., and the Douglas Amendment in particular, privileges to the enacting state's banking organizations, 12 U.S.C.S. § 1842(d), are to retain local, violated the commerce, compact, and equal protection community-based control over banking. clauses of the Federal Constitution by discriminating against non-New England out-of-state bank holding companies. The Board rejected these arguments and Banking Law > Bank Holding Companies > General approved the applications, and the United States Court of Overview Appeals for the Second Circuit, in consolidated review Banking Law > Federal Acts > Bank Holding Company proceedings, affirmed (740 F2d 203). Act Constitutional Law > Congressional Duties & Powers > On certiorari, the United States Supreme Court Commerce Clause > General Overview affirmed. In an opinion by Rehnquist, J., expressing the [HN8] When Congress so chooses, state actions which it unanimous view of the eight participating members of the plainly authorizes are invulnerable to constitutional attack court, it was held (1) that the Connecticut and under the Commerce Clause, U.S. Const. art. I, § 8, cl. 3. Massachusetts statutes in question, authorizing interstate bank acquisitions on a regional basis, were of the kind contemplated by the Douglas Amendment to lift its ban Constitutional Law > Supremacy Clause > General on interstate acquisitions, and (2) that these statutes did Overview not violate the commerce clause, the compact clause, and [HN9] The application of the Compact Clause is limited the equal protection clause of the United States to agreements that are directed to the formation of any Constitution. combination tending to the increase of political power in the States, which may encroach upon or interfere with the O'Connor, J., concurred, expressing the view that just supremacy of the United States. there is no meaningful distinction for equal protection clause purposes between the Connecticut and DECISION: Massachusetts statute at issue here and the Alabama State statutes authorizing interstate bank acquisitions statute imposing a substantially lower gross premiums tax on a regional basis held valid. rate on domestic insurance companies than on out-of-state insurance companies, at issue in Metropolitan SUMMARY: Life Ins. Co. v Ward (1985) 470 US 869, 84 L Ed 2d 751, 105 S Ct 1676. Three bank holding companies applied to the Federal Reserve Board to obtain approval for the acquisitions of Powell, J., did not participate. banks in New England states other than the ones in which they were located. Three prospective competitors LAWYERS' EDITION HEADNOTES: opposed these proposed acquisitions in proceedings before the Board on the grounds (1) that the acquisitions BANKS §3.5; were not authorized by the Douglas Amendment to the Bank Holding Company Act of 1956 (12 USCS 1842(d)), state statutes -- interstate bank acquisitions on prohibiting the Federal Reserve Board from approving an regional basis -- validity under Bank Holding Company application of a bank holding company located in one Act -- ; state to acquire a bank located in another state unless the acquisition "is specifically authorized by the statute laws Headnote:[1A][1B][1C] of the state in which such bank is located, by language to that effect and not merely by implication," and (2) that if State statutes authorizing interstate bank acquisitions they were authorized by the Act, the applicable by bank holding companies on a regional basis are of the Connecticut and Massachusetts statutes, substantially kind contemplated by the Douglas Amendment to the providing that an out-of-state bank holding company with Bank Holding Company Act of 1956 (12 USCS 1842(d)), its principal place of business in one of the other New which prohibits the Federal Reserve Board from England states may acquire an in-state bank, provided approving an application of a bank holding company that the other state accords equivalent reciprocal located in one state to acquire a bank located in another Page 4 472 U.S. 159, *; 105 S. Ct. 2545, **; 86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126 state unless the acquisition is authorized by the statutes of encroach upon or interfere with the just supremacy of the the state in which the bank is located; the Amendment's United States, and these state statutes, which comply with legislative history indicates that Congress contemplated the Douglas Amendment to the Bank Holding Company that some states might partially lift the ban on interstate Act of 1956 (12 USCS 1842(d)), cannot possibly infringe banking without opening themselves up to interstate federal supremacy, and they do not enhance the political banking from everywhere in the nation, and these state power of the states within the region at the expense of statutes are not only consistent with the Amendment's other states. anticipation of differing approaches to interstate banking, but they are also consistent with the broader purposes BANKS §3.5 underlying the Act as a whole and the Douglas Amendment in particular to retain local, CONSTITUTIONAL LAW §409; community-based control over banking. equal protection clause -- state statutes -- interstate bank acquisitions on regional basis -- ; BANKS §3.5 Headnote:[4A][4B] COMMERCE §113; State statutes authorizing interstate bank acquisitions commerce clause -- state statutes -- interstate bank by bank holding companies on a regional basis do not acquisitions on regional basis -- ; violate the equal protection clause of the Fourteenth Headnote:[2A][2B][2C] Amendment even though the statutes favor out-of-state corporations within the region over out-of-state State statutes authorizing interstate bank acquisitions corporations from other parts of the country where the by bank holding companies on a regional basis do not states, in enacting these statutes, considered that interstate violate the commerce clause of the United States banking on a regional basis combines the beneficial effect Constitution (art I, 8, cl 3); in this instance, the commerce of increasing the number of banking competitors with the power of Congress is not dormant, but has been exercised need to preserve a close relationship between those in the by Congress when it enacted the Douglas Amendment to community who need credit and those who provide the Bank Holding Company Act of 1956 (12 USCS credit, and that acquisition of in-state banks by holding 1842(d)); when Congress so chooses, state actions which companies headquartered outside the region would it plainly authorizes are invulnerable to constitutional threaten the independence of local banking institutions. attack under the commerce clause. SYLLABUS BANKS §3.5 The Bank Holding Company Act of 1956 (BHCA) requires a bank holding company to obtain the approval STATES, TERRITORIES, AND POSSESSIONS of the Federal Reserve Board (Board) before it may §59; acquire a bank. Section 3(d) of the Act (known as the Douglas Amendment) prohibits the Board from compact clause -- state statutes -- interstate bank approving an application of a bank holding company acquisitions on regional basis -- ; located in one State to acquire a bank located in another Headnote:[3A][3B][3C] State unless the acquisition "is specifically authorized by the statute laws of the State in which such bank is State statutes authorizing interstate bank acquisitions located, by language to that effect and not merely by by bank holding companies on a regional basis do not implication." Substantially similar Connecticut and violate the compact clause of the United States Massachusetts statutes provide that an out-of-state bank Constitution (art I, 10, cl 3); the application of the holding company with its principal place of business in compact clause is limited to agreements that are directed one of the other New England States may acquire an to the formation of any combination tending to the in-state bank, provided that the other State accords increase of political power in the states which may equivalent reciprocal privileges to the enacting State's Page 5 472 U.S. 159, *; 105 S. Ct. 2545, **; 86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126 banking organizations. Certain bank holding companies that the state statutes (along with statutes of other New (respondents here) applied to the Board as out-of-state England States under petitioners' theory) constitute an companies for purposes of either the Connecticut or agreement or compact, "application of the Compact Massachusetts statute, seeking approval for acquisitions Clause is limited to agreements that are 'directed to the of banks located in one or the other of those States. formation of any combination tending to the increase of Petitioners, prospective competitors, opposed the political power in the States, which may encroach upon proposed acquisitions in proceedings before the Board, or interfere with the just supremacy of the United contending that the acquisitions were not authorized by States.'" New Hampshire v. Maine, 426 U.S. 363, 369, the Douglas Amendment and that, if they were, the quoting Virginia v. Tennessee, 148 U.S. 503, 519. In applicable Connecticut or Massachusetts statute, by view of the Douglas Amendment, the challenged state discriminating against non-New England out-of-state statutes, which comply with the BHCA, cannot possibly bank holding companies, violated the Commerce, infringe federal supremacy. Nor do the state statutes in Compact, and Equal Protection Clauses of the Federal question either enhance the political power of the New Constitution. Rejecting petitioners' contentions, the England States at the expense of other States or have an Board approved the applications, and the Court of impact on the federal structure. Pp. 175-176. Appeals, in consolidated review proceedings, affirmed. 4. The Connecticut and Massachusetts statutes do not Held: violate the Equal Protection Clause. The statutes favor out-of-state corporations within the New England region 1. The Connecticut and Massachusetts statutes are of over corporations from other parts of the country. the kind contemplated by the Douglas Amendment to lift However, Connecticut and Massachusetts, in enacting its ban on interstate acquisitions. The Amendment's their statutes, considered that interstate banking on a language plainly permits States to lift the federal ban regional basis combined the beneficial effect of entirely, and although it does not specifically indicate that increasing the number of banking competitors with the a State may partially lift the ban, neither does it need to preserve a close relationship between those in the specifically indicate that a State is allowed only the community who need credit and those who provide alternatives of leaving the federal ban in place or lifting it credit, and that acquisition of in-state banks by holding completely. The Amendment's legislative history companies headquartered outside the New England indicates that Congress intended to allow each State region would threaten the independence of local banking flexibility in its approach, contemplating that some institutions. These concerns meet the traditional rational States might partially lift the ban on interstate banking basis for judging equal protection claims. Metropolitan without opening themselves up to interstate banking from Life Ins. Co. v. Ward, 470 U.S. 869, distinguished. Pp. everywhere in the Nation. Moreover, the Connecticut 176-178. and Massachusetts statutes, by allowing only regional acquisitions, are consistent with the Amendment's and the COUNSEL: Stephen M. Shapiro argued the cause for BHCA's purpose of retaining local, community-based petitioners. With him on the brief for petitioner Citicorp control over banking. Pp. 168-173. were Ira M. Millstein, Robert L. Stern, James W. Quinn, and Jay N. Fastow. George D. Reycraft, John Boyer, 2. The Connecticut and Massachusetts statutes do not Jeffrey Q. Smith, Gregory Scott Mertz, and Joseph violate the Commerce Clause. Congress' commerce Polizzotto filed a brief for petitioners Northeast Bancorp, power is not dormant here, but has been exercised by Inc., et al. The named attorneys filed a joint reply brief enactment of the BHCA and the Douglas Amendment, and supplemental memorandum for all petitioners. authorizing the challenged state statutes. State actions that Congress plainly authorizes are invulnerable to Solicitor General Lee argued the cause for the federal constitutional attack under the Commerce Clause. Pp. respondent. With him on the brief were Acting Assistant 174-175. Attorney General Willard, Deputy Solicitor General Wallace, Anthony J. Steinmeyer, and Michael Kimmel. 3. The challenged state statutes do not violate the Laurence H. Tribe argued the cause for respondents Bank Compact Clause, which provides that no State, without of New England Corp. et al. With him on the briefs were Congress' consent, shall enter into an agreement or Bertram M. Kantor, Michael H. Byowitz, Mark A. Weiss, compact with another State. Even assuming, arguendo, Page 6 472 U.S. 159, *; 105 S. Ct. 2545, **; 86 L. Ed. 2d 112, ***; 1985 U.S. LEXIS 126 Stuart C. Stock, Wilmot T. Pope, and Douglas M. Kraus. Court, in which all other Members joined except Francis X. Bellotti, Attorney General, Jamie W. Katz, POWELL, J., who took no part in the decision of the Assistant Attorney General, and Thomas R. Kiley, First case. O'CONNOR, J., filed a concurring opinion, post, p. Assistant Attorney General, filed a brief for respondent 178. Commonwealth of Massachusetts. Joseph I. Lieberman, Attorney General, Elliot F. Gerson, Deputy Attorney OPINION BY: REHNQUIST General, and John G. Haines and Jane D. Comerford, Assistant Attorneys General, filed a brief for respondents OPINION State of Connecticut et al. * [*162] [***117] [**2547] JUSTICE * Briefs of amici curiae urging reversal were REHNQUIST delivered the opinion of the Court. filed for the State of New York by Robert Abrams, Attorney General, Robert Hermann, [***LEdHR1A] [1A] [***LEdHR2A] [2A] Solicitor General, R. Scott Greathead, First [***LEdHR3A] [3A]Respondents Bank of New England Assistant Attorney General, and Judith T. Kramer Corporation (BNE), Hartford National Corporation and Howard L. Zwickel, Assistant Attorneys (HNC), and Bank of Boston Corporation (BBC) are bank General; for Chase Manhattan Corp. by Joseph A. holding companies which applied to the Federal Reserve Califano, Jr., and Kent T. Stauffer; for the David Board to obtain approval for the acquisition of banks or F. Bolger Revocable Trust by William A. Harvey bank holding companies in New England States other and Edward S. Ellers; for the New York State than the ones in which they are principally located. Bankers Association by John Leferovich, Jr.; for Petitioners Northeast Bancorp, Inc., Union Trust Senator Alphonse D'Amato et al. by J. Robert Company, and Citicorp opposed these proposed Lunney; and for Frank L. Morsani by Dewey R. acquisitions in proceedings before the Board. The Board Villareal, Jr., approved the acquisitions, and the Court of Appeals for the Second Circuit affirmed the orders of the Board. Briefs of amici curiae urging affirmance were Petitioners sought certiorari, contending that the filed for the State of Georgia by Michael J. acquisitions were not authorized by the Bank Holding Bowers, Attorney General, James P. Googe, Jr., Company Act [**2548] of 1956, 70 Stat. 133, as Executive Assistant Attorney General, H. Perry amended, 12 U. S. C. § 1841 et seq., and [***118] that, Michael, First Assistant Attorney General, Verley if they were authorized by that Act, the state statutes J. Spivey, Senior Assistant Attorney General, and which permitted the acquisitions in each case violated the Grace E. Evans, Assistant Attorney General; for Commerce Clause and the Compact Clause of the United Bank of New York Co., Inc., by John L. Warden; States Constitution. We granted certiorari because of the for the Conference of State Bank Supervisors by importance of these issues, 469 U.S. 810, and we now Erwin N. Griswold, James F. Bell, and Arthur E. affirm. Wilmarth, Jr.; for the Council of State Governments et al. by Joyce Holmes Benjamin [HN1] The Bank Holding Company Act (BHCA) and Vicki C. Jackson; for Fleet Financial Group, regulates the acquisition of state and national banks by Inc., by Allan B. Taylor, J. Bruce Boisture, Robert bank holding companies. [*163] The Act generally M. Taylor III, and Edward W. Dence, Jr.; and for defines a bank as any institution organized under state or Bob Graham, Governor of Florida, et al. by J. federal law which "(1) accepts deposits that the depositor Thomas Cardwell, Sydney H. McKenzie III, S. has a legal right to withdraw on demand, and (2) engages Craig Kiser, and Carl B. Morstadt. in the business of making commercial loans." 12 U. S. C. § 1841(c). The Act defines a bank holding company as Robert F. Mullen filed a brief for the New any corporation, partnership, business trust, association, York Clearing House Association as amicus or similar organization that owns or has control over a curiae. bank or another bank holding company. §§ 1841(a)(1), (b); see § 1841(a)(5). Before a company may become a bank holding company, or a bank holding company may acquire a bank or substantially all of the assets of a bank, JUDGES: REHNQUIST, J., delivered the opinion of the the Act requires it to obtain the approval of the Federal Page 7 472 U.S. 159, *163; 105 S. Ct. 2545, **2548; 86 L. Ed. 2d 112, ***118; 1985 U.S. LEXIS 126 Reserve Board. § 1842. located outside of New England, may establish or acquire a Massachusetts-based bank or bank holding company, [HN2] The Board will evaluate the proposed provided that the other New England State accords transaction for anticompetitive effects, financial and equivalent reciprocal privileges to Massachusetts banking managerial resources, community needs, and the like. § organizations. Mass. Gen. Laws Ann., ch. 167A, § 2 1842(c). In addition, § 3(d) of the Act, 12 U. S. C. § (West 1984). In June 1983, Connecticut followed suit by 1842(d), known as "the Douglas Amendment," prohibits adopting [**2549] a substantially similar statute. 1983 the Board from approving an application of a bank Conn. Pub. Acts 83-411. holding company or bank located in one State to acquire a bank located in another State, or substantially all of its The other New England States have taken different assets, unless the acquisition "is specifically authorized courses or have not acted. Rhode Island, in May 1983, by the statute laws of the State in which such bank is authorized acquisition of local banks by out-of-state bank located, by language to that effect and not merely by holding companies on a reciprocal basis similarly limited implication." Pursuant to the Douglas Amendment, a to the New England region, but this geographic limitation number of States recently have enacted statutes which will expire on June 30, 1986, after which the selectively authorize interstate bank acquisitions on a authorization will extend nationwide subject only to the regional basis. This case requires us to consider the reciprocity requirement. R. I. Gen. Laws § 19-30-1 et validity of these statutes. seq. (Supp. 1984). Since February 1984, Maine has permitted banking organizations from all other States to From 1956 to 1972, the Douglas Amendment had the acquire local banks without any [*165] reciprocity effect of completely barring interstate bank acquisitions requirement. Me. Rev. Stat. Ann., Tit. 9-B, § 1013 because no State had enacted the requisite authorizing (Supp. 1984-1985). At the other extreme, New statute. Beginning in 1972, several States passed statutes Hampshire and Vermont have not enacted any statute permitting such acquisitions in limited circumstances or releasing the Douglas Amendment's ban on interstate for specialized purposes. For example, Iowa passed a bank acquisitions. grandfathering statute which had the effect of permitting the only out-of-state bank holding company owning an One predictable effect of the regionally restrictive Iowa bank to maintain and expand its in-state banking statutes will apparently be to allow the growth of regional activities, Iowa Code § 524.1805 (1983); see Iowa multistate bank holding companies which can compete Independent Bankers v. Board of Governors, [*164] 167 with the established banking giants in New York, U. S. App. D. C. 286, 511 F.2d 1288, cert. denied, 423 California, Illinois, and Texas. See 740 F.2d 203, 209, U.S. 875 (1975); Washington authorized out-of-state and n. 16 (1984). The Massachusetts and Connecticut purchasers to acquire failing local banks, Wash. Rev. statutes have prompted at least 15 other States to consider Code § 30.04.230(4)(a) (Supp. 1985); and Delaware legislation which, according to the Federal Reserve allowed out-of-state bank holding companies to set up Board, would establish interstate banking regions in all special purpose banks, such as credit card operations, in parts of the country. 70 Fed. Res. Bull. 374, 375-376 Delaware so long as they do not compete in other (1984). At least seven of these States have already respects with locally controlled full-service banks, Del. enacted the necessary statutes. Code Ann., Tit. 5, § 801 et seq. (Supp. 1984). Two months after Connecticut passed its statute, Beginning with Massachusetts in December 1982, BNE applied to the Board for approval of its merger with several States have [***119] enacted statutes lifting the respondent CBT Corporation (CBT), a Connecticut bank Douglas Amendment ban on interstate acquisitions on a holding company, and thereby to acquire indirectly the reciprocal basis within their geographic regions. [HN3] Connecticut Bank and Trust Company, N. A., of The Massachusetts Act specifically provides that an Hartford, Connecticut. Soon thereafter HNC applied to out-of-state bank holding company with its principal the Board for approval of the acquisition of Arltru Bank place of business in one of the other New England States Corporation (Arltru), a Massachusetts bank holding (Connecticut, Maine, New Hampshire, Rhode Island, and company which owns the Arlington Trust Company, a Vermont), which is not directly or indirectly controlled bank located in Lawrence, Massachusetts. Finally BBC by another corporation with its principal place of business applied to the Board for approval of the acquisition of the Page 8 472 U.S. 159, *165; 105 S. Ct. 2545, **2549; 86 L. Ed. 2d 112, ***119; 1985 U.S. LEXIS 126 successor by merger to Colonial Bancorp, Inc., a holding companies." Id., at 380. This renunciation of Connecticut bank holding company, by which it would federal interest eliminated any objection to the statutes acquire Colonial Bank of Waterbury, Connecticut. under the Compact Clause or dormant Commerce Clause. Citicorp offers financial services to consumers and [*167] The Board also found nothing in the history businesses nationally through its bank and nonbank of the Amendment to suggest that "the states were to be subsidiaries. In response to the Board's invitation for permitted only to choose between not allowing comments from interested persons on these three out-of-state bank holding companies to enter, and proposed acquisitions, Citicorp submitted [***120] allowing completely free entry." Id., at 386. The Board comments opposing all three of them. Northeast owns disposed of the equal protection challenge by reasoning petitioner Union Trust Company, a Connecticut bank that that the regional restriction in the two statutes was competes directly with banks owned by CBT, [*166] "rationally related to an attempt to maintain a banking HNC, and Colonial. In addition, Bank of New York system responsive to local needs in New England." Id., at Corporation has agreed to acquire Northeast if 381. The Board then analyzed the proposed transactions Connecticut or the United States enacts the necessary in light of the relevant statutory considerations set out in enabling legislation. Northeast and Union Trust 12 U. S. C. §§ 1842(c) and 1843(c)(8) and approved the submitted comments opposing BNE's application to applications. acquire CBT. [HN4] Pursuant to 12 U. S. C. § 1848, which The petitioners challenged the applications in part on provides that "[any] party aggrieved by an order of the the ground that the Douglas Amendment did not Board" may seek review in a federal court of appeals, and authorize them, and in part on the grounds that the § 1850, which permits prospective competitors to be Massachusetts and Connecticut statutes, by aggrieved parties under § 1848, Citibank, Northeast, and discriminating against non-New England bank holding Union Trust petitioned the Court of Appeals for the companies, violated the Commerce, Compact, and Equal Second Circuit to review the Board's order approving Protection Clauses of the Federal Constitution. They [***121] the BNE-CBT acquisition. Citibank also claimed, therefore, that the proposed interstate petitioned for review of the HNC-Arltru acquisition, and acquisitions were not authorized by valid state statutes as Northeast and Union Trust were permitted to intervene. required by the Douglas Amendment. The Board rejected These petitions were consolidated and the acquisitions these arguments. It first determined that the BNE-CBT stayed pending expedited review. Meanwhile, the Board and BBC-Colonial acquisitions were specifically stayed its order approving the BBC-Colonial acquisition, authorized by the Connecticut statute and the HNC-Arltru and the Court of Appeals consolidated a petition filed by acquisition was specifically authorized by the Citicorp for review of that transaction with the two other Massachusetts statute, and therefore that the Douglas pending review petitions. The court also permitted BBC, Amendment would not prevent the Board from approving BNE, CBT, HNC, the State of Connecticut, and the any of the three proposed transactions. Commonwealth of Massachusetts to intervene. The Court of Appeals affirmed the Board's orders approving The Board then rejected the constitutional challenge the three applications in all respects. 740 F.2d 203 to the two state statutes. In doing so, it noted that it (1984). It agreed with the Board's determination that the would hold a state statute unconstitutional only if there Connecticut and Massachusetts statutes satisfied the was "clear and unequivocal evidence" of its terms of the Douglas Amendment, and it then rejected unconstitutionality. [**2550] 70 Fed. Res. Bull. 353, challenges to the Board's orders under the Commerce 354 (1984); id., at 376; 70 Fed. Res. Bull. 524, 525-526 Clause, the Compact Clause, and the Equal Protection (1984). While stating that "the issue is not free from Clause. The Court of Appeals stayed its mandate [*168] doubt," it concluded that this standard had not been met. and ordered that the status quo be maintained pending 70 Fed. Res. Bull, at 376-377. Interpreting the statutory disposition by this Court. language and the legislative history of the Douglas Amendment, it determined that "the Douglas Amendment The Douglas Amendment should be read as a renunciation of federal interest in regulating the interstate acquisition of banks by bank [***LEdHR1A] [1B][HN5] The Douglas Amendment to the BHCA prohibits the Board from Page 9 472 U.S. 159, *168; 105 S. Ct. 2545, **2550; 86 L. Ed. 2d 112, ***LEdHR1A; 1985 U.S. LEXIS 126 approving the application of a bank holding company or a agree with the Board that the legislative history of the bank located in one State to acquire a bank located in Amendment supplies a sufficient indication of Congress' another State, or substantially all of its assets, unless the intent. acquisition "is specifically authorized by the statute laws of the State in which such bank is located, by language to At the time of the BHCA, interstate branch banking that effect and not merely by implication." § 1842(d). was already prohibited by the McFadden Act. 12 U. S. Clearly the proposed acquisitions with which we deal in C. § 36(c). The bank holding company device, however, this case must be consistent with the Douglas had been created to get around this restriction. A holding Amendment, or they are invalid as a matter of federal company would purchase banks in different localities statutory law. If the Massachusetts and Connecticut both within and without a State, and thereby provide the statutes allowing regional acquisitions are not the type of equivalent of branch banking. One of the major purposes state statutes contemplated by the Douglas Amendment, of the BHCA was to eliminate this loophole. H. R. Rep. they would not lift the ban imposed by the general No. 609, 84th Cong., 1st Sess., 2-6 (1955); 101 Cong. prohibition of the Douglas Amendment. While petitioners Rec. 4407 (1955) (remarks of Rep. Wier); id., at blend together arguments about the meaning of the 8028-8029 (remarks of Rep. Patman); 102 Cong. Rec. Douglas Amendment with arguments about the effect of 6858-6859 (1956) (remarks of Sen. Douglas). As enacted the Commerce Clause, U.S. Const., Art. I, § 8, cl. 3, we by the House in 1955, the BHCA contained a flat ban on think the contentions are best treated separately. interstate bank acquisitions. The legislative history from the House makes it clear that the policies of community The Board resolved the statutory issue in favor of the control and local responsiveness of banks inspired this state statutes, concluding that they were the sort of laws flat ban. See 101 Cong. Rec. A2454 (1955) (remarks of contemplated by the Douglas Amendment. [HN6] While Rep. Wier); id., at 8030-8031 (remarks of Rep. Rains); H. the Board apparently does not consider itself expert on R. Rep. No. 609, supra, at 2-6. any constitutional issues raised, it is [**2551] nonetheless an authoritative voice on the meaning of a The Douglas Amendment was added on the floor of federal banking statute. Securities Industry Assn. v. the Senate. Its entire legislative history is confined to the Board of Governors of Federal Reserve System, 468 U.S. Senate debate. In such circumstances, the comments of 207 (1984). The Board may have applied a higher individual [*170] legislators carry substantial weight, standard than was necessary when it analyzed the especially when they reflect a consensus as to the Douglas Amendment to see whether there was a "clear meaning and objectives of the proposed legislation authorization" for selective lifting of the ban, such as the though not necessarily the wisdom of that legislation. Massachusetts and Connecticut statutes undertake to do. The instant case is not a situation where the comments of Whether or not so stringent a standard was applicable, we an individual legislator, even a sponsor, is at odds with think the Board was correct in concluding that it was in the language of the statute or other traditionally more fact met in this case. authoritative indicators of legislative intent such as the conference or committee reports. [*169] The language of the Douglas Amendment plainly permits States to lift the federal ban entirely, as The bill reported out by the Senate Committee on has been done by Maine. It does not specifically indicate Banking and Currency permitted interstate bank that a State may partially lift the ban, for example in acquisitions conditioned only on approval by the Federal [***122] limited circumstances, for special types of Reserve Board. This approach apparently was favored by acquisitions, or for purchasers from a certain geographic many of the large bank holding companies which sought region. On the other hand, it also does not specifically further expansion, see, e. g., Control of Bank Holding indicate that a State is allowed only two alternatives: Companies, 1955: Hearings on S. 880 et al. before the leave the federal ban in place or lift it completely. The Subcommittee of the Senate Committee on Banking and Board concluded that the language "does not appear on Currency, 84th Cong., 1st Sess., 132, 136 (1955) its face to authorize discrimination" by region or "to meet (testimony of Ellwood Jenkins, First Bank Stock Corp.), the stringent test of explicitness laid down by" this Court 298-299 (Baldwin Maull, Marine Midland Corp.), 320 in the dormant Commerce Clause cases. 70 Fed. Res. (Cameron Thomson, Northwest Bancorporation), cf. 375, Bull., at 384. We need not resolve this issue because we 385 (Frank N. Belgrano, Jr., Transamerica Corp.), and by Page 10 472 U.S. 159, *170; 105 S. Ct. 2545, **2551; 86 L. Ed. 2d 112, ***122; 1985 U.S. LEXIS 126 some who thought the total ban in the House bill out-of-State holding companies to acquire banks in other offensive to States' rights, see 102 Cong. Rec. 6752 States only to the degree that State laws expressly permit (1956) (remarks of Sen. Robertson, floor manager of them; and that is the provision of the McFadden Act." Committee bill, quoting Sen. Maybank). Ibid. [**2552] The Douglas Amendment was a [***123] See id., at 6860. compromise between the two extremes that also accommodated the States' rights concern: In enacting the McFadden Act in 1927, Congress relaxed federal restrictions on branch banking by national "Our amendment would prohibit bank holding banks, but at the same time subjected them to the same companies from purchasing banks in other States unless branching [*172] restrictions imposed by the States on such purchases by out-of-State holding companies were state banks. First National Bank v. Walker Bank & Trust specifically permitted by law in such States." Id., at 6860 Co., 385 U.S. 252, 258 (1966). Congress intended "to (remarks of Sen. Douglas). leave the question of the desirability of branch banking up to the States," ibid., and to permit branch banking by Accord, ibid. (remarks of Sen. Bennett in national banks "'in only those States the laws of which opposition to the Amendment). permit branch banking, and only to the extent that the State laws permit branch banking.'" Id., at 259 (quoting Of central concern to this litigation, the Douglas Sen. Glass, 76 Cong. Rec. 2511 (1933)). The McFadden compromise did not simply leave to each State a choice Act did not offer the States an all-or-nothing choice with one way or [*171] the other -- either to permit or bar respect to branch banking. As Senator [***124] Douglas interstate acquisitions of local banks -- but to allow each observed, some States had limited intrastate branching by State flexibility in its approach. Senator Douglas state banks, and others like Illinois had prohibited it explained that under his amendment bank holding altogether. companies would be permitted to acquire banks in other States "only to the degree that State laws expressly permit This variative approach to intrastate branching was them." Id., at 6858. Petitioners contend that by the nicely illustrated at the time by the structure in New phrase "to the degree" Senator Douglas intended merely a York, which Senator Douglas described as follows: "In quantitative reference to the number of States which New York the State is divided into 10 zones. Branch might lift the ban, and did not mean that a State could banking is permitted within each of the zones, but a bank partially lift the ban. Petitioners' contention, however, is cannot have branches in another zone." 102 Cong. Rec. refuted by the close analogy drawn by Senator Douglas 6858 (1956). At the same time, Pennsylvania permitted between his amendment and the McFadden Act, 12 U. S. branching in contiguous counties. Upper Darby National C. § 36(c): Bank v. Myers, 386 Pa. 12, 124 A. 2d 116 (1956). In view of this analogy to the McFadden Act and Senator "The organization of branch banks proceeded very Douglas' explanation of that Act, there can be no other rapidly in the 1920's, and to check their growth various conclusion but that Congress contemplated that some States passed laws limiting, and in some cases preventing States might partially lift the ban on interstate banking it, as in the case of Illinois. National banks had without opening themselves [**2553] up to interstate previously been implicitly prohibited from opening banking from everywhere in the Nation. branches, and there was a strong movement to remove this prohibition and completely open up the field for the Not only are the Massachusetts and Connecticut national banks. This, however, was not done. Instead, by statutes consistent with the Douglas Amendment's the McFadden Act and other measures, national banks anticipation of differing approaches to interstate banking, have been permitted to open branches only to the degree but they are also consistent [HN7] with the broader permitted by State laws and State authorities. purposes underlying the BHCA as a whole and the Douglas Amendment in particular to retain local, "I may say that what our amendment aims to do is to community-based control over banking. Faced with carry over into the field of holding companies the same growing competition from nonbank financial services that provisions which already apply for branch banking under are not confined within state lines, these States sought an the McFadden Act -- namely, our amendment will permit alternative that allowed expansion and growth of local Page 11 472 U.S. 159, *173; 105 S. Ct. 2545, **2553; 86 L. Ed. 2d 112, ***124; 1985 U.S. LEXIS 126 [*173] banks without opening their borders to this type of economic "Balkanization" into confederations unimpeded interstate banking. The Connecticut General of States to the detriment of the welfare of the Union as a Assembly established a Commission in 1979 to study the whole. See, e. g., H. P. Hood & Sons, Inc., v. Du Mond, problem. It concluded: 336 U.S. 525, 533 (1949); Hughes v. Oklahoma, 441 U.S. 322, 325-326 (1979); The Federalist Nos. 7 and 22, "Both at the national and state levels the philosophy pp. 62-63, 143-145 (Rossiter ed. 1961). There can be underlying our structure of bank regulation has been to little dispute that the dormant Commerce Clause would promote a pluralistic banking system -- a system prohibit a group of States from establishing a system of comprised of many units, rather than a highly regional banking by excluding bank holding companies concentrated system made up of a few large banks. The from outside the region if Congress had remained promotion of local ownership and control of banks has as completely silent on the subject. Lewis v. BT Investment one of its objectives the preservation of a close Managers, Inc., 447 U.S. 27, 39-44 (1980). Nor can there relationship between those in our communities who need be serious question that an individual State acting entirely credit and those who provide credit. To allow the control on its own authority would run afoul of the dormant of credit that is essential for the health of our state Commerce Clause if it sought to comprehensively economy to pass to hands that are not immediately regulate acquisitions of local banks by out-of-state responsive to the interests of Connecticut citizens and holding companies. Sporhase v. Nebraska ex rel. businesses would not, we believe, serve our state well. Douglas, 458 U.S. 941 [**2554] (1982). Similarly, to expose our smaller banks to the rigors of unlimited competition from large out-of-state banking But that is not our case. Here the commerce power organizations -- particularly at a time when deregulation of Congress is not dormant, but has been exercised by of banking products at the federal level is already putting that body when it enacted the Bank Holding Company strains on the resources of smaller banks -- would not be Act and the Douglas amendment to the Act. Congress wise." Report to the General Assembly of the State of has authorized by the latter amendment the Connecticut (Jan. 5, 1983), 4 App. in No. 84-4047 (CA2), Massachusetts and Connecticut statutes which petitioners pp. 1230, 1240-1241. challenge as violative of the Commerce Clause. [HN8] When Congress so chooses, state actions which it plainly Rather, the Commission proposed "an experiment in authorizes are invulnerable to constitutional attack under regional banking" as a first step toward full interstate the Commerce Clause. Western & Southern Life banking which "would afford the legislature an Insurance Co. v. State Board of Equalization, 451 U.S. opportunity to make its own calculus of the benefits and 648, 653-654 (1981); White v. Massachusetts Council of detriments that might result from a broader program of Construction Employers, Inc., 460 U.S. 204 (1983); cf. interstate banking." Id., at 1241-1242. The Connecticut South-Central Timber Development, Inc. v. Wunnicke, General Assembly adopted the Commission's [*175] 467 U.S. 82 (1984). Petitioners' Commerce recommendations, and we believe that Connecticut's Clause attack on the challenged acquisitions therefore approach is precisely what was contemplated [***125] fails. by Congress when it adopted the Douglas Amendment. Compact Clause We hold that the Connecticut and Massachusetts statutes are of the kind contemplated by the Douglas [***LEdHR3A] [3B]Petitioners maintain that the Amendment to lift its bar against interstate acquisitions. Massachusetts and Connecticut statutes constitute a compact to exclude non-New England banking [*174] Commerce Clause organizations which violates the Compact Clause, U. S. Const., Art. I, § 10, cl. 3, because Congress has not [***LEdHR2A] [2B]Petitioners contend that the specifically approved it. We have some doubt as to regional limitation in the Massachusetts and Connecticut whether there is an agreement amounting to a compact. statutes burdens commerce from without the region while The two statutes are similar in that they both require permitting a free flow of commerce among the States reciprocity and impose a regional limitation, both within the region. They provide numerous citations to legislatures favor the establishment of regional banking prove that one of the principal purposes of the Framers of in New England, and there is evidence of cooperation the Constitution was to break up and forestall precisely Page 12 472 U.S. 159, *175; 105 S. Ct. 2545, **2554; 86 L. Ed. 2d 112, ***126; 1985 U.S. LEXIS 126 [***126] among legislators, officials, bankers, and supra, at 471, 473. others in the two States in studying the idea and lobbying for the statutes. But several of the classic indicia of a Equal Protection Clause compact are missing. No joint organization or body has [***LEdHR4A] [4A]Petitioners argued before the been established to regulate regional banking or for any Board and the Court of Appeals that the Massachusetts other purpose. Neither statute is conditioned on action by and Connecticut statutes violated the Equal Protection the other State, and each State is free to modify or repeal Clause, U.S. Const., Amdt. 14, § 2, by excluding bank its law unilaterally. Most importantly, neither statute holding companies from some States while admitting requires a reciprocation of the regional limitation. Bank those from others. This claim was abandoned in their holding companies based in Maine, which has no petition for [***127] certiorari and their briefs on the regional limitation, and Rhode Island, which will drop merits, but after our decision in Metropolitan Life the regional limitation in 1986, are permitted by the two Insurance Co. v. Ward, 470 U.S. 869 (1985), petitioners statutes to acquire Massachusetts and Connecticut banks. filed a supplemental brief urging us to consider the equal These two States are included in the ostensible compact protection issue. Because the issue was fully reviewed by under petitioners' theory, yet one does not impose the the Board and the Court of Appeals and because it would exclusion to which petitioners so strenuously object and undoubtedly [*177] cloud other pending applications for the other plans to drop it after two years. acquisitions by bank holding companies, we elect to But even if we were to assume that these state decide it. actions constitute an agreement or compact, not every In Metropolitan Life we held that encouraging the such agreement violates the Compact Clause. Virginia v. formation of new domestic insurance companies within a Tennessee, 148 U.S. 503 (1893). State and encouraging capital investment in the State's [HN9] "The application of the Compact Clause is assets and governmental securities were not, standing limited to agreements that are 'directed to the formation alone, legitimate state purposes which could permissibly of any combination tending to the increase of political be furthered by discriminating against out-of-state power in [*176] the States, which may encroach upon or corporations in favor of local corporations. There we interfere with the just supremacy of the United States.'" said: New Hampshire v. Maine, 426 U.S. 363, 369 (1976), "This case does not involve or question, as the quoting Virginia v. Tennessee, supra, at 519. dissent suggests, post, at 900-901, the broad authority of See United States Steel Corp. v. Multistate Tax a State to promote and regulate its own economy. We Comm'n, 434 U.S. 452, 471 (1978). hold only that such regulation may not be accomplished by imposing discriminatorily higher taxes on nonresident In view of the Douglas Amendment to the BHCA, corporations solely because they are nonresidents." Id., at the challenged state statutes which comply with that Act 882, n. 10. cannot possibly infringe federal supremacy. To the extent that the state statutes might conflict in a particular Here the States in question -- Massachusetts and situation with other federal statutes, such as the provision Connecticut -- are not favoring local corporations at the under which the Federal Deposit Insurance Corporation expense of out-of-state corporations. They are favoring will arrange for the acquisition of failing banks by out-of-state corporations domiciled within the New out-of-state bank holding companies, 12 U. S. C. § England region over out-of-state corporations from other 1823(f), they would be pre-empted by those statutes, and parts of the country, and to this extent their laws may be therefore any Compact Clause argument would be said to "discriminate" against the latter. But with respect academic. Petitioners also assert that the alleged regional to the business of banking, we do not write on a clean compact impermissibly offends the sovereignty of sister slate; recently in Lewis v. BT Investment Managers, Inc., States outside of New England. We do not see how the 447 U.S., at 38, we said that "banking and related statutes in question either enhance the political [**2555] financial activities are of profound local concern." This power of the New England States at the expense of other statement is a recognition of the historical fact that our States or have an "impact on our federal structure." country traditionally has favored widely dispersed control United States Steel Corp. v. Multistate Tax Comm'n, of banking. While many other western nations are Page 13 472 U.S. 159, *177; 105 S. Ct. 2545, **2555; 86 L. Ed. 2d 112, ***127; 1985 U.S. LEXIS 126 dominated by a handful of centralized banks, we have that I see no meaningful distinction for Equal Protection some 15,000 commercial banks attached to a greater or Clause purposes between the Massachusetts and lesser degree to the communities in which they are Connecticut statutes we uphold today and the Alabama located. The Connecticut legislative Commission that statute at issue in Metropolitan Life Insurance Co. v. recommended adoption of the Connecticut statute in Ward, 470 U.S. 869 (1985). question considered [*178] interstate banking on a regional basis to combine the beneficial effect of [*179] The Court distinguishes this case from increasing the number of banking competitors with the Metropolitan Life on the ground that Massachusetts and need to preserve a close relationship between those in the Connecticut favor neighboring out-of-state banks over all community who need credit and those who provide other out-of-state banks. It is not clear to me why credit. 4 App. in No. 84-4047 (CA2), pp. 1239-1241. completely barring the banks of 44 States from doing The debates in the Connecticut Legislature preceding the business is less discriminatory than Alabama's scheme of enactment of the Connecticut law evince concern that taxing the insurance companies from 49 States at a immediate acquisition of Connecticut banks by holding slightly higher rate. Nor is it clear why the Equal companies headquartered outside the New England Protection Clause should tolerate a regional "home team" region would threaten the independence of local banking when it condemns a state "home team." See id., at 878. institutions. See, e. g., App. to Pet. for Cert. A157-A160. The Court emphasizes that here we do not write on a No doubt similar concerns motivated the Massachusetts clean slate as the business of banking is "of profound Legislature. local concern." Ante, at 177. The business of insurance is We think that the concerns which spurred also of uniquely local concern. Prudential Insurance Co. Massachusetts and Connecticut to enact the statutes here v. Benjamin, 328 U.S. 408, 415-417 (1946). Both challenged, different as they are from those which industries historically have been regulated by the States motivated the enactment [***128] of the Alabama in recognition of the critical part they play in securing the statute in Metropolitan, meet the traditional rational basis financial well-being of local citizens and businesses. for judging equal protection claims under the Fourteenth Metropolitan Life Insurance Co. v. Ward, supra, at Amendment. Barry v. Barchi, 443 U.S. 55, 67 (1979); 888-893 (dissenting opinion). States have regulated Vance v. Bradley, 440 U.S. 93, 97 (1979). insurance since 1851. Like the local nature of banking, the local nature of insurance is firmly ensconced in [**2556] [***LEdHR1A] [1C] [***LEdHR2A] federal law. 470 U.S., at 888-889. The [2C] [***LEdHR3A] [3C] [***LEdHR4A] [4B]We McCarran-Ferguson Act, enacted in 1945, states: hold that the state statutes here in question comply with the Douglas Amendment and that they do not violate the "Congress hereby declares that the continued Commerce Clause, the Compact Clause, or the Equal regulation and taxation by the several States of the Protection Clause of the United States Constitution. The business of insurance is in the public interest, and that judgment of the Court of Appeals is therefore silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such Affirmed. business by the several States." 59 Stat. 33, 15 U. S. C. § 1011. JUSTICE POWELL took no part in the decision of this case. The Court distinguishes the Connecticut and Massachusetts banking laws as having a valid purpose: CONCUR BY: O'CONNOR "to [***129] preserve a close relationship between those in the community who need credit and those who provide CONCUR credit." Ante, at 178. This interest in preserving local institutions responsive to local concerns was a JUSTICE O'CONNOR, concurring. cornerstone in Alabama's defense of its insurance [*180] tax. It survives as one of the "15 additional purposes" the I agree that the state banking statutes at issue here do Court remanded for reconsideration. Metropolitan Life not violate the Commerce Clause, the Compact Clause, or Insurance Co. v. Ward, supra, at 875-876, n. 5. the Equal Protection Clause. I write separately to note Page 14 472 U.S. 159, *180; 105 S. Ct. 2545, **2556; 86 L. Ed. 2d 112, ***129; 1985 U.S. LEXIS 126 Especially where Congress has sanctioned the barriers to L Ed Index to Annos, Banks; Equal Protection of the commerce that fostering of local industries might Laws engender, this Court has no authority under the Equal Protection Clause to invalidate classifications designed to ALR Quick Index, Banks and Banking; Equal Protection encourage local businesses because of their special of Law contributions. Today's opinion is consistent with the Federal Quick Index, Banks; Equal Protection of the longstanding doctrine that the Equal Protection Clause Laws permits economic regulation that distinguishes between groups that are legitimately different -- as local Annotation References: institutions so often are -- in ways relevant to the proper goals of the State. Jurisdiction of United States Courts of Appeals to review agency action under 9 of Bank Holding Company Act (12 REFERENCES USCS 1848). 40 ALR Fed 593. 10 Am Jur 2d, Banks 16, 27; 54 Am Jur 2d, Monopolies, Restraints of Trade, and Unfair Trade Practices 418 et Construction and application of Bank Holding Company seq. Act provision that application for approval to acquire control of bank shall be deemed granted if Federal 4 Federal Procedure, L Ed, Banking and Financing 8:754 Reserve Board does not act on application within 91 days et seq. (12 USCS 1842(b)). 38 ALR Fed 913. 12 USCS 1842(d) Who is "party aggrieved" under 9 of Bank Holding Company Act (12 USCS 1848), which allows any party US L Ed Digest, Banks 3.5; Commerce 113; aggrieved by Federal Reserve Board order under Act to Constitutional Law 409; States, Territories, and obtain judicial review. 36 ALR Fed 349. Possessions 59 Page 1 THE PEOPLE, Petitioner, v. BOARD OF SUPERVISORS OF THE COUNTY OF CALAVERAS et al., Respondents Civ. No. 4783 COURT OF APPEAL OF CALIFORNIA, THIRD APPELLATE DISTRICT 126 Cal. App. 670; 15 P.2d 209; 1932 Cal. App. LEXIS 600 October 7, 1932, Decided SUBSEQUENT HISTORY: [***1] A Petition for a Constitution made lands belonging to the State exempt Rehearing of this Cause was Denied by the District Court from taxation. The State argued that Cal. Pol. Code § of Appeal on November 5, 1932, and an Application by 3408a provided that when the State acquired property and Respondents to have the Cause Heard in the Supreme there had been an assessment made against the property Court, after Judgment in the District Court of Appeal, which became a lien on the property, the officer who had was Denied by the Supreme Court on December 2, 1932. custody of the record of the lien had to cancel the lien because the property was now public property that was PRIOR HISTORY: PROCEEDING in Mandamus to exempt from taxation. The court agreed with the State's compel the Board of Supervisors of Calaveras County to contention and held that it was the duty of the board to cancel an assessment of taxes assessed against land cancel the assessment. The court overruled the demurrer acquired by the state for park purposes. to the petition and issued the writ of mandamus. DISPOSITION: Peremptory writ granted. OUTCOME: The court granted the peremptory writ. CASE SUMMARY: CORE TERMS: cancellation, canceled, supervisors, county purposes, taxation, acquisition, exempt, ownership, levy, writ of mandate, power of taxation, PROCEDURAL POSTURE: Petitioner, the People of exemptions, directing, lands belonging, fiscal year, the State of California, brought a proceeding against satisfactory proof, vesting, deeded, levied, lesser, merger, respondents, the Board of Supervisors of the County of bare, void, surrendered, complying, prayed Calveras, to compel the board to cancel an assessment of taxes made against land acquired by the State for park LexisNexis(R) Headnotes purposes. OVERVIEW: The State of California acquired property which was encumbered by a tax lien filed by the board of supervisors of the county. The State filed a petition with Governments > State & Territorial Governments > the court to secure a writ of mandamus to order the board Property to cancel the assessment made against the property Tax Law > State & Local Taxes > Personal Property because the property was exempt from taxation under the Tax > Exempt Property > General Overview provisions of Cal. Const. art. XIII, § 1. That section of the [HN1] Under the provisions of Cal. Const. art. XIII, § 1 Page 2 126 Cal. App. 670, *; 15 P.2d 209, **; 1932 Cal. App. LEXIS 600, ***1 lands belonging to the state are exempt from taxation. (3) Id.--Constitutional Law--Exemptions--Cancellation of Assessments. -- --Section 3804a of the Political Code, which provides Governments > Local Governments > Administrative that assessments on land acquired by the state after the Boards time a tax or assessment becomes a lien thereon may be Governments > Local Governments > Finance canceled, is not in conflict with section 6 of article XIII Tax Law > State & Local Taxes > Real Property Tax > of the Constitution or with section 12 of article XI; and in Assessment & Valuation > General Overview this proceeding, where it was shown that there had been a [HN2] Cal. Pol. Code § 3408 provides, in part, that when compliance with section 3804 of the Political Code, the property is acquired and owned by the state, county, city, state was entitled to a writ of mandate to compel etc., and that prior to such ownership there had been an cancellation of the assessment. assessment of said property, which at the time of said assessment became a lien, and which because of such SYLLABUS public ownership is not subject to sale for delinquent taxes, the assessment may, upon satisfactory proof The facts are stated in the opinion of the court. thereof, be canceled by the officer having custody of the record thereof upon the order of the Board of COUNSEL: U. S. Webb, Attorney-General, and Neil Supervisors, or other governing board with the written Cunningham and Jess Hession, Deputies consent of the district attorney, city attorney, or other Attorney-General, for Petitioner. legal adviser of said board. Section 3408 further provides that no cancellation should be made of such charges on Virgil M. Airola, District Attorney, for Respondents. property exempt from taxation in event of failure to comply with this law, if any, relative to manner of JUDGES: JAMISON, J., pro tem. Plummer, Acting P. J., claiming exemptions. and Thompson (R. L.), J., concurred. OPINION BY: JAMISON Real Property Law > Nonmortgage Liens > Tax Liens Tax Law > State & Local Taxes > Administration & OPINION Proceedings > Tax Liens Tax Law > State & Local Taxes > Personal Property [*670] [**209] JAMISON, J., pro tem. This Tax > Exempt Property > General Overview proceeding is based upon a petition for a writ of mandate [HN3] There has been the enactment of a law providing requiring the defendants, constituting the Board of for the cancellation of a lien for taxes attaching prior to Supervisors, to make an order directing the officer having the acquisition of the premises by the state. This law is charge of the records thereof to cancel an assessment of contained in Cal. Pol. Code § 3804a, and it is not in taxes assessed against land now [*671] owned by the violation of the Constitution. state of California, and acquired by it for park purposes. HEADNOTES [***2] The said petition sets forth, in substance, the following facts: That the above-named defendants are the CALIFORNIA OFFICIAL REPORTS HEADNOTES duly elected and qualified supervisors of said county of Calaveras; that the Park Commission is a duly authorized (1) Taxation--Exemptions--Public Lands. -- --Under body created by act of the legislature of this state for the the provisions of section 1 of article XIII of the purpose, among other purposes, of acquiring real estate Constitution, lands belonging to the state are exempt for park purposes; that petitioner is now the owner of, from taxation. and ever since the 23d of June, 1931, has been the owner of certain lands described in its petition; that said lands (2) Id.--Assessments--Liens--Public Lands. -- --Where were acquired from one Whitesides by deed dated June the state acquires land for park purposes after the lien for 24, 1931; that for the fiscal year 1931-32 the county taxes thereon has attached, the assessment or tax may be assessor of said county assessed the said lands for canceled by complying with the requirements of section taxation; 3804 of the Political Code. Page 3 126 Cal. App. 670, *671; 15 P.2d 209, **209; 1932 Cal. App. LEXIS 600, ***2 That on or about the fifth day of November, 1931, there had been an assessment of said property, which at application was made by the said Park Commission to the time of said assessment became a lien, and which said Board of Supervisors for the cancellation of said because of such public ownership is not subject to sale assessment and levy upon said property for the fiscal year for delinquent taxes, the assessment may, upon 1931-32; that with said application petitioner presented satisfactory proof thereof, be canceled by the officer satisfactory proof to said Board of Supervisors that said having custody of the record thereof upon the order of the lands had been deeded to the state of California; that said Board of Supervisors, or other governing board with the application for cancellation of said tax was made upon written consent of the district attorney, city attorney, or the ground that said property was exempt from taxation other legal adviser of said [***5] board. under the provisions [***3] of section 1, article XIII, of the state Constitution, and that said assessment should be This section further provides that no cancellation canceled under the provisions of section 3804a of the should be made of such charges on property exempt from Political Code; taxation in event of failure to comply with this law, if any, relative to manner of claiming exemptions. That on June 14, 1932, the attorney-general, acting in place of the district attorney, under section 470 of the Respondent relies upon the case of Santa Monica v. Political Code, gave his consent in writing to the making Los Angeles County, 15 Cal. App. 710 [115 P. 945, 946]. of [**210] an order by said Board of Supervisors In that case there had been assessment of land for county directing that the said taxes be canceled; that the said purposes and the lien of said assessment had attached board has failed and refused to order the cancellation of before the city acquired ownership. The city paid the said taxes. taxes so assessed and then brought suit against the county of Los Angeles. Judgment was rendered in favor of the Upon the filing of this petition an alternative writ of city and upon appeal the court in reversing it used the mandate was issued directing the said Board of following language: "Under the law, counties are Supervisors to make said order or show cause why the authorized to levy taxes for certain school and county same should not be done. Thereupon the said defendants purposes, and when collected the taxes are so applied; demurred to said petition upon the ground that it failed to with reference to such matters the city may not exercise state facts sufficient to constitute a cause of action and any right. Plaintiff by its organization as a part of the warranted the relief prayed for. Defendant also filed a state government has not been [*673] vested with power verified answer to the petition in which it is alleged that to aid the state in connection with county government or prior to the acquisition of said land by plaintiff, that is to school government under the control of the county say, prior to June 23, [*672] 1931, one Whitesides was authorities. The taxes so levied upon the property were the owner thereof and had been such owner for many levied and assessed by the county [***6] for purposes years, and was such owner when the lien for said tax had within its jurisdiction. The bare acquisition of the attached and become fixed. [***4] And upon premises upon which the tax levy attached did not carry information and belief alleged that at the time the owner with it any interest or estate in the lien therein created for thereof deeded the said land to plaintiff, the said owner county purposes. There was, therefore, no vesting of any obligated himself to pay all taxes and liens then existing lesser estate, held in the same right or otherwise, through against said land. which a merger could be said to result. The plaintiff, when it acquired this land, took it subject to the lien for (1) It must be conceded that [HN1] under the county purposes to the same extent as would a private provisions of section 1 of article XIII of the Constitution purchaser." lands belonging to the state are exempt from taxation. No mention is made in said decision of section 3804a (2) The question then for determination is whether of the Political Code. or not a tax on lands acquired by the state after the lien for taxes thereon has attached can be canceled by As a matter of fact, it was not in existence at that complying with the requirements of section 3804 of the time. This decision was rendered March 8, 1911, and the Political Code. This section of said code [HN2] provides said section was enacted and became a law on June 8, in part that when property is acquired and owned by the 1911, but as then enacted it did not contain the provision state, county, city, etc., and that prior to such ownership for cancellation hereinbefore set forth, and it was not Page 4 126 Cal. App. 670, *673; 15 P.2d 209, **210; 1932 Cal. App. LEXIS 600, ***6 until the amendment of 1925 that the said provision was Respondent contends [***8] that this section of the incorporated in said section. Political Code is in violation of section 6, article XIII, of the Constitution and therefore void. This section of the (3) Respondent contends that section 3804a of the Constitution is as follows: Political Code, in so far as it provides that an assessment after the time said tax or assessment becomes a lien "The power of taxation shall never be surrendered by thereon, shall be canceled, is in conflict with article XIII, any grant or contract to which the state shall be a party." section 6, of the Constitution and, also, in conflict [***7] with article XI, section 12, of said Constitution and We find nothing in this record indicating that the therefore void. power of taxation has been surrendered by the state either by grant or contract. The facts before us show that the No authorities are cited in support of this contention power of taxation was exercised, and that by operation of except City of Santa Monica v. Los Angeles County, law, it has ceased to be a charge upon the land for the supra, which does not pass upon this question. reason that the land is now the property of the state. It is true that article XI, section 12, of the We are of the opinion that, upon the showing made Constitution vests in the county the authority to assess by petitioner, it was the duty of respondents to order the and collect taxes for county purposes, and in the instant cancellation of the said assessment. case, the assessment was made for county purposes, and as was held in Santa Monica v. Los Angeles County, The demurrer to the petition is overruled. supra, the bare acquisition by the state of the premises Let the peremptory writ issue as prayed for. upon which the assessment attached, did not carry with it any interest or estate in the lien, and therefore there was Plummer, Acting P. J., and Thompson (R. L.), J., no vesting of a lesser estate, held in the same right, concurred. through which a merger could result, but since that decision was rendered [HN3] there has been the A petition for a rehearing of this cause was denied by enactment of a law providing for the cancellation of a the District Court of Appeal on November 5, 1932, and [*674] lien for taxes attaching prior to the acquisition of an application by respondents to have the cause heard in the premises by the state. the Supreme Court, after judgment in the District Court of Appeal, was denied by the Supreme Court on This law is contained in section 3804a of the December 2, [***9] 1932. Political Code, and if it is not in violation of the Constitution, then unquestionably [**211] the petitioner has the right to have the said assessment canceled. Page 1 THE RAILROAD TAX CASES; COUNTY OF SAN MATEO v. SOUTHERN PACIFIC R. CO. Circuit Court, D. California 13 F. 722; 1882 U.S. App. LEXIS 2045; 8 Sawy. 238 September 25, 1882 CASE SUMMARY: protection, natural persons, levied, corporators, deprive, mile, state board of equalization, rolling stock, charter, constitutional provision, property of individuals, public PROCEDURAL POSTURE: Plaintiff county sued use, prescribed, uniformity, valuation, situated, state defendant railroad to recover back taxes levied on the constitutions, road-bed, supposed, railway, void railroad's property. The railroad demurred alleging that the taxes violated U.S. Const. amend. XIV because they LexisNexis(R) Headnotes were discriminatory and the railroad was not given an opportunity to contest the assessment. OVERVIEW: A county assessed taxes against a railroad's property and sued the railroad to collect and the Constitutional Law > Equal Protection > Scope of railroad demurred. The court entered judgment in favor Protection of the railroad upon the demurrer and held as follows: [HN1] Whatever acts may be imputed justly or unjustly The railroad was a person for U.S. Const. amend. XIV to the corporations, they are entitled when they enter the purposes and was entitled to have the same justice meted tribunals of the nation to have the same justice meted out out to it as that meted out to the humblest citizen no to them which is meted out to the humblest citizen. There matter what acts were attributed to it because of its power cannot be one law for them and another law for others. and wealth. Because the tax imposed a different system of assessment on the railroad than for other persons, the Constitutional Law > The Judiciary > Jurisdiction > tax violated the equal protection clause of amend. XIV Amount in Controversy and was thus unlawful and could not be collected. International Trade Law > General Overview Because the assessment under Cal. Const. art. 13 did not Tax Law > State & Local Taxes > Administration & provide for notice and opportunity to be heard on the Proceedings > General Overview assessment, the tax procedures violated the due process [HN2] The power of taxation possessed by a state may be clause of amend. XIV. exercised upon any subject within her jurisdiction, and to any extent not prohibited by the constitution of the OUTCOME: The court entered judgment in favor of a United States. It may touch property in every shape, -- in railroad on its demurrer to a county's suit to collect back its natural condition, in its manufactured form, and in its taxes on the railroad's property. various transmutations. And the amount of the taxation may be determined by the value of the property, or its CORE TERMS: taxation, railroad, notice, process of use, or its capacity, or its productiveness. It may touch law, taxed, guaranty, franchise, mortgage, deprived, equal Page 2 13 F. 722, *; 1882 U.S. App. LEXIS 2045, **; 8 Sawy. 238 business in the almost infinite forms in which it is the power to declare war, to make peace, to enter into conducted, -- in professions, in commerce, in treaties of alliance, and to regulate commerce with manufactures, and in transportation. Unless restrained by foreign nations. The question in all cases presented to a provisions of the federal constitution, the power of the federal court, where complaint is made of a tax levied by state as to the mode, form, and extent of taxation is the states, is whether there is any inhibition, express or unlimited where the subjects to which it applies are implied, in the constitution of the United States upon the within her jurisdiction. The hardship and injustice of a tax imposition of the tax. If there be, it is the duty of the levied by a state, considered with reference to its amount, court to enforce the inhibition, it matters not whom its are not subjects of federal cognizance. decision may affect, nor how great and irresponsible the power of the state may be independently of such prohibition. Administrative Law > Separation of Powers > Constitutional Controls > General Overview Constitutional Law > Supremacy Clause > General Constitutional Law > Equal Protection > Scope of Overview Protection Governments > Federal Government > General Tax Law > State & Local Taxes > Administration & Overview Proceedings > Judicial Review [HN3] There are in the very nature of the federal [HN5] The fourteenth amendment to the U.S. government, and the powers with which it is clothed, Constitution, in declaring that no state shall deny to any many prohibitions upon the taxing power of the states. person within its jurisdiction the equal protection of the Within the sphere of its action that government is laws, imposes a limitation upon the exercise of all the supreme, and no impediment to the free and full exercise powers of the state which can touch the individual or his of its power is permissible. The state cannot, therefore, property, including among them that of taxation. place any restrictions upon the agencies of the federal Whatever the state may do, it cannot deprive any one government; otherwise it might embarrass and even within its jurisdiction of the equal protection of the laws. defeat the operations of that government. The power to And by equal protection of the laws is meant equal tax involves the power to destroy; and there would be a security under them to every one on similar terms, -- in manifest repugnance in allowing one government to his life, his liberty, his property, and in the pursuit of control the constitutional measures of another happiness. It not only implies the right of each to resort, government in respect to which the latter is declared to be on the same terms with others, to the courts of the supreme. country for the security of his person and property, the prevention and redress of wrongs and the enforcement of contracts, but also his exemption from any greater Constitutional Law > Supremacy Clause > General burdens or charges than such as are equally imposed Overview upon all others under like circumstances. Unequal International Law > Authority to Regulate > General exactions in every form, or under any pretense, are Overview absolutely forbidden; and of course unequal taxation, for International Trade Law > General Overview it is in that form that oppressive burdens are usually laid. [HN4] In regard to the express prohibitions upon the It is not possible to conceive of equal protection under states contained in the federal constitution; they apply any system of laws where arbitrary and unequal taxation equally to taxation and to any other action of the state. is permissible; where different persons may be taxed on They cannot be evaded under the plea that the state their property of the same kind, similarly situated, at possesses the unrestricted power to tax. It is to no different rates. purpose to speak of the power of taxation as an attribute of state sovereignty which cannot be surrendered; that sovereignty, whatever its extent, must be exerted in Constitutional Law > Equal Protection > Scope of subordination to the prohibition of the constitution, which Protection is the supreme law of the land. Many of the attributes of Tax Law > State & Local Taxes > Administration & sovereignty which the states would possess if Proceedings > General Overview independent political communities, have been in like [HN6] To compel individuals to contribute money or manner surrendered to the federal government, such as property to the use of the public without reference to any Page 3 13 F. 722, *; 1882 U.S. App. LEXIS 2045, **; 8 Sawy. 238 common ratio, and without requiring the sum paid by one taxation; personal property to another rate. Property in piece or kind of property, or by one person, to bear any particular districts may be taxed for local purposes, while relation whatever to that paid by another, is to levy a property elsewhere may be exempt. forced contribution, not a tax, duty, or impost, within the sense of these terms as applied to the exercise of powers Constitutional Law > Involuntary Servitude by any enlightened or responsible government. [HN10] The amendment prohibiting slavery and involuntary servitude, except as a punishment for crime, Constitutional Law > Involuntary Servitude had its origin in the previous existence of African slavery. Constitutional Law > Equal Protection > Scope of But the generality of its language makes its prohibition Protection apply to slavery of white men as well as that of black Tax Law > State & Local Taxes > Administration & men; and also to serfage, vassalage, villenage, peonage, Proceedings > General Overview and every other form of compulsory labor to minister to [HN7] Absolute equality and uniformity may not be the pleasure, caprice, vanity, or power of others. attainable in practice, but an approximation to them is possible, and any plain departure from the rule will defeat Constitutional Law > Equal Protection > Scope of the tax. What is called for under a constitutional Protection provision requiring equality and uniformity in the [HN11] The court cannot limit the application of the taxation of property must be equally called for by the prohibition of the fourteenth amendment to legislation fourteenth amendment. The forced contribution from one touching members of the enfranchised race. It has a much which would follow taxation of his property without broader operation. It does not, indeed, place any limit reference to a common ratio, would be inconsistent with upon the subjects in reference to which the states may that equal protection which the amendment requires the legislate. It does not interfere with their police power. state to extent to every person within its jurisdiction. The Upon every matter upon which previously to its adoption application of the amendment to taxation has been they could act, they may still act. They can legislate now, recognized by the legislation of congress. as they always could, to promote the health, good order, and peace of the community; to develop their resources, Constitutional Law > Equal Protection > Scope of increase their industries, and advance their prosperity; but Protection it does require that in all such legislation hostile and Tax Law > State & Local Taxes > Administration & partial discrimination against any class or person shall be Proceedings > General Overview avoided; that the state shall impose no greater burdens [HN8] As the foundation of all just and equal taxation is upon any one than upon others of the community under the assessment of the property taxed, -- that is, the like circumstances, nor deprive any one of rights which ascertainment of its value, -- in order that the tax may be others similarly situated are allowed to enjoy. It forbids levied according to some ratio to the value, uniformity of the state to lay its hand more heavily upon one than upon taxation necessarily requires uniformity in the mode of another, under like conditions. It stands in the assessment as well as in the rate of taxation. Uniformity constitution as a perpetual shield against all unequal and in taxing implies equality in the burden of taxation, and partial legislation by the states, and the injustice which this equality of burden cannot exist without uniformity in follows from it, whether directed against the most humble the mode of assessment as well as in the rate of taxation. or the most powerful; against the despised laborer from China, or the envied master of millions. Tax Law > State & Local Taxes > Administration & Proceedings > General Overview Business & Corporate Law > Corporate Names > Tax Law > State & Local Taxes > Personal Property Requirements Tax > Exempt Property > General Overview Business & Corporate Law > Corporations > Formation Tax Law > State & Local Taxes > Real Property Tax > > Corporate Existence, Powers & Purpose > General General Overview Overview [HN9] Property may be classified for purposes of Constitutional Law > Equal Protection > Scope of taxation. Real property may be subjected to one rate of Protection Page 4 13 F. 722, *; 1882 U.S. App. LEXIS 2045, **; 8 Sawy. 238 [HN12] Whenever a provision of the constitution, or of a > Corporate Existence, Powers & Purpose > General law, guaranties to persons the enjoyment of property, or Overview affords to them means for its protection, or prohibits Constitutional Law > Relations Among Governments > legislation injuriously affecting it, the benefits of the Privileges & Immunities provision extend to corporations, and that the courts will Constitutional Law > Privileges & Immunities always look beyond the name of the artificial being to the [HN15] Nor do all the privileges and immunities of individuals whom it represents. citizenship attach to corporations. These bodies have never been considered citizens for any other purpose than the protection of the property rights of the corporators. Constitutional Law > Bill of Rights > Fundamental The status of citizenship, entitling the citizen to certain Rights > Procedural Due Process > Scope of Protection privileges and immunities in the several states, does not Criminal Law & Procedure > Grand Juries > belong to corporations. The special privileges which Indictments > Right to Indictment by Grand Jury citizens acquire by becoming incorporated in one state Criminal Law & Procedure > Accusatory Instruments > cannot, therefore, be exercised in another state without Indictments > General Overview the latter's consent, although such consent will generally [HN13] See U.S. Const. amend. V. be presumed in the absence of positive prohibition. Business & Corporate Law > Corporations > Business & Corporate Law > Corporations > Formation Shareholders > Disregard of Corporate Entity > > Corporate Existence, Powers & Purpose > General General Overview Overview Constitutional Law > Bill of Rights > Fundamental Civil Rights Law > Contractual Relations & Housing > Rights > Eminent Domain & Takings General Overview Constitutional Law > Bill of Rights > Fundamental Constitutional Law > Equal Protection > Scope of Rights > Procedural Due Process > Scope of Protection Protection [HN14] To deprive a corporation of its property, or to [HN16] The term "person" includes, or may include, burden it, is, in fact, to deprive the corporators of their corporations; which amounts to what we have already property or to lessen its value. Their interest, undivided said, that whenever it is necessary for the protection of though it be, and constituting only a right during the contract or property rights, the courts will look through continuance of the corporation to participate in its the ideal entity and name of the corporation to the dividends, and on its dissolution to receive a persons who compose it, and protect them, though the proportionate share of its assets, has an appreciable value, process be in its name. All the guaranties and safeguards and is property in a commercial sense, and whatever of the constitution for the protection of property affects the property of the corporation necessarily affects possessed by individuals may, therefore, be invoked for the commercial value of their interests. If, for example, to the protection of the property of corporations. And as no take the illustration given by counsel, a corporation discriminating and partial legislation, imposing unequal created for banking purposes acquires land, notes, stocks, burdens upon the property of individuals, would be valid bonds, and money, no stockholder can claim that he owns under the fourteenth amendment, so no legislation any particular item of this property, but he owns an imposing such unequal burdens upon the property of interest in the whole of it which the courts will protect corporations can be maintained. against unlawful seizure or appropriation by others, and on the dissolution of the company he will receive a proportionate share of its assets. Now, if a statute of the Tax Law > State & Local Taxes > Personal Property state takes the entire property, who suffers loss by the Tax > General Overview legislation? Whose property is taken? Certainly, the [HN17] See Cal. Const. art. 13, § 10. corporation is deprived of its property; but at the same time, in every just sense of the constitutional guaranty, Tax Law > State & Local Taxes > Administration & corporations are also deprived of their property. Proceedings > General Overview [HN18] The presentation to a state board by a corporation Business & Corporate Law > Corporations > Formation of a statement of its property and of its value, which it is Page 5 13 F. 722, *; 1882 U.S. App. LEXIS 2045, **; 8 Sawy. 238 required to furnish, is not the equivalent to a notice of the the valuation committed by the officers. Notice to him assessment made and of an opportunity to be heard will be deemed sufficient, if the time and place of hearing thereon. It is a preliminary proceeding, and until the be designated by statute. But whatever the character of assessment the corporation cannot know whether it will the proceeding, and whether it takes property directly, or have good cause of complaint. No hearing upon the creates a charge or liability which may be the basis of statement presented is allowed, and when the assessment taking it, the law directing the proceeding must provide is made the matter is closed; no opportunity to correct for some kind of notice, and offer to the owner an any errors committed is provided. The presentation of the opportunity to be heard, or the proceeding will want the statement can no more supersede the necessity of essential ingredient of due process of law. Nothing is allowing a subsequent hearing of the owners, than the more clearly established by a weight of authority filing of a complaint in court can dispense with the right absolutely overwhelming than that notice and opportunity of the suitor and his contestant to be there heard. to be heard are indispensable to the validity of the proceeding. Constitutional Law > Bill of Rights > Fundamental Rights > Procedural Due Process > Scope of Protection Tax Law > State & Local Taxes > Personal Property [HN19] The provision in the fourteenth amendment is in Tax > General Overview the form of an interdict upon the states -- Nor shall any Torts > Transportation Torts > Rail Transportation > state deprive any person of life, liberty, or property General Overview without due process of law. And by due process is meant [HN21] Cal. Const. art. 13 is not intended to make any one which, following the forms of law, is appropriate to change in the powers or rights of corporations under the the case, and just to the parties to be affected. It must be laws of the state. It treats entirely of revenue and taxation, pursued in the ordinary mode prescribed by the law; it and of the rules which shall govern the assessment of the must be adapted to the end to be attained; and it must property of individuals, and of railroad and other quasi give to the party to be affected an opportunity of being public corporations. It is in another article that provisions heard respecting the justice of the judgment sought. are made for the control of railroad corporations; and the Without these conditions entering into the proceeding, it duties and responsibilities of corporations generally, and would be anything but due process. If it touched life or the power of the state over them, are declared. liberty, it would be wanton punishment, or rather wanton cruelty. Business & Corporate Law > Corporations > Formation > Corporate Existence, Powers & Purpose > General Civil Procedure > Eminent Domain Proceedings > Overview General Overview Constitutional Law > Supremacy Clause > General Constitutional Law > Bill of Rights > Fundamental Overview Rights > Procedural Due Process > Scope of Protection [HN22] The state, in the creation of corporations, or in Tax Law > State & Local Taxes > Administration & amending their charters, or rather in passing or amending Proceedings > General Overview general laws under which corporations may be formed [HN20] In the taking of property by taxation the and altered, possesses no power to withdraw them when proceeding is more summary and stringent. The created, or by amendment, from the guaranties of the necessities of revenue for the support of government will federal constitution. not admit of the delays attendant upon judicial proceedings in the courts of justice. The statute fixes the Business & Corporate Law > Corporations > Formation rate of taxation upon the value of the property, and > Corporate Existence, Powers & Purpose > General appoints officers to estimate and appraise the value. Due Overview process of law in the proceeding is deemed to be pursued, Constitutional Law > Congressional Duties & Powers > when, after the assessment is made by the assessing Contracts Clause > General Overview officers upon such information as they may obtain, the Governments > Legislation > Expirations, Repeals & owner is allowed a reasonable opportunity, at a time and Suspensions place to be designated, to be heard respecting the [HN23] The charter of a private corporation is a contract correctness of the assessment, and to show any errors in Page 6 13 F. 722, *; 1882 U.S. App. LEXIS 2045, **; 8 Sawy. 238 between the corporators and the state, and that it is, had under the provisions of the constitution of California, therefore, within the prohibition of the federal adopted in 1879, which in that respect are in conflict with constitution against the impairment of contracts. To avoid the fourteenth amendment of the constitution of the this result the states have generally inserted clauses in United States. their constitutions reserving a right to repeal, alter, or amend charters granted by their legislatures, or to repeal, By the constitution of California, all property in the alter, or amend the general laws under which state, not exempt under the laws of the United States, is, corporations are allowed to be formed. The reservation with certain exceptions, to be taxed in proportion to its relates only to the contract of incorporation, which, value, to be ascertained as prescribed by law; but in the without such reservation, would be irrepealable. It ascertainment of its value as a basis for taxation, a removes the impediment to legislation touching the distinction is made between the property owned by contract. It places the corporation in the same position it individuals and that owned by railroad corporations. By would have occupied had the supreme court held that the thirteenth article, "a mortgage, deed of trust, or other charters are not contracts, and that laws repealing or obligation by which a debt is secured, is treated, for the altering them did not impair the obligation of contracts. purposes of assessment and taxation, [*728] "as an The property of the corporation, acquired in the exercise interest in the property affected thereby," and, "except as of its faculties, is held independently of such reserved to railroad and other quasi public corporations," the value power, and the state can only exercise over it the control of the property affected, less the value of the security, is which it exercises over the property of individuals to be assessed and taxed to its owner, and the value of the engaged in similar business. security is to be assessed and taxed to its holder. Section 4. But by the same article "the franchise, road-way, COUNSEL: [**1] A. L. Rhodes, A. L. Hart, Atty. Gen., road-bed, rails, and rolling stock of all railroads operated and Tolles and Ware, Dist. Attys., for plaintiff. in [**3] more than one county" are to be assessed at their actual value, and apportioned to the counties, cities, and Creed Haymond, J. Norton Pomeroy, T. I. Bergin, and T. districts in which the roads are located in proportion to B. Bishop, for defendants. the number of miles of rail-way laid therein. No deduction from this value is allowed for any mortgages OPINION BY: FIELD on the property. OPINION By the constitution there is also a different system of assessment provided for "the franchise, road-way, [*727] FIELD, Justice. This action is brought to road-bed, rails, and rolling stock" of railroads operated in recover of the Southern Pacific Railroad Company, a more than one county from that provided for other corporation formed under the laws of California, certain property. The assessment of other property is to be made state and county taxes levied upon its property for the in the county, city, or district in which it is situated in the fiscal year of 1881 and 1882, alleged to be due to the manner prescribed by law; and the supervisors of each plaintiff, with 5 per cent. added for their non-payment, county constitute a board of equalization of the taxable and interest. It was commenced in one of the superior property of the county, and must act upon prescribed courts of the state, and, on application of the defendant, rules of notice to its owners. A state board of was removed to this court. equalization is also created to equalize the valuation of the taxable property of the several counties, so that The railroad company, besides a general denial of the equality may be preserved between the tax-payers of the allegations of the complaint, sets up as a special answer different localities, and its action in this respect must to the action that in the assessment of its property, likewise be upon prescribed rules of notice. according to which the taxes claimed were levied, an unlawful and unjust discrimination was made between its The assessment of the franchise, road-way, road-bed, property and the property of individuals, to its rails, and rolling stock of railroads [**4] operated in disadvantage, subjecting it to an unequal share of the more than one county in the state is to be made by this public burdens, and that it was not afforded an state board. And in making it, the board is not required to opportunity of being heard respecting the assessment, and give any notice to the owners, nor is any provision made that such discrimination was [**2] made and proceeding Page 7 13 F. 722, *728; 1882 U.S. App. LEXIS 2045, **4; 8 Sawy. 238 for affording them an opportunity to be heard respecting the valuation of its property for the mortgage thereon, and the valuation of their property. The tenth section of the was thus subjected to an unjust proportion of the public article which confers this power of assessment has been burdens, and denied the equal protection of the laws held by the supreme court of the state to be guarantied by the fourteenth amendment of the federal self-executing, requiring no legislation for its constitution; and (2) because the assessment was made in enforcement. pursuance of provisions of the state constitution, which gave no notice to the company, and afforded it no The defendant, as already stated, is a corporation opportunity to be heard respecting the value of the formed under the laws of the state, and operates a railroad property, or for the correction of any errors of the board, through several counties. The entire length of its road in thus depriving it of its property without due process of the state is a little over 711 miles, of which twenty-five law guarantied by that amendment. miles and one-tenth of a mile pass through the county of San Mateo. Its principal place of business is at San The plaintiff, on the other hand, contends: Francisco. Its stockholders are, and always have been, citizens of the United States, some of whom are residents (1) That the power of taxation possessed by the state of this state, and some of other states. Previously to is unlimited, except by the constitution of the United January 1, 1881, it was indebted to different citizens of States, and that its exercise cannot be assailed in a federal the United States, many of them residents of this [*729] court, either for the hardship or injustice of the tax levied; state, in large sums, advanced to construct and equip the (2) that the classification of property for taxation, and the road; and to secure this indebtedness it executed, [**5] [**7] apportionment of taxes according to such prior to that date, a mortgage upon its road, its franchise, classification, are not forbidden by the constitution of the and its rolling stock and appurtenances, and also upon a United States, and that within this principle the taxes on large number of tracts of land situated in different the property of the railroad company were lawfully counties. The indebtedness secured exceeds $3,000 a imposed; (3) that the fourteenth amendment of the mile of the road, no part of which, except the accruing constitution of the United States was adopted to protect interest, has been paid; the whole remains a valid and the newly-made citizens of the African race in their subsisting obligation of the company. freedom, and [*730] should not be extended beyond that purpose; (4) that corporations are not persons within the In the fiscal year of 1881 and 1882, the state board of meaning of that amendment; (5) that the statute fixing the equalization assessed the franchise, road-way, road-bed, sessions of the state board of equalization, and requiring a rails, and rolling stock of the defendant at $11,739,915, -- statement in writing from the defendant of the amount that is, at the rate of $16,500 per mile, -- and apportioned and value of its property, afforded all the notice and to the county of San Mateo $414,150. Upon the amount hearing essential to the validity of the assessment made; thus apportioned the taxes were levied for which the and (6) that the provisions of article 13 of the present action is brought. In the assessment no deduction constitution, as to the taxation of railroad property, are to was allowed for the mortgage, but the property was be treated as conditions upon the continued existence of assessed at its entire value independently of the railroad corporations. mortgage. Nor was any notice given to the company by the board of its action, nor was any opportunity allowed We do not state the positions of the several counsel the company to be heard respecting the assessment. who argued the case in their precise language, for they These facts are admitted by the demurrer, and the validity were presented in various forms, but we give their of the defense rests upon the application of the law to substance and purport. them. The questions thus presented for our determination The railroad company contends that the [**6] taxes [**8] are of the greatest magnitude and importance. The are invalid and void on two grounds: answer to them concerns not merely the railroad corporations of this state, but all corporations other than (1) Because the assessment, according to which they municipal within the United States. It is of the highest were levied, was made in pursuance of the discriminating interest to them all to know whether their property is provisions of the state constitution, in the enforcement of subject to the same rules of assessment and taxation to which the company was not allowed any deduction from which the property of individuals is subject, or whether it Page 8 13 F. 722, *730; 1882 U.S. App. LEXIS 2045, **8; 8 Sawy. 238 can be separated and distinguished from that of language to the affect that the state's power of taxation is individuals and made liable to such different burdens in without limitation; language which may be correct when the way of taxation as the state may choose to impose. applied to the special facts of the cases in which it is The questions have been argued with great ability and used, but which should always be read with a reservation learning by distinguished counsel on both sides, and they that the exercise of the power does not conflict with any have received from the court the most patient and of the inhibitions of the federal constitution. thoughtful examination. Indeed, their examination has been accompanied with a painful anxiety to reach a right [HN3] There are in the very nature of the federal conclusion, aware as the court is of the opinion prevailing government, and the powers with which it is clothed, throughout the community that the railroad corporations many prohibitions upon the taxing power of the states. of the state, by means of their great wealth and the Within the sphere of its action that government is numbers in their employ, have become so powerful as to supreme, and no impediment to the free and full exercise be disturbing influences in the administration of the laws; of its power is permissible. The state cannot, therefore, an opinion which will be materially strengthened by a place [**11] any restrictions upon the agencies of the decision temporarily relieving any one [**9] of them federal government; otherwise it might embarrass and from its just proportion of the public burdens. That even defeat the operations of that government. It was consideration, however, cannot be allowed to affect the long ago said by Chief Justice Marshall that the power to judgment of the court. [HN1] Whatever acts may be tax involves the power to destroy; and that there would be imputed justly or unjustly to the corporations, they are a manifest repugnance in allowing one government to entitled when they enter the tribunals of the nation to control the constitutional measures of another have the same justice meted out to them which is meted government in respect to which the latter is declared to be out to the humblest citizen. There cannot be one law for supreme. When, therefore, congress had created a bank them and another law for others. of the United States as an agency in the menagement of the finances of the government, it was held that the states It is undoubtedly true that [HN2] the power of were inhibited from taxing the institution. taxation possessed by the state may be exercised upon any subject within her jurisdiction, and to any extent not "If the states," said that great judge, "may tax one prohibited by the constitution of the United States. As instrument employed by the government in the execution stated by the supreme court: "It may touch property in of its powers, they may tax any and every other every shape, -- in its natural condition, in its instrument. They may tax the mail; they may tax the manufactured form, and in its various transmutations. mint; they may tax the papers of the custom-house; they And the amount of the taxation may be determined may tax judicial process; they may tax all the means [*731] by the value of the property, or its use, or its employed by the government to an excess which would capacity, or its productiveness. It may touch business in defeat all the ends of government. This was not intended the almost infinite forms in which it is conducted, -- in by the American people. They did not design to make professions, in commerce, in manufactures, and in their government dependent on the states." McCullough transportation. Unless restrained by provisions of the v. Maryland, 4 [**12] Wheat. 432. federal constitution, the power of the state as to the mode, [*732] For like reasons the public securities of the form, and extent [**10] of taxation is unlimited where United States are exempt from taxation by the states, the subjects to which it applies are within her except so far as such taxation is permitted by congress. A jurisdiction." State Tax on Foreign-held Bonds, 15 Wall. tax imposed by the city of Charleston upon all personal 319. estate in its limits, including among other things stock of It is also undoubtedly true that the hardship and the United States, was therefore adjudged to be invalid. injustice of a tax levied by the state, considered with The court said that the tax was upon a contract between reference to its amount, are not subjects of federal the government and individuals, and therefore operated cognizance. Whether a tax upon property, subject to directly upon the power to borrow money on the credit of taxation, be 1 per cent. of its value, or 10 per cent., or 20, the United States; that if the right to impose it existed or more, is a mere matter of state discretion; a question of with the states, it was a right which in its nature policy and not of power. So we often find in the reports acknowledged no limits, and might be exercised to an Page 9 13 F. 722, *732; 1882 U.S. App. LEXIS 2045, **12; 8 Sawy. 238 extent which would seriously embarrass the government. [HN5] The fourteenth amendment to the constitution, Its existence was therefore held inconsistent with the in declaring that no state shall deny to any person within supremacy of the government in the exercise of its its jurisdiction the equal protection of the laws, imposes a granted powers. Weston v. Charleston, 2 Pet. 449. limitation upon the exercise of all the powers of the state which can touch the individual or his property, including Other illustrations might be given of implied among them that of taxation. Whatever [**15] the state inhibitions of the federal constitution to taxation by the may do, it cannot deprive any one within its jurisdiction states. The powers of the general government cannot be of the equal protection of the laws. And by equal interfered with, or their exercise embarrassed in any protection of the laws is meant equal security under them respect, by such taxation; as has often been held with to every one on similar terms, -- in his life, his liberty, his reference to attempted [**13] taxation on goods property, and in the pursuit of happiness. It not only imported, while retaining the character of imports in implies the right of each to resort, on the same terms with unbroken packages, and on goods in transit from one others, to the courts of the country for the security of his state to another. The power to regulate commerce, person and property, the prevention and redress of foreign and interstate, cannot be thus trammeled by state wrongs and the enforcement of contracts, but also his action. Brown v. Maryland, 12 Wheat. 434; Welton v. exemption from any greater burdens or charges than such State, 100 U.S. 275; Webber v. Virginia, 103 U.S. 344. as are equally imposed upon all others under like circumstances. So [HN4] in regard to the express prohibitions upon the states contained in the federal constitution; they apply Unequal exactions in every form, or under any equally to taxation and to any other action of the state. prtense, are absolutely forbidden; and of course unequal They cannot be evaded under the plea that the state taxation, for it is in that form that oppressive burdens are possesses the unrestricted power to tax. Where, for usually laid. It is not possible to conceive of equal example, a state has stipulated for a valid consideration to protection under any system of laws where arbitrary and exempt certain property from taxation, as it has been unequal taxation is permissible; where different persons repeatedly held that it may do, the stipulation cannot may be taxed on their property of the same kind, subsequently be withdrawn, and the property subjected to similarly situated, at different rates; where, for instance, taxation. The provision which secures the inviolability of one may be taxed at 1 per cent. on the value of his contracts against state legislation stands as a perpetual property, another at 2 or 5 per cent., or where one may be interdict against the imposition of the charge. It is to no thus [**16] taxed according to his color, because he purpose in such case to speak of the power of taxation as white, or black, or brown, or yellow, or according to any an attribute of state sovereignty which cannot be other rule than that of a fixed rate proportionate to the surrendered; that sovereignty, whatever its extent, [**14] value of his property. must be exerted in subordination to the prohibition of the constitution, which is the supreme law of the land. Many In the constitution of several states a provision is of the attributes of sovereignty which the states would found requiring "equality and uniformity" in the taxation possess if independent political communities, have been of property, and this is held to mean that taxes must be in like manner surrendered to the federal government, levied according to some fixed rate or rule of such as the power to declare war, to make peace, to enter apportionment, so that all persons shall pay the like into treaties of alliance, and to regulate commerce [*733] amount upon similar kinds of property of the same value. with foreign nations. The question in all cases presented As it seemed to one of the judges of the supreme court of to a federal court, where complaint is made of a tax Michigan: levied by the states, is whether there is any inhibition, express or implied, in the constitution of the United [HN6] "To compel individuals to contribute money States upon the imposition of the tax. If there be, it is the or property to the use of the public without reference to duty of the court to enforce the inhibition, it matters not any common ratio, and without requiring the sum paid by whom its decision may affect, nor how great and one piece or kind of property, or by one person, to bear irresponsible the power of the state may be independently any relation [*734] whatever to that paid by another, is of such prohibition. to levy a forced contribution, not a tax, duty, or impost, within the sense of these terms as applied to the exercise Page 10 13 F. 722, *734; 1882 U.S. App. LEXIS 2045, **16; 8 Sawy. 238 of powers by any enlightened or responsible constitutional authority to exact from one citizen the government." Woodbridge v. City of Detroit, 8 Mich. entire revenue of the commonwealth; [*735] and though 301; Burroughs, Taxation, c. 5. the distinction between constitutional [**19] taxation and the taking of private property for public use by [HN7] Absolute equality and uniformity may not be legislation might not be definable with perfect precision, attainable in practice, but an approximation [**17] to the court was clearly of the opinion that whenever the them is possible, and any plain departure from the rule property of a citizen was taken from him by the sovereign will defeat the tax. will and appropriated without his consent to the benefit of the public, the exaction could not be considered a tax What is called for under a constitutional provision unless similar contributions were made by the public requiring equality and uniformity in the taxation of itself, or rather exacted by the same public will from such property must be equally called for by the fourteenth constituent members of the same community as own the amendment. The forced contribution from one which same kind of property; and that, though there may be a would follow taxation of his property without reference discrimination in the subjects of taxation, still persons of to a common ratio, would be inconsistent with that equal the same class, and property of the same kind, must protection which the amendment requires the state to generally be subjected alike to the same common burden. extent to every person within its jurisdiction. 9 Dana, (Ky.) 513. The application of the amendment to taxation has In State v. Township of Readington the supreme been recognized by the legislation of congress. Soon court of New Jersey said: after the adoption of the constitutional amendment, abolishing slavery and involuntary servitude, measures "Taxation operates upon a community, or a class in a were proposed to give practical freedom to the community, according to some rule of apportionment. emancipated race, which resulted in the passage of the When the amount levied upon individuals is determined civil-rights act. This act gave citizenship to persons of without regard to the amount or value exacted from any that race, and then declared that citizens of the United other individual or classes of individuals, the power States of every race and color, without regard to any exercised is not that of taxation, but of eminent domain. previous condition of slavery or involuntary servitude, A tax upon the persons or property [**20] of A., B., and should have the same right in every state and territory to C. individually, whether designated by name or in any make and enforce contracts, to sue, be parties, and give other way, which is in excess of an equal apportionment evidence, to inherit, purchase, lease, [**18] sell, own, among the persons, or property of the class of persons or and convey real and personal property, and to the full and kind of property subject to the taxation, is to the extent of equal benefit of all laws and proceedings for the security such excess, the taking of private property for a public of person and property, as is enjoyed by white citizens, use without compensation. The process is one of and should be subject to like punishments, pains, and confiscation, and not of taxation." 36 N.J. Law, 70. penalties, and to none other. After the adoption of the fourteenth amendment, congress re-enacted this act, and [HN8] As the foundation of all just and equal to the clause that all persons within the jurisdiction of the taxation is the assessment of the property taxed, -- that is, United States should enjoy the same rights as white the ascertainment of its value, -- in order that the tax may citizens, and be subject only to like punishments, pains, be levied according to some ratio to the value, uniformity and penalties, it added, and subject only to like "taxes, of taxation necessarily requires uniformity in the mode of licenses, and exactions of every kind, and to no other." assessment as well as in the rate of taxation; or, to quote Rev. St. § 1977. the language of the supreme court of Ohio expressing the same thought: "Uniformity in taxing implies equality in The adjudications as to the meaning of the rule of the burden of taxation, and this equality of burden cannot equality and uniformity to be observed in taxation, may, exist without uniformity in the mode of assessment as therefore, be properly referred to in construing the well as in the rate of taxation." Exchange Bank of requirement of the fourteenth amendment, when it is Colunbus v. Hines, 3 Ohio St. 1. invoked with respect to burdens imposed by taxation. In Lexington v. McQuillan's Heirs the supreme court of If we now look at the scheme of taxation prescribed Kentucky said that the legislature of the state had no by the constitution of California for the property of Page 11 13 F. 722, *735; 1882 U.S. App. LEXIS 2045, **20; 8 Sawy. 238 railroad companies, we shall [**21] perceive a flagrant the valuation of his personal property, except so much as departure from the rule of equality and uniformity so consisted of those shares, taxed the shares at a greater essential to equality in the distribution of the burdens of rate than other moneyed capital. government. Whenever an individual holds property incumbered with a mortgage he is assessed at its value, The assessment thus held to be a discrimination after deducting [*736] from it the amount of the against the shares of national banks in the taxation system mortgage. If a railroad company holds property subject to of New York is similar to what we hold to be a a mortgage, it is assessed at its full value, without any discrimination against the property of railroad deduction for the mortgage; that is, as though the corporations in the taxation system of California. property were unincumbered. The inequality and [*737] In the case of the Evansville Bank v. Britton, discriminating character of the procedure will be apparent decided at the last term of the supreme court, the doctrine by an illustration given by counsel. Suppose a private of the Weaver Case was affirmed, and it was held that the person owns a farm which is valued at $100,000, and is taxation of shares in the national banks, under the incumbered with a mortgage amounting to $80,000: he is, revenue laws of Indiana, without permitting the in that case, assessed at $20,000; if the rate of taxation be shareholder to deduct from their assessed value the 2 per cent. he would pay $400 taxes. If a railroad amount of his bona fide indebtedness, which was allowed corporation owns an adjoining tract worth $100,000, in the case of other investments of moneyed capital, was which is also incumbered by a mortgage for $80,000, it a discrimination against the act of congress and illegal. would be assessed for $100,000, and be required to pay 105 U.S. 322. $2,000 taxes, or five times as much as the private person. There is here a discrimination too palpable and gross to It is no answer to this discrimination to say that be questioned, and such is the nature of the property in the state may be divided into [**24] classes, discrimination made against [**22] the Southern Pacific and different rates prescribed for them. Undoubtedly Railroad Company in the taxation of its property. [HN9] property may be classified for purposes of Nothing can be clearer than that the rule of equality and taxation. Real property may be subjected to one rate of uniformity is thus entirely disregarded. taxation; personal property to another rate. Property in particular districts may be taxed for local purposes, while The case of People v. Weaver, 100 U.S. 539, decided property elsewhere may be exempt. Taxation on business by the supreme court, respecting the taxation of shares of in the form of licenses may also vary according to the the national banks, may be cited in this connection. calling or occupation licensed, and the extent of business Without the permission of congress, the shares of these transacted, but even then there must be uniformity of banks could not be taxed by the states. Congress gave the charges with respect to the same calling or occupation in permission on condition that the taxation should not be at the same locality. It is, however, only with the taxation a greater rate than is assessed on other moneyed capital in of property that we are concerned in this case, and the the hands of individual citizens of the state, and that the whole object of classifying property is that each class shares owned by non-residents of the state should be may be subjected to a special rate of taxation. There is no taxed at the place where the bank is located. Rev. St. § difference in the rate prescribed by the law of the state for 5219. In the case cited the court held, with regard to such the property of railroad corporations, and the rate taxation: prescribed for the property of individuals. There is only (1) That the prohibition imposed by congress against one rate for all property. There is, therefore, no case discrimination had reference to the entire process of presented for the application of the doctrine of assessment, and included the valuation of the shares as classification. The discrimination complained of arises well as the rate of percentage charged; (2) that a statute of from the different rule adopted in ascertaining the value New York which established a mode of assessment by of the property [**25] of railroad corporations as a basis which such shares were valued higher in proportion to for taxation, not from any different rate of taxation when their real value than other moneyed capital, [**23] was the value is established. In all taxes upon property, in conflict with the prohibition, although the same whatever its form or nature, the property is taken as percentage on such valuation was levied; and (3) that a representing a pecuniary value; as standing for so much statute which permitted a party to deduct his debts from money invested. The tax is the rate per centum of this Page 12 13 F. 722, *737; 1882 U.S. App. LEXIS 2045, **25; 8 Sawy. 238 pecuniary value. The value being ascertained, the law "They were in some states forbidden to appear in the fixes the rate. The ground of complaint here is that the towns in any other character than as menial servants. law requires a higher value to be placed upon the They were required to reside on and cultivate the soil defendant's property than upon the property of without the right to purchase or own it. They were individuals similarly incumbered, or rather requires the excluded from many occupations of gain and hire, and assessor of the defendant's property, in estimating its were not permitted to give testimony in the courts in any value, to disregard and set aside certain elements case where a white man was a party. It was said that their materially affecting its amount, which are to be lives were at the mercy of bad men, either because the considered in estimating the value of the property of laws for their protection were inefficient, or were not individuals. It is not classifying property to make this enforced." 16 Wall. 70. distinction in determining its value. It [*738] is not classifying property to provide that the property of certain There was probably much exaggeration in what was parties, which has a mortgage upon it, shall be assessed at reported of their treatment, but the statements made its value after deducting the mortgage; and that the produced a profound impression upon congress. The property of other parties, also having a mortgage upon it, validity of the [**28] civil-rights act was also [*739] shall be taxed at its full value without any deduction. called in question, and in some instances was adjudged [**26] That is not providing for a different rate of by state courts to be invalid. Reports also prevailed that taxation for different kinds of property, but for unequal loyal men of the south were treated with exceptional taxation according to the character of the owner. harshness, and that men from the north seeking residence there were met with marked hostility and aversion. It is Is the defendant, being a corporation, a person within not surprising that such was the fact, for notwithstanding the meaning of the fourteenth amendment, so as to be the fiery courage and martial spirit of her people, their entitled, with respect to its property, to the equal battalions had gone down before the forces of the Union. protection of the laws? The learned counsel of the With the sound of the tread of the victorious army still plaintiff, and attorney general of the state, take the ringing in their ears; with the desolations of was all negative of this question, and assert with much around them, and the sudden rupture of their social earnestness that the amendment applies, and was intended relations by the emancipation of their former slaves, -- it to apply, only to the newly-made citizens of the African would have been a miracle if bitterness towards their race, and should be limited to their protection. recent foes had not lingered in their hearts and been exhibited in their conduct. A proud and brave people feel It is undoubtedly true that the amendment had its more keenly than others the sting of defeat. Undoubtedly origin in a purpose to secure to these newly-made citizens much misconception and falsehood were mingled with the full enjoyment of their freedom. When the the statements made respecting their action; nevertheless amendment abolishing slavery and involitary servitude they led to the introduction into congress of the was adopted, there were men in congress who believed proposition for the fourteenth amendment. The discussion that it was intended to make every one born within the which followed, indicated that the purpose [**29] of its United States a freeman, and as such to give to him the framers and advocates was to obviate objections to right to pursue his happiness, in the ordinary vocations of legislation similar to that contained in the first section of life, subject to no restraint except such as affects others, the civil-rights act, and to prevent for the future the and to enjoy equally with them the fruits of his labor. possibility of any discriminating and hostile state They therefore [**27] proposed the civil-rights bill, and legislation against any one. secured its passage, the substantial provisions of which we have stated. Notwithstanding this expression of the Mr. Stevens, of the house of representatives, in national legislature as to the purpose of the amendment, presenting the proposition, after stating the provisions of the newly-made citizens were subjected in several of the the first section, said: states to various disabilities and burdens, and curtailed of their rights to such an extent that their freedom became of "I can hardly believe that any person can be found little value. To quote from the opinion of Mr. Justice who will not admit that every one of these provisions is Miller, speaking for the court, in the Slaughter-house just. They are all asserted in some form or other in our Cases: declaration or organic law. But the constitution limits Page 13 13 F. 722, *739; 1882 U.S. App. LEXIS 2045, **29; 8 Sawy. 238 only the action of congress, and is not a limitation on the slavery. But the generality of its language makes its states. This amendment supplies that defect, and allows prohibition apply to slavery of white men as well as that congress to correct the unjust legislation of the states so of black men; and also to serfage, vassalage, villenage, far that the law which operates upon one man shall peonage, and every other form of compulsory labor to operate equally upon all." minister to the pleasure, caprice, vanity, or power of others. In reply to an objection that the first section of the amendment was in substance the civil-rights bill, which The provision of the constitution prohibiting congress had passed over the president's veto, and that by legislation by states impairing the obligation of contracts voting to so amend the constitution as to put the bill into had its origin in the existence of tender laws, it was to admit that the bill was unconstitutional, Mr. appraisement laws, stay laws, and installment laws Garfield, then also a member of the [**30] house, said: passed by the states soon after the [**32] revolution, when their finances were embarrassed and their people "We propose to lift that great and good law above the were overwhelmed with debts. These laws, according to reach of political strife, beyond the reach of plots and Story, prostrated all private credit and all private morals, machinations of any party, and fix it in the serene sky, in and led to the adoption of the prohibition, by which such the eternal firmament of the constitution, where no storm legislation was forever prevented. But in its construction of passion can skake it and no cloud can obscure it. For the provision has not been limited to mere commercial this reason, and not because I believe the civil-rights bill contracts. In the Dartmouth College Case it was urged unconstitutional, I am glad to see that first section here." that the charter of the college was not a contract contemplated by the constitution, because no valuable [*740] Though the occasion of the amendment was consideration passed to the king as an equivalent for the the supposed denial of rights in some states to grant, and that contracts merely voluntary were not newly-made citizens of the African race, and the [*741] within the prohibition. But Chief Justice supposed hostility to Union men, the generality of the Marshall, after showing that the charter was a contract language used extends the protection of its provisions to upon a valuable consideration, said: persons of every race and condition against discriminating and hostile state action of any kind. Its "It is more than possible that the preservation of effect in preserving free institutions, and preventing harsh rights of this description was not particularly in view of and oppressive state legislation, can hardly be overstated. the framers of the constitution when the clause under When burdens are placed upon particular classes or consideration was introduced into that instrument. It is individuals, while the majority of the people are probable that interferences of more frequent recurrence, exempted, little heed may be paid to the complaints of to which the temptation was stronger and of which the those affected. Oppression thus becomes possible and mischief was more extensive, constituted the great motive lasting. But a burdensome law operating equally upon all for imposing this restriction on [**33] the state will soon create a [**31] movement for its repeal. With legislatures. But although a particular and a rare case the amendment enforced, a bad or an oppressive state law may not in itself be of sufficient magnitude to induce a will not long be left on any statute book. rule, yet it must be governed by the rule when established, unless some plain and strong reason for The argument that a limitation must be given to the excluding it can be given." And again: "The case being scope of this amendment because of the circumstances of within the words of the rule, must be within its operation its origin is without force. Its authors, seeing how likewise, unless there be something in the literal possible it was for the states to oppress without relief construction so obviously absurd or mischievous, or from the federal government, placed in the constitution repugnant to the general spirit of the instrument, as to an interdict upon their action which makes lasting justify those who expound the constitution in making it oppression of any kind by them under the form of law an exception." 4 Wheat. 644. impossible. Following that authority, [HN11] we cannot adopt [HN10] The amendment prohibiting slavery and the narrow view for which counsel contend, and limit the involuntary servitude, except as a punishment for crime, application of the prohibition of the fourteenth had its origin in the provious existence of African Page 14 13 F. 722, *741; 1882 U.S. App. LEXIS 2045, **33; 8 Sawy. 238 amendment to legislation touching members of the grievances, and to be secure in their persons, houses, enfranchised race. It has a much broader operation. It papers, and effects, against unreasonable searches and does not, indeed, place any limit upon the subjects in seizures; that certain securities against wanton reference to which the states may legislate. It does not prosecution [**36] for public offenses should not be interfere with their police power. Upon every matter withdrawn, such as that no person should be held to upon which previously to its adoption they could act, answer for a felony except upon the presentment or an they may still act. They can legislate now, as they always indictment of a grand jury; that in all prosecutions the could, to promote the health, good order, and peace of the accused should have the benefit of a speedy trial; should community; to develop [**34] their resources, increase be informed of the nature and cause of the accusation; their industries, and advance their prosperity; but it does should be confronted with the witnesses against him; require that in all such legislation hostile and partial should have compulsory process for obtaining witnesses, discrimination against any class or person shall be and the assistance of counsel; that certain guaranties avoided; that the state shall impose no greater burdens against oppression of person and spoliation of property upon any one than upon others of the community under should not be violated, such as afford protection against like circumstances, nor deprive any one of rights which the deprivation of life, liberty, and property without due others similarly situated are allowed to enjoy. It forbids process of law, and the taking of private property by the the state to lay its hand more heavily upon one than upon public without compensation; that the enumeration in the another, under like conditions. It shands in the constitution of certain rights should not be construed to constitution as a perpetual shield against all unequal and deny or disparage others retained by the people; and that partial legislation by the states, and the injustice which the powers not delegated to the United States by the follows from it, whether directed against the most humble constitution, nor prohibited by it to the states, were or the most powerful; against the despised laborer from reserved to the states, respectively, or to the people. China, or the envied master of millions. These were all restraints upon the general government. Had the population of the United States continued as The adoption of the federal constitution met, as all sparse as when the constitution was formed, and [**37] know, with most determined opposition from a large the means of more rapid intercourse between the states class who believed that the exercise of the powers had not been invented, it is possible that further delegated to the general government would eripple and amendments to the constitution would not have been embarrass the states in the administration of their local demanded. But the immense development of the [*742] affairs. The dread of centralization disturbed the resources of the country, the [*743] great increase of minds of some of the purest and greatest statesmen of the population, the constant intercourse between the states by day. This [**35] feeling continued after the adoption of steamer, railway, and telegraph, changed the business and the constitution, and finally led to the first 10 commercial relations of the states to each other, and led amendments. The population of the country was sparse; the people of one section to seek a closer union, and to each state afforded security to its people, and was to them desire a greater authority to be exercised by the central the special object of attachment. They enjoyed under its government, while the peculiar institutions of the other laws protection in their property, in their homes, and in section, and the different industries they developed, led their business. They felt a natural distrust of a power its people to desire to limit, rather than to strengthen, the wielded by officers not selected by themselves. They central authority. Differences of opinion in matters of apprehended that the rights which they enjoyed might be internal policy, and the estrangement engendered by encroached upon, if not destroyed. So the amendments controversies growing out of the existence of slavery in proposed contained limitations upon the powers of some of the states, ultimately culminated in civil war. congress, many of which were, indeed, unnecessary, but Men then saw that danger was to be apprehended in a were adopted in order to prevent "misconception or abuse direction opposite to that which led to the original of the powers of the general government." They declared, amendments. Restraints upon the power and action of the among other things, that certain liberties should not be states were therefore suggested, and to impose them and abridged, such as the free exercise of religion, the to abolish slavery, the great [**38] cause of the civil freedom of speech and of the press; that certain rights conflict, the new amendments -- the thirteenth, should not be taken away, such as the right of the people fourteenth, and fifteenth -- were adopted. to peaceably assemble and petition for a redress of Page 15 13 F. 722, *743; 1882 U.S. App. LEXIS 2045, **38; 8 Sawy. 238 "While, therefore," to quote the language of an aggregate value of their property is several thousand admirable writer and eminent jurist, Judge Cooley, "the millions. * It would be a most singular result if a first amendments were for the purpose of keeping the constitutional provision intended for the protection of central power within due limits, at a time when the every person against partial and discriminating legislation tendency to centralization was alarming to many persons, by the states, should cease to exert such protection the the last were adopted to impose new restraints on state moment the person becomes a member of a corporation. sovereignty, at a time when state powers had nearly We cannot accept such a conclusion. On the contrary, we succeeded in destroying the national sovereignty. Of think that it is well established by numerous these amendments it may be safely affirmed that the first adjudications of the supreme court of the United States ten took from the Union no power it ought ever to have and of the several states, that [HN12] whenever a exercised, and that the last three required of the states the provision of the constitution, or of a law, guaranties to surrender of no power which any free government should persons the enjoyment of property, or affords to them ever employ." means for its protection, or prohibits legislation injuriously affecting it, the benefits of the provision It would tend, therefore, to defeat the great purposes extend to corporations, and that the courts will always of the late amendments, if to any of them we should give look beyond the name of the artificial being to the the narrow construction for which counsel contend. individuals whom it represents. [**41] Private corporations are, it is true, artificial persons, * NOTE. The number of corporations here but with the exception of a sole corporation, with which stated is much less than the number actually we are not concerned, they consist of aggregations of existing. There are over 5,000 corporations in individuals united for some legitimate business. In this California alone. state they are formed [**39] under general laws; and the Civil Code provides that they "may be formed for any The case of the Society for the Propagation of the purpose for which individuals may lawfully associate Gospel in Foreign Parts v. Town of New Haven, 8 themselves." Any five or more persons may by voluntary Wheat. 464, furnishes an apt illustration of this doctrine. association form themselves into a corporation. And, as a The sixth article of the treatly of peace with Great Britain matter of fact, nearly all enterprises in this state, requiring of 1783 provided that there should be "no future for their execution an expenditure of large capital, are confiscations made, nor any prosecutions commenced, undertaken by corporations. They engage in commerce; against any person or persons for or by reason of the part they build and sail ships; they cover our navigable which he or they may have taken in the present war, and streams with steamers; they construct houses; they bring that no person shall on that account suffer any future loss the products of earth and sea to market; they light our or damage, either in his person, liberty, or property." An streets and buildings; they [*744] open and work mines; English corporation claimed the benefit of this article they carry water into our cities; they build railroads, and with reference to certain lands in Vermont granted to it cross mountains and deserts with them; they erect before the revolution, which the legislature of that state churches, colleges, lyceums, and theaters; they set up had undertaken to give to the [*745] town where they manufactories, and keep the spindle and shuttle in were situated. It was contended that the treaty only motion; they establish banks for savings; they insure applied to natural persons; that it did not embrace against accidents on land and sea; they give policies on corporations, because they were not persons who could life; they make money exchanges with all parts of the take part in the war, or could be considered British world; they publish newspapers and books, and send subjects; but the position was held [**42] to be news by lightning across the continent and under the untenable. The court, speaking through Mr. Justice ocean. Indeed, there is nothing which is lawful to be Washington, said that the argument proceeded upon an done to feed [**40] and clothe our people, to beautify incorrect view of the subject, and referred to the case of and adorn their dwellings, to relieve the sick, to help the U.S. v. Devaux, 5 Cranch, 86, to show that the court, needy, and to enrich and ennoble humanity, which is not when necessary, will look beyond the name of a to a great extent done through the instrumentalities of corporation to reach and protect those whom it corporations. There are over 500 corporations in this represents. state; there are 30,000 in the United States, and the Page 16 13 F. 722, *745; 1882 U.S. App. LEXIS 2045, **42; 8 Sawy. 238 The constitution, in defining the judicial power of the "A corporation," observed Mr. Justice Grier, United States, declares that it shall extend to speaking for the court, "it is said, is an artificial person, a "controversies between citizens of different states;" and mere legal entity, invisible and intangible. This is no in the case referred to by Mr. Justice Washington the doubt metaphysically true in a certain sense. The question arose whether a corporation composed of inference, also, that such an artificial entity 'cannot be a citizens of one state could sue in the circuit court of the citizen' is a logical conclusion from the premises, which United States a citizen of another state, and it was held cannot be denied. But a citizen who has made a contract, that it could. In deciding the question, the court, and has a controversy with a corporation, may also say, speaking through Chief Justice Marshall, said: with equal truth, that he did not deal with a mere metaphysical abstraction, but with natural persons; that "However true the fact may be that the tribunals of his writ has not been served on an imaginary entity, but the state will administer justice as impartially as those of on men and citizens; and that his contract was made the nation to parties of every description, it is not less true [**45] with them as the legal representatives of that the constitution itself either entertains apprehension numerous unknown associates, or secret and dormant on this subject, or views with such indulgence the partners. possible fears and apprehensions of suitors, that it has established national tribunals [**43] for the decision of "The necessities and conveniences of trade and controversies between aliens and citizens, or between business require that such numerous associates and citizens of different states. Aliens or citizens of different stockholders should act by representation, and have the states are not less susceptible of these apprehensions, nor faculty of contracting, suing, and being sued in a can they be supposed to be less the objects of ficititious or collective name. But these important constitutional provision because they were allowed to sue faculties, conferred on them by state legislation, for their by a corporate name. That name, indeed, cannot be an own convenience, cannot be wielded to deprive others of alien or a citizen, but the persons whom it represents may acknowledged rights. It is not reasonable that those who be the one or the other, and the controversy is, in fact and deal with such persons should be deprived of a valuable in law, between those persons suing in their corporate privilege by a syllogism, or rather sophism, which deals character, by their corporate names, for a corporate right, subtly with words and names, without regard to the and the individual against whom the suit may be things or persons they are used to represent." instituted. Substantially and essentially the parties in such a case, where the members of the corporation are The fifth amendment to the constitution declares that aliens or citizens of a different state from the opposite -- party, come within the spirit and terms of the jurisdiction [HN13] "No person shall be held to answer for a conferred by the constitution on the national tribunals. capital or otherwise infamous crime, unless on a Such has been the universal understanding on the subject. presentment or indictment of a grand jury, except in cases Repeatedly has this court decided causes between a arising in the land or naval forces, or in the militia, when corporation and an individual without feeling a doubt in actual service in time of war or public danger; nor shall respecting its jurisdiction." any person be subject for the same offense to be twice put The same point was presented in another form in the in jeopardy of life or limb; nor shall he be compelled in case of Marshall v. [**44] Baltimore & O.R. Co. 16 any [**46] criminal case to be a witness against himself, How. 326. There the question was whether a citizen of nor be deprived of life, liberty, or property without due one state could sue in the circuit court of the United process of law; nor shall private property be taken for States a corporation of another state, and a similar public use without just compensation." conclusion was reached. After referring to the clause of From the nature of the prohibitions in this the constitution extending the judicial power of the amendment it would seem, with the exception of the last United States to controversies between [*746] citizens one, as though they could apply only to natural persons. of different states, the court proceeded to consider the No others can be witnesses; no others can be twice put in objections urged to treating a corporation as a citizen, so jeopardy of life or limb, or compelled to be witnesses far as it might be necessary to protect the corporators: against themselves; and therefore it might be said with much force that the word "person," there used in Page 17 13 F. 722, *746; 1882 U.S. App. LEXIS 2045, **46; 8 Sawy. 238 connection with the prohibition against the deprivation of the latter's consent, as was held in Paul v. Virginia, 8 life, liberty, and property without due process of law, is Wall. 168, although such consent will generally be in like manner limited to a natural person. But such has presumed in the absence of positive prohibition. not been the construction of the courts. A similar provision is found in nearly all of the state constitutions; Decisions of state courts, in harmony with the views and everywhere, and at all times, and in all courts, it has we have expressed, exist in great numbers. But it is been held, either by tacit assent or express adjudication, unnecessary to cite them. It is sufficient to add that in all to extend, so far as their property is concerned, [*747] to text writers, in all codes, and in all [**49] revised corporations. And this has been because the property of a statutes, it is laid down that [HN16] the term "person" corporation is in fact the property of the corporators. includes, or may include, corporations; which amounts to [HN14] To deprive the corporation of its [**47] what we have already said, that whenever it is necessary property, or to burden it, is, in fact, to deprive the for the protection of contract or property [*748] rights, corporators of their property or to lessen its value. Their the courts will look through the ideal entity and name of interest, undivided though it be, and constituting only a the corporation to the persons who compose it, and right during the continuance of the corporation to protect them, though the process be in its name. All the participate in its dividends, and on its dissolution to guaranties and safeguards of the constitution for the receive a proportionate share of its assets, has an protection of property possessed by individuals may, appreciable value, and is property in a commercial sense, therefore, be invoked for the protection of the property of and whatever affects the property of the corporation corporations. And as no discriminating and partial necessarily affects the commercial value of their interests. legislation, imposing unequal burdens upon the property If, for example, to take the illustration given by counsel, a of individuals, would be valid under the fourteenth corporation created for banking purposes acquires land, amendment, so no legislation imposing such unequal notes, stocks, bonds, and money, no stockholder can burdens upon the property of corporations can be claim that he owns any particular item of this property, maintained. The taxation, therefore, of the property of but he owns an interest in the whole of it which the courts the defendant upon an assessment of its value, without a will protect against unlawful seizure or appropriation by deduction of the mortgage thereon, is to that extent others, and on the dissolution of the company he will invalid. receive a proportionate share of its assets. Now, if a If there were no other objection to the assessment we statute of the state takes the entire property, who suffers might, perhaps, order judgment for the amount of taxes loss by the legislation? Whose property is taken? due upon the valuation of the property, after deducting Certainly, the corporation is deprived of its property; but therefrom the amount of the mortgage; [**50] but there at the same time, in every just sense of the constitutional is another objection, of equal significance, which goes to guaranty, [**48] corporations are also deprived of their the validity of the whole assessment. No opportunity was property. afforded to the defendant to be heard respecting it before The prohibition against the deprivation of life and the state board of equalization. It was made by the board liberty in the same clause of the fifth amendment does not under the tenth section of article 13 of the constitution, apply to corporations, because, as stated by counsel, the which declares that [HN17] "the franchise, road-way, lives and liberties of the individual corporators are not the road-bed, rails, and rolling stock of all railroads operated life and liberty of the corporation. in more than one county in this state shall be assessed by the state board of equalization at their actual value, and [HN15] Nor do all the privileges and immunities of the same shall be apportioned to the counties, cities and citizenship attach to corporations. These bodies have counties, cities, towns, townships, and districts in which never been considered citizens for any other purpose than such railroads are located, in proportion to the number of the protection of the property rights of the corporators. miles of railway laid in such counties, cities and counties, The status of citizenship, entitling the citizen to certain towns, townships, and districts." privileges and immunities in the several states, does not belong to corporations. The special privileges which Other articles of the constitution, and laws citizens acquire by becoming incorporated in one state supplementing their directions, provide for the cannot, therefore, be exercised in another state without assessment by county officers of all property except "the Page 18 13 F. 722, *748; 1882 U.S. App. LEXIS 2045, **50; 8 Sawy. 238 franchise, road-way, road-bed, rails, and rolling stock" of mail, express, baggage, freight, and other cars, or railroads operated in more than one county, for a hearing property used in operating or repairing [**53] the by property holders respecting the assessment, and for its railway in the state, and on railways which are parts of equalization by county boards. Ample security is thus lines extending beyond its limits, the amount of the afforded to individuals [**51] against erroneous and rolling stock in use during the year, the annual gross arbitrary assessments. But the assessment of the property earnings of the entire railway, and the proportionate mentioned, of railroads operated in more than one county, annual gross earnings of the same in the state, and such is placed entirely with the state board. other facts as the board may in writing require; and that if the officer or officers designated fail to make and furnish In People v. Sup'rs of Sacramento County the such statement, the board shall proceed to assess the supreme court of the state said that -- property; and the valuation fixed shall be final and conclusive. The law also provides that the property shall "It is the manifest intent of the constitution that the be assessed at its actuul value; that the assessment shall valuation of the railroad property mentioned in section 10 be made of the entire railway in the state, including the of article 13 shall be finally fixed and determined by the right of way, road-bed, track, bridges, culverts, and state board of equalization. The state board has the rolling stock; that the state board shall transmit to the [*749] exclusive power to assess and equalize its value. county assessor of each county through which the railway Thus the constitution furnishes a system for the runs, a statement showing the length of its main track assessment of railroads operated in more than one county, within the county, and its assessed value per mile, as which is separate and distinct from that provided for the fixed by a pro rata distribution per mile of the assessed assessment of other property." And again: "The portion value of the whole property; [*750] that this statement of the section quoted (the portion above) is clearly shall be entered on the assessment roll of the county, and self-executing. We are at a loss to imagine how any that at their first meeting after its receipt by the county statute could make the duty of the state board any clearer [**54] assessor the board of supervisors of the county than does this distinct and positive mandate of the shall cause an order to be entered in the proper record constitution. If any doubt could possibly be built upon book stating the length of the main track and the assessed the words cited ti would be dispelled by the first clause of value of the railway lying in each city, town, township, the same section: 'All property, except as hereinafter in school-district, or lesser taxing district in the county this section provided, [**52] shall be assessed in the through which the railway runs, as fixed by the state county, city, city and county, town, township, or district board, which shall constitute the taxable value of the in which it is situated, in the manner prescribed by law.' property for taxable purposes in the district, and that such Thus by the very language of the constitution all other but property shall be taxed at the same rates as the property the railroad property mentioned must be assessed by local of individuals. assessors, in the manner prescribed by statute. The railroad property must be assessed in the manner We have no doubt that further legislation might have prescribed by the section of the constitution, that is, by been adopted providing for notice the the company, and a the state board, without the aid of statute." 8 Pac. Law J. system of procedure by which it might have been heard 103. respecting the assessment. We do not understand that the supreme court of the state intended by the decision cited The Political Code provides that the assessment shall to hold that the tenth section of the thirteenth article is be made by the state board on or before the first Monday self-executing, except to the extent that it vests complete in May of each year; that the president, secretary, cashier, power in the state board to make the assessment of the or managing agent, or such officer of the corporation as property; not that legislation may not be had providing the board may designate, shall furnish to the board, on or for the mode in which the powers of the board shall be before the first Monday of April of the year, a statement, exercised. Indeed, the concluding section of the article signed and sworn to by him, showing in detail the whole authorizes any legislation necessary to give effect to number of miles of railway owned, operated, or leased in [**55] its provisions. Unfortunately, no such legislation the state by the corporation, and the value thereof per has been had. The attempted legislation failed, because it mile, and all its property of every kind located in the did not receive in the legislature the constitutional state, the number and value of its engines, passenger, majority, as is clearly shown by the circuit judge in his Page 19 13 F. 722, *750; 1882 U.S. App. LEXIS 2045, **55; 8 Sawy. 238 opinion. It is unnecessary to go over the ground he has affected. It must be pursued in the ordinary mode completely covered. prescribed by the law; it must be adapted to the end to be attained; and it must give to the party to be affected an [HN18] The presentation to the state board by the opportunity of being heard respecting the justice of the corporation of a statement of its property and of its value, judgment sought. Without these conditions entering into which it is required to furnish, is not the equivalent to a the proceeding, it would be anything but due process. If notice of the assessment made and of an opportunity to be it touched life or liberty, it would be wanton punishment, heard thereon. It is a preliminary proceeding, and until or rather wanton cruelty; if it touched property, it would the assessment the corporation cannot know whether it be arbitrary exaction. It is significant that the guaranty will have good cause of complaint. No hearing upon the against the deprivation of property without due process of statement presented is allowed, and when the assessment law is contained in the clause which guaranties against a is made the matter is closed; no opportunity to correct like deprivation of life and liberty; and it means that there any errors committed is provided. The presentation of shall be no proceeding against either without the the statement can no more supersede the necessity of observance [**58] of all the securities applicable to the allowing a subsequent hearing of the owners, than the case recognized by the general law, by those principles filing of a complaint in court can dispense with the right which are established in all constitutional governments of the suitor and his contestant to be there heard. for the protection of private rights. Notice is absolutely essential to the validity of the proceeding in any case; it There being, then, no provision of law giving to the may be given by personal citation, and in some cases it company notice of the action of the state board, and an may be given by statute; but given it must be in some opportunity [**56] to the heard respecting it, is the form. If life and liberty are involved, there [*752] must assessment valid? Would the taking of the company's be a regular course of judicial proceedings; so, also, [*751] property in the enforcement of the tax levied where title or possession of property is in contention. But according to the assessment be depriving it of its property [HN20] in the taking of property by taxation the without due process of law? It seems to us there can be proceeding is more summary and stringent. The but one answer to these questions. There is something necessities of revenue for the support of government will repugnant to all notions of justice in the doctrine that any not admit of the delays attendant upon judicial body of men can be clothed with the power of finally proceedings in the courts of justice. The statute fixes the determining the value of another's property, according to rate of taxation upon the value of the property, and which it may be taxed, without affording to him an appoints officers to estimate and appraise the value. Due opportunity of being heard respecting the correctness of process of law in the proceeding is deemed to be pursued, their action. And the injustice is strikingly apparent when when, after the assessment is made by the assessing the property consists of the great number of particulars officers upon such information as they may obtain, the which go to make up the taxable estate of a railroad owner is allowed a reasonable opportunity, at a time and company, requiring for any just estimate of their value place to be designated, to be heard respecting the [**59] accurate knowledge upon a multitude of subjects, not correctness of the assessment, and to show any errors in usually possessed without special study. We cannot the valuation committed by the officers. Notice to him assent to any such doctrine. It conflicts with the great will be deemed sufficient, if the time and place of hearing principle which lies at the foundation of all just be designated by statute. But whatever the character of government, that no one shall be deprived of his life, his the proceeding, whether judicial or administrative, liberty, or his property without an opportunity of being summary or protracted, and whether it takes property heard against the proceeding. The principle [**57] is as directly, or creates a charge or liability which may be the old as Magna Charta, and is embodied in all the state basis of taking it, the law directing the proceeding must constitutions, and in the fourteenth amendment of the provide for some kind of notice, and offer to the owner an federal constitution. [HN19] The provision in this opportunity to be heard, or the proceeding will want the amendment is in the form of an interdict upon the states essential ingredient of due process of law. Nothing is -- "Nor shall any state deprive any person of life, liberty, more clearly established by a weight of authority or property without due process of law." And by due absolutely overwhelming than that notice and opportunity process is meant one which, following the forms of law, to be heard are indispensable to the validity of the is appropriate to the case, and just to the parties to be proceeding. Page 20 13 F. 722, *752; 1882 U.S. App. LEXIS 2045, **59; 8 Sawy. 238 In Davidson v. New Orleans the supreme court of the upon the question of the constitutionality of such a law, United States assumed this position to be unquestionable. that the assessment has in fact been fairly apportioned. In that case an assessment levied on certain real estate in The constitutional validity of a law is to be tested, not by New Orleans for draining the swamps of that city was what has been done under it, but what may, by its resisted on the ground that the proceeding deprived the authority, be done. The legislature may prescribe the owners of their property without due process of law; and kind of [**62] notice, and the mode in which it shall be the court refused to disturb it for the reason that the given, but it cannot dispense with all notice." And, again, [**60] owners of the property had notice of the that "no case, it is believed, and be found in which it was assessment and an opportunity to contest it in the courts. decided that this constitutional guaranty [against After stating that much misapprehension prevailed as to depriving one of his property without due process of law] the meaning of the terms "due process of law," and that it did not extend to cases of assessments; and yet we may would be difficult to give a definition which would be at infer, from certain dicta of judges, that their attention was once perspicuous, comprehensive, and satisfactory, the not called to it, or that they lost sight of it in the cases court, speaking through Mr. Justice Miller, said that it which they were considering. It has sometimes been would lay down the following proposition as applicable intimated that a citizen is not deprived of his property, to the case: within the meaning of this constitutional provision, by the imposition of an assessment. It might as well be said that "That whenever by the laws of a state, or by state he is not deprived of his property by a judgment entered authority, a tax, assessment, servitude, or other burden is against him. A judgment does not take property until it is imposed upon property for the public use, whether it be enforced, and then it takes the real or personal property of for the whole state or of some more limited portion of the the debtor. So an assessment may generally be enforced, community, and those laws provide for a mode of not only against the real estate upon which it is a lien, confirming or contesting the charge [*753] thus but, as in this case, against the personal property of the imposed, in the ordinary course of justice, with notice to owner also; and by it he may just as much be deprived of the person, or such proceeding in regard to the property his property, and in the same sense, as the judgment as is appropriate to the nature of the case, the judgment in debtor is deprived of his by the judgment." 74 N.Y. 188, such proceedings cannot be said to deprive the owner of [**63] 195. his property without due process of law, however obnoxious it may be to other objections." 96 U.S. 104. We concur fully in the views thus forcibly expressed. In Stuart v. Palmer the meaning of these terms is It remains to consider the last position of counsel, elaborately considered [**61] by the court of appeals of that the provisions of article 13 of the constitution of the New York with reference to numerous adjudications on state, as to the taxation [*754] of railroad property, are the subject. In that case a law of the state imposed an to be treated as conditions upon the continued existence assessment on certain real property for a local of railroad corporations. On the hearing, this position improvement without notice to the owner, and a hearing seemed to us to possess some force, but on careful or an opportunity to be heard by him, and the court held consideration its supposed force is dissipated. The that it had the effect of depriving him of his property argument is that on the original creation of the without due process of law, and was therefore corporation the state might have imposed any conditions unconstitutional. Mr. Justice Earl, speaking for the court, whatever as to the manner and the amount in which its said: property should be taxed; that under the reserved power of amendment of the law creating the corporation, the "I am of the opinion that the constitution sanctions state could at any time afterwards impose such a no law imposing such an assessment without a notice to, condition; that the new constitution, in continuing the and a hearing, or an opportunity of hearing, by the defendant and other railroad corporations in existence, owners of the property to be assessed. It is not enough and at the same time authorizing the taxation of their that the owners may by chance have notice, or that they property upon a valuation different from that at which the may, as a matter of favor, have a hearing. The law must property of individuals is assessed, imposed that require notice to them, and give them the right to a condition upon them, and that the subsequent exercise of hearing, and an opportunity to be heard. It matters not, its franchises by the defendant implies an assent to such Page 21 13 F. 722, *754; 1882 U.S. App. LEXIS 2045, **63; 8 Sawy. 238 condition. reservation clause it retains power only over that which it grants; it does not grant the rails on the road; it does not There are two answers [**64] to this argument. In grant the depots along-side of it; it does not grant the cars the first place, article 13 [HN21] is not intended to make on the track, nor the engines which move them, and over any change in the powers or rights of corporations under them it can exercise no power except such as may be the laws of the state. It treats entirely of revenue and exercised through its control over the franchise, and such taxation, and of the rules which shall govern the as may be exercised with reference to all property used assessment of the property of individuals, and of railroad by carriers for the public. The reservation of power over and other quasi public corporations. It is in another the franchise, -- that is, over that which is granted, -- article that provisions are made for the control of railroad makes its grant a conditional or revocable contract, corporations; and the duties and responsibilities of whose obligation is not impaired by its revocation or corporations generally, and the power of the state over change. The supreme court established, in the Dartmouth them, are declared. College Case, that [HN23] the charter of a private corporation is a contract between the corporators and the In the second place, [HN22] the state, in the creation state, and that it was, therefore, within the prohibition of of corporations, or in amending their charters, or rather in the federal constitution against the impairment of passing or amending general laws under which contracts. To avoid this result the states have generally corporations may be formed and altered, possesses no inserted clauses in their constitutions reserving a right to power to withdraw them when created, or by amendment, repeal, alter, or amend charters granted by their from the guaranties of the federal constitution. It cannot legislatures, or to repeal, alter, or amend the [**67] impose the condition that they shall not resort to the general laws under which corporations are allowed to be courts of law for the redress of injuries or the protection formed. The reservation relates only to the contract of of its property; that they shall make no complaint if their incorporation, which, without such reservation, would be goods are plundered and their premises invaded; that they irrepealable. It removes the impediment to legislation shall ask no indemnity if their lands be seized for public touching the contract. It places the corporation in the use, or be taken without due process of [**65] law, or same position it would have occupied had the supreme that they shall submit without objection to unequal and court held that charters are not contracts, and that laws oppressive burdens arbitrarily imposed upon them; that, repealing or altering them did not impair the obligation of in other words, over them and their property the state contracts. The property of the corporation, acquired in may exercise unlimited and irresponsible power. the exercise of its faculites, is held independently of such Whatever the state may do, even with the creations of its reserved power, and the state can only exercise over it the own will, it must do in subordination to the inhibitions of control which it exercises over the property of individuals the federal constitution. It may confer, by its general engaged in similar business. laws, upon corporations certain capacities of [*755] doing business, and of having perpetual succession in The case of Detroit v. Detroit & Howell Plank-road their members. It may make its grant in these respects Co., in the [*756] supreme court of Michigan, is in point revocable at pleasure; it may make the grant subject to on both of the propositions stated. An act of the modifications and impose conditions upon its use, and legislature of the state, amending the charter of the reserve the right to change these at will. But whatever company, required it to remove without the limits of the property the corporations acquire in the exercise of the city of Detroit a toll-gate on its road, then within the capacities conferred, they hold under the same guaranties limits. The effect of the act was to take from the which protect the property of individuals from spoliation. company about two and a half miles of its road, upon It cannot be taken for public use without compensation. which it collected tolls. The [**68] act under which the It cannot be taken without due process of law, nor can it company was incorporated reserved a power in the be subjected to burdens different from those laid upon the legislature to repeal and amend it at any time, and the property of individuals under like circumstances. question was whether, under this reservation, the legislature could require the removal of the toll-gate out The state grants to railroad corporations formed of the city; and it was held that it could not. Ordinarily a under its laws a [**66] franchise, and over it retains law requiring the removal of a toll-gate from one place to control, and may withdraw or modify it. By the another on a road would be a mere police regulation, but Page 22 13 F. 722, *756; 1882 U.S. App. LEXIS 2045, **68; 8 Sawy. 238 here it was something more; it deprived the company of corporations any property which they may rightfully have compensation for the use of its road within the city limits; acquired. In the most arbitrary times such an act was that is, for a large part of the travel over it. The court, recognized as pure tyranny, and it has been forbidden in speaking through Mr. Justice Cooley, observed that there England ever since Magna Charta, and in this country were cases in which amendments to charters having some always. It is immaterial in what way the property was resemblance to this had been sustained, and cited several lawfully acquired, -- whether by labor in the ordinary which involved a mere police regulation, such as avocations of life, by gift or descent, or by making requiring a railroad company to build a station-house and profitable use of a franchise granted by the state; it is stop its trains at a certain locality; to permit and provide enough that it has become private property, and it is then for the crossing of its track; and to unite with others in a protected by the 'law of the land.'" [**71] 43 Mich. common passenger station for trains entering a city. 140-147; [S.C. 5 N.W. Rep. 275.] "But [the court added] there is no well-considered We have already extended this opinion to a great case in which it has been held that a legislature, under its length, and we do not think it necessary or important to power to amend a charter, might take from a [**69] notice other positions urged by counsel with great corporation any of its substantial property or property learning and ability against the validity of the taxes for rights. In some cases the power has been denied, where which the present action is brought. We are satisfied that the interest involved seemed insignificant. The case of the assessment upon which they were levied is invalid Albany, etc., R. Co. v. Brownell, 24 N.Y. 345, is an and void, and judgment must be accordingly entered on illustration. It was there decided that although the the demurrer for the defendant, and, by stipulation of legislature might require railroad companies to suffer parties, the judgment must be made final. highways to cross their tracks, they could not subject the lands which the companies had acquired for other CONCUR BY: SAWYER purposes to the same burden, except in connection with the provision for compensation. The decision was in CONCUR accord with that in Com. v. Essex Co. 13 Gray, 239, 253, in which, while the power to alter, amend, or repeal the SAWYER, C.J., concurring. The facts of this case corporate franchises was sustained, it was at the same are fully stated by Mr. Justice FIELD, and need not be time declared that 'no amendment or alteration of the repeated here. The questions presented are of the gravest charter can take away the property or rights which have character, and of the utmost importance to the people of become vested under a legitimate exercise of the powers California. While I concur, generally, in the conclusions, granted.' The same doctrine is clearly asserted in and in the line of argument adopted by my associate, I Railroad Co. v. Maine, 96 U.S. 499, and is assumed to be shall also state as briefly as I reasonably can, considering unquestionable in the several opinions delivered in the the gravity of the questions discussed, my conclusions Sinking-fund Cases, 99 U.S. 700. upon the points involved. "But for the provision of the constitution of the 1. In my judgment, the word "person," in the clause United States which forbids impairing the [**70] of the fourteenth amendment to the national constitution, obligation of contracts, the power to amend and repeal "No state shall * * * deprive any person of life, liberty, or corporate charters would be ample without being [**72] property without due process of law, nor deny to expressly reserved. The [*757] reservation of the right any person the equal protection of the law," includes a leaves the state where any sovereignty would be, if private corporation. It must, at least, through the unrestrained by express constitutional limitations and corporation include the natural persons who compose the with the powers which it would then possess. It might, corporation, and who are the beneficial owners of all the therefore, do what it would be admissible for any property, the technical and legal title to which is in the constitutional government to do when not thus restrained, corporation in trust for the corporators. The fact that the but it could not do what would be inconsistent with corporators are united into an ideal legal entity, called a constitutional principles. And it cannot be necessary at corporation, does not prevent them from [*758] having this day to enter upon a discussion in denial of the right a right of property in the assets of the corporation which of the government to take from either individuals or is entitled to the protection of this clause of the constitution. Nor does the intervention of this artificial Page 23 13 F. 722, *758; 1882 U.S. App. LEXIS 2045, **72; 8 Sawy. 238 being between the real beneficial owners and the state, corporations are the parties to the record. The cases in for the simple purpose of convenient management of the the supreme court upon this point are numerous, and too business, enable the state, by acting directly upon the familiar to require further citation. legal entity, to deprive the real parties beneficially interested of the protection of these important provisions. In Society, etc., v. New Haven, 8 Wheat. 464-489, it In the language of Mr. Pomeroy, one of the counsel, was held that a corporation was protected under the sixth which I adopt: article of the treaty with [*759] England, of 1783, which reads: "There shall be no confiscations made, nor any "Whatever be the legal nature of a corporation as an prosecutions commenced [**75] against any person or artficial, metaphysical being, separate and distinct from persons for or by reason of the part which he or they may the individual members, and whatever distinctions the have taken in the present war, and that no person shall, [**73] common law makes, in carrying out the technical on that account, suffer any future loss or damage, either legal conception, between property of the corporation and in person, liberty, or property," etc. The word "person" in that of the individual members, still, in applying the the civil-rights act of congress of April 20, 1870, (17 St. fundamental guaranties of the constitution, and in thus 13,) was held on the circuit to include a corporation. protecting the rights of property, these metaphysical and N.W. Fert. Co. v. Hyde Park, 3 Biss. 481. technical notions must give way to the reality. The truth cannot be evaded that, for the purpose of protecting In Railroad Co. v. Richmond, 96 U.S. 529, the rights, the property of all business and trading supreme court assumes that a corporation is included in corporations is the property of the individual corporators. the word "person," as thus used in the fourteenth A state act depriving a business corporation of its amendment. property without due process of law, does, in fact, The word "person" is, unquestionably, much broader deprive the individual corporators of their property. In in its signification than the word "citizen," and the change this sense, and within the scope of these grand safeguards from the word "citizen," in the first clause of the section, of private rights, there is no real distinction between to the word "person" of so much larger import, in the last, artificial persons, or corporations, and natural persons." must have been well considered, and have been intended This principle is recognized, and the question settled to extend the shield of the constitution to all cases which for all time, in an early case by Chief Justice Marshall, in might require the protection of this wholesome and which he says: greatly-needed guaranty. There is nothing in the context to indicate a purpose to limit the meaning of the word "Aliens, or citizens of different states, are not less "person" to a narrower sense than the word ordinarily and susceptible of these apprehensions, nor can they be naturally imports, or [**76] to make the application of supposed to be less the objects of constitutional the provision partial only. To exclude corporations from provisions, because they are allowed to sue by a its import, would be to leave, perhaps, at this day, the far corporate name. That name, [**74] indeed, cannot be larger portion of the vast capital of the country employed an alien or a citizen; but the persons whom it represents in great enterprises, either commercial, manufacturing, may be the one or the other; and the controversy is, in mining, or otherwise, beyond the pale of its protection. fact and in the law, between those persons suing in their There is no good reason for excluding the plroperty of corporate character by their corporate name for a corporations from the same protection extended to other corporate right, and the individuals against whom the suit property. It is subject to all the burdens, and it should be may be instituted. Substantially and essentially the entitled to all the immunities, of other property. It is, at parties in such a case, where the members of the last, the property of natural persons. The provision is corporation are aliens or citizens of a different state from protective and remedial, not punitive in character, and the opposite party, come within the spirit and terms of the should, therefore, be liberally, not strictly, construed. No jurisdiction conferred by the constitution on the national restriction should be put upon the term not called for by tribunals." Bank U.S. v. Devaux, 5 Cranch, 87. the exigencies of the case, or by the public interest; and it must be manifest that the public interest requires that the It is upon this principle that the national courts have broadest signification should be adopted. ever since entertained jurisdiction on the ground of citizenship of the corporators in cases wherein Blackstone treats of corporations under the head of Page 24 13 F. 722, *759; 1882 U.S. App. LEXIS 2045, **76; 8 Sawy. 238 "Rights of Persons;" chapter 18 under this head being but also because statutes violating their prohibitions, in devoted to the subject. He says: "Persons, also, are dealing with corporations, must necessarily infringe upon divided by law into either natural persons or artificial;" the rights of natural persons. In applying and enforcing giving a definition [**77] of each. Book 1, p. 123. So, these constitutional guaranties, corporations cannot be also, does Kent, (2 Kent, 316.) separated from the natural persons who compose them." In U.S. v. Amedy, 11 Wheat, 412, wherein a person It is upon this principle that the decision in Dodge v. was indicted, under an act of congress, for destroying a Woolsey, 18 How. 331, rests, which establishes the right vessel belonging to a corporation, [*760] the supreme of stockholders to maintain a suit against the directors of court held that a corporation is a person within the the corporation and state officers to restrain the payment meaning of the act. The court, among other things, says: by the one, and the collection by the other, of a tax "The mischief intended to be reached by the statute is the illegally assessed against the corporation. See, also, same, whether it respects private or corporate persons. Marshall [*761] v. B. & O.R. Co. 16 How. 327. But a That corporations are in law, for civil purposes, deemed corporation itself is, in my judgment, a "person," within persons is unquestionable." And the court in this case the meaning of the constitutional provision in question. holds the same for criminal purposes also; and in criminal Such has been the ruling in all cases under statutes cases statutes are strictly construed. So, in regard to the containing the word "person," unless the context clearly provisions of the fourteenth amendment under indicated a more limited signification. consideration, "the mischief intended to be reached" by the amendment, "is the same, whether it respects private 2. I shall not spend much time in discussing the or corporate persons." See, also, cases cited in the question whether the fourteenth amendment applies only opinion. The authorities to a similar effect are numerous. to the African race. Undoubtedly, the negro furnished the See, as examples, People v. Ins. Co. 15 Johns. 588; immediate occasion and motive for [**80] adoption of Planters' Bank v. Andrews, 8 Porter, 404; Kyd, Corp. 15; the amendment; but its benefits could not have been Douglas v. P.M.S. Co. 4 Cal. 304; State v. Nash. intended to be limited to the negro. The protection University, 4 Humph. 166. There are [**78] many other afforded is as important to others as to him, as is clearly cases affording support, more or less direct, to this view. shown by experience under this provision. A whole race, not african, large numbers of whom came to our shores In Ins. Co. v. New Orleans, 1 Woods, 85, it was held under the solemn guaranties of stipulations in a treaty on the circuit that a corporation is not embraced in the suggested and sought, and in a great part framed, by word "person," as used in the amendment under ourselves, to promote our then supposed interests, were consideration, and the supreme court of California, upon amoung the first to invoke this very provision of the the authority of that case, made a similar ruling in C.P.R. fourteenth amendment to protect them, under the word Co. v. State Bd. of Equalization, 8 Pac. Coast Law J. "person," in the right to earn an honest living, by honest 1155. But notwithstanding their high character for labor; and its protecting power was not invoked in vain. ability, and my respect for the decisions of the judges Parrott's Chinese Case, 6 Sawy. 349; In re Ah Chong, taking that view, I am compelled to adopt a different (Chinese Fisherman Case,) Id. 451. Who, in view of past conclusion. I think, both upon reason and authority, that experience, shall say there was no occasion to extend the the other is the better view. Again, with respect to signification of the word "person" beyond the negro? And corporate property, I adopt the language of counsel, are all other races, including our own, to be now which expresses my view accurately and clearly: withdrawn from its protecting power by so narrow and unnatural a construction. I apprehend not. It the line "The property of the corporation is in reality the cannot be drawn at the negro, then no other can be property of its individual corporators. A state statute adopted that will not embrace every human being in his depriving a corporation of its property does deprive the individual character, or [**81] in his legal association individual corporators of their property. These clauses of with his fellows, for the more convenient administration the fifth and fourteenth amendments, ans the similar of his property, and more successful pursuit of happiness. clauses of the state constitution, apply, therefore, to I apprehend that it would have struck the world with private corporations, not alone because such corporations some astonishment, when this amendment was proposed are 'persons,' [**79] within the meaning of that word, to the people of the United States for adoption, if it had Page 25 13 F. 722, *761; 1882 U.S. App. LEXIS 2045, **81; 8 Sawy. 238 read: "Nor shall any state deprive any person of the negro so. It is enough to say that it has been settled by judicial race of life, liberty, or property without due process of decision, as I think, that whether the proceeding be law; nor deny to any person of the negro race within its judicial, administrative, or executive, if it affects life or jurisdiction the equal protection of the laws." Yet so it liberty, or takes property directly, or imposes a charge must, in effect, be read if its operation is to be limited to which becomes the basis of taking property, some kind of that race. The rights of the negro are, certainly, no more notice, or opportunity to be heard on his own behalf, and sacred or worthy of protection than the rights of the to defend his rights, given to the person whose life or Caucasian or other races; and the security of the rights of liberty is to be affected, or whose property is to be taken, corporations, and, through them, the rights of the real or burdened with the liability, is an indispensable element parties, -- the corporators, -- is as of great public -- an essential ingredient -- of "due process of law." No importance as the security of any other private interests. one, I apprehend, would for a moment contend that a man's life, or his liberty, could be legally taken away [*762] 3. Does the assessment in question, made in without notice of the proceeding, or without being strict pursuance of the provisions of the constitution of offered an opportunity to be heard; or that a proceeding California, violate that clause of the fourteenth whereby his life or liberty should be forfeited, or amendment of the national constitution which says that permanently [**84] [*763] affected, without notice or no state "shall deprive any [**82] person of life, liberty, opportunity to be heard in his own defense, could, by any or property without due process of law?" possibility, be by "due process of law." In such cases there could be no just conception of "due process of law" The provision of the state constitution under which that would not embrace these elements of notice and the assessment was made is as follows: opportunity to be heard. Any conception excluding these elements would be abhorrent to all our ideas of either law "The franchise, road-way, road-bed, rails, and rolling or justice. If these elements must enter into and stock of all railroads operated in more than one county in constitute an essential part of due process of law, in this state shall be assessed by the state board of respect to life and liberty, they must also constitute equalization at their actual value, and the same shall be essential ingredients in due process of law, where apportioned to the counties, cities and counties, cities, property is to be taken; for the guaranty in the towns, townships, and districts in which such railroads constitution is found in the same provision in the same are located, in proportion to the number of miles of connection, and in the identical language applicable to roadway laid in such counties, cities and counties, cities, all. One meaning, therefore, cannot be attributed to the towns, townships, and districts." phrase with respect to property, and another with respect This is the only provision affecting this question. to life and liberty. To take one's property by taxation is to take or Having stated the principle, which I conceive to be deprive one of his property; and if not taken in pursuance established by an unbroken line of authorities, I shall of the law of the land -- in some due and recognized refer to some of them. One of the latest and most course of proceedings, based upon well-recognized instructive cases upon the subject was recently decided principles in force before and at the time this clause was by the court of appeals of the state of New York, from first introduced into the various constitutions, and the which I shall extract a passage which I [**85] adopt as legislation of the country -- is to take it "without due expressing my own views, and presenting the question in process of law." The signification of these words has a very clear and satisfactory light. It involved the validity been the subject of judicial consideration and discussion of an assessment for a public street improvement, and but in [**83] a vast number of cases, and their import has one question, which was decisive of the case, was been determined to be the same as that of equivalent examined or determined. The question was as to the phrases in Magna Charta, from which the principle validity of the law under which the assessment was made. adopted was derived. The court, by Mr. Justice Earl, says: "The latter assessment could be made without any notice to or I shall not attempt to give an accurate definition of hearing of any person. The law requires no notice, and a the term "due process of law," applicable to all cases. It provision for notice cannot be implied. Upon the is not necessary for the determination of this case to do assumption that the law was valid, there was ample Page 26 13 F. 722, *763; 1882 U.S. App. LEXIS 2045, **85; 8 Sawy. 238 authority for the commissioners to make the assessment citizen is not deprived of his property, within the meaning without any notice or hearing." Stewart v. Palmer, 74 of this constitutional provision, by the imposition of an N.Y. 186. The judge proceeds: assessment. It might as well be said that he is not deprived of his property by a judgment entered against "I am of the opinion that the constitution sanctions him. A judgment does not take property until it is no law imposing such an assessment without a notice to enforced, and then it takes the real or personal property of and a hearing, or an opportunity of a hearing, by the the debtor. So an assessment may generally be enforced, owners of the property to be assessed. It is not enough not only against the real estate [**88] upon which it is a that the owners may by chance have notice, or that they lien, but, as in this case, against the personal property of may, as a matter of favor, have a hearing. The law must the owner also, and by it he may just as much be deprived require a notice to them, and give them a right to a of his property, and in the same sense, as the judgment hearing and an opportunity to be heard. It matters not, debtor is deprived of his by the judgment." Id. 195. upon [**86] the question of the constitutionality of such law, that the assessment has in fact been fairly Much more is worth quoting, but it would extend this apportioned. The constitutional validity of a law is to be opinion to an unreasonable length. tested, not by what has been done under it, but what may by its authority be done. The legislature may prescribe Thus, it is determined in the case cited that a party is the kind of notice and the mode in which it shall be not only entitled to notice and an opportunity to be heard, given, but it cannot dispense with all notice. * * *" Id. but that the law, or constitution itself, must expressly 188. provide for notice. This decision was approved by the supreme court of California in October last, in Mulligan "The legislature can no more arbitrarily impose an v. Smith, involving the validity of a tax. 8 Pac. Coast assessment for which property may be taken or sold, than Law J. 499. Said McKinstry, J.: "In my opinion the it can render a judgment against a person without a statute provides no notice or process by means of which hearing. It is a rule founded on the first principles of the property owners can be subjected to the judgment of [*764] natural justice, older than written constitutions, the county court. The act is therefore void;" citing that a citizen shall not be deprived of his life, liberty, or Stewart v. Palmer, supra, Cooley, Taxation, 266, and property without an opportunity to be heard in defense of other cases; and McKee, J., in the same case said: his rights; and the constitutional provision that no person shall be deprived of these without due process of law, has "It is a principle which underlies all forms of its foundation in this rule. This provision is the most government by laws that a citizen shall not be deprived of important guaranty of personal rights to be found in the life, liberty, or property without due process of law. The federal or state constitutions. It is a limitation upon legislature [**89] has no power to take away any man's arbitrary legislation. No citizen shall arbitrarily be property, nor can it authorize its agents to do so, without deprived of his life, liberty, or property. This the first providing for personal notice to be given to him, and legislature [**87] cannot do, nor authorize to be done. for a full opportunity of time, place, and tribunal to be 'Due process of law' is not confined to any judicial beard in defense of his rights. This constitutional proceedings, but extends to every case which may guaranty is not confined [*765] to judicial proceedings, deprive a citizen of his life, liberty, or property, whether but extends to every case in which a citizen may be the proceedings be judicial, administrative, or executive deprived of life, liberty, or property, whether the in its nature. This great guaranty is always and proceeding be judicial, administrative, or executive in its everywhere present to protect the citizen against arbitrary nature." interference with these sacred rights. * * *" Id. 190. In Patten v. Green, 13 Cal. 329, Mr. Justice Baldwin, "No case, it is believed, can be found in which it was all the justices, including Mr. Justice Field, concurring in decided that the constitutional guaranty did not extend to the opinion, said: "We think it would be a dangerous cases of assessments, and yet we may infer from certain precedent to hold that an absolute power resides in the dicta of judges that their attention was not called to it, or supervisors to tax land as they may choose, without that they lost sight of it in the cases which they were giving any notice to the owner. It is a power liable to considering. It has sometimes been intimated that a great abuse. The general principles of law applicable to such tribunals oppose the exercise of any such power." Page 27 13 F. 722, *765; 1882 U.S. App. LEXIS 2045, **89; 8 Sawy. 238 The raising of the tax by the board of equalization was manner he must be afforded an opportunity to defend his held void for want of notice. Mr. Webster, in the interests. In this case the [**92] constitution makes no Dartmouth College Case, defined due process of law, or provision for notice or a hearing, and the answer alleges "the law of the land," as "the general law, which hears that there was none, which is admitted by the demurrer. before it condemns, [**90] which proceeds upon inquiry, and renders judgment only after trial." He adds: 4. On behalf of the plaintiff, what purorts to be a "Everything which may pass under the form of an statute passed March 14, 1881, (St. 1881, p. 83,) is cited, enactment is not 'the law of the land.'" which, it is insisted, supplements the constitution, and provides for a notice and hearing upon a petition filed In Cooper v. Board of Works, 108 Eng. C.L.R. 181, within five days after the assessment is made upon a in which was in question the action of the board of public railroad. But it is claimed that, although published in the works, in pursuance of a statute which did not require volume of statutes for the year 1881 as a statute, the bill notice, Willes, J., said: "I apprehend that a tribunal, which never constitutionally passed, and that it is consequently is by law invested with power to affect the property of no law. Section 15 of article 4 of the constitution of one of her majesty's subjects, is bound to give such California provides that "on the final passage of all bills subject an opportunity of being heard before it proceeds; they shall be by yeas and nays upon each bill separately, and that that rule is of universal application, and founded and shall be entered on the journals, and no bill shall upon the plainest principles of justice." In the same case, become a law without the concurrence of a majority of Byles, J., said: "The judgment of Mr. Justice Fortescue, in the members elected to each house." Under section 5 of Dr. Bentley's Case, is somewhat quaint, but it is very the same article the house consists of 80 members, of applicable, and has been the law from that time to the whom it would require 41 to constitute a majority of the present." He says: "The objection for want of notice can members elected to the house. Upon reference to the never be got over. The laws of God and man both give published journals of the legislature it appears that the the party an opportunity to make his defense, if he has bill in question passed the house and was [**93] sent to any. I remember to have heard it observed by a very the senate, where it was amended by adding a long learned man, upon such an occasion, that even God provision, being the very provision, if any there is, which himself did not pass sentence upon Adam before he gives the owners of railroads of the class in question, called upon [**91] him to make his defense. 'Adam, dissatisfied with the assessment, a right to file a petition, where art thou? Hast thou not eaten of the tree whereof I "within five days after the assessment is made and commanded thee that thou shouldst not eat?'" See, also, entered of record on the books of the board," to have the Philadelphia v. Miller, 49 Pa. 448; Matter of Ford, 6 assessment corrected, and providing for proceedings Lans. 92; Overing v. Foote, 65 N.Y. 263; Westervelt v. upon said petition. On March 4th the house considered Gregg, 12 N.Y. 209; Cooley, Const. Lim. 355; Butler v. the senate amendment, and upon a call of the yeas and Sup'rs Saginaw, 26 Mich. 22, 29; Sedg. St. & Const. nays, as required by the constitution, 39 members voted Constr. (Pomeroy's Ed.) 474 et seq., and notes; Cooley, for the amendment and 32 against it, there being four Taxation, 266; 267. paired and not voting. Thus the votes in favor of the amendment were two less than a majority of members In Davidson v. New Orleans, 96 U.S. 97, it was not elected to the house, and the bill failed. It does not questioned, [*766] but assumed, that the party taxed appear that the bill was "read [*767] at length." The must have an opportunity to be heard, and decided upon speaker declared that this was not the final action of the that theory. house, and that the amendment concurred in ay a vote of 39 ayes to 32 nays was adopted. An appeal having been In my judgment the authorities establish beyond all taken from this decision of the chair, it was afterwards controversy that somewhere in the process of assessing a laid upon the table. Thereupon two members filed each a tax under a law, or a state constitution, at some point separate protest against the decision of the speaker, and before the amount of the assessment becomes finally and the certificate that [**94] the bill had passed, on the irrevocably fixed, the statute or the state constitution expressed ground that it did not receive the vote of a must provide for notice to be given to the owner of the majority of the members elected to the house. All this property taxed, and an opportunity to be afforded to make appears upon the journal. If this was not the final action objections, and to be heard upon them. In some form or of the house, then, as there was no further action, the act Page 28 13 F. 722, *767; 1882 U.S. App. LEXIS 2045, **94; 8 Sawy. 238 never finally passed, even by the numbers indicated. correct record of the proceedings of their respective Assembly Journal, 24th Sess. pp. 472-475. houses." And sections 256 and 257 require the daily proceedings to be recorded in the journals, and that they The bill, therefore, never was constitutionally passed, "must be read by the secretary each day of meeting, and and never became a law. Whether the bill became a law then be authenticated by the signatures of the president is a question of law of which the court will take judicial and speaker of the respective houses." Section 1875, notice. Sherman v. Storey, 30 Cal. 253; Ottawa v. Code C.P., provides that "courts take judicial notice of Perkins, 94 U.S. 268; Gardner v. The Collector, 6 Wall. the following facts: * * * Public and private official acts 509, 510; Post v. Sup'rs, 105 U.S. Under the decisions of of the legislative, executive, and judicial departments of the courts upon constitutional provisions in all respects this state, and of the United States," etc. * * * "In all similar to that in the present constitution of California, it these cases the court may resort for its aid to appropriate is settled that the court, to inform itself, will look to the books of documents of reference." Section 1888 provides journals of the legislature. So the supreme court of the that "public writings are (1) the written [**97] acts or United States holds where it is so decided by the state records of the acts of the sovereign authority of official courts in construing their own constitutions and laws. bodies and tribunals, and of public officers, legislative, See cases last cited. I am not aware of any decision of judicial, and executive, whether of this state or of the the supreme court of California giving a different United States," etc. And section 1918 provides that construction to [**95] the state constitution as it now "official documents may be proved as follows: * * * (2) stands. Unless this mode is adopted of resorting to the The proceedings of the legislature of this state, and of journals to ascertain whether a statute has been legally congress, by the journals of those bodies respectively, or passed or not, experience, and the number of cases that either house thereof, or by published statutes or have already arisen under similar constitutional resolutions." Thus the journals of the legislature are put provisions, demonstrate that the requirement of the upon the same footing as the statutes. We think there can constitution that the vote shall be taken by yeas and nays, be no doubt, under the constitution of the state and these and a majority of the members required to vote in the statutes, that we may look to the journals to see what affirmative on the final passage of an act, would be of action was in fact had with respect to any apparent law as little avail. published in the volumes of the statutes of the state; and looking to the journals it affirmatively appears that the While we think the case of Sherman v. Storey act upon the statute book in question never did become a correctly decided under the constitution as it then was, we law. are of the opinion that the change in the constitution requires a change in the rule. When California adopted Even if the act had passed, it is at least extremely from other states the provision now found in its doubtful whether the notice, or time for filing the constitution substantially as found in the constitution of petition, is sufficiently definite to be of any effect. The Illinois, it must be deemed to have adopted with the assessment, under the provision, might be made, even if provision the settled construction put upon it by the the party is bound to notice the state of the record [**98] courts of the state from which it was taken. The leading on the first Monday of May, the five days might elapse, cases upon the point are Spangler v. Jacoby, 14 Ill. 278; and the assessment be transmitted to the county, before Prescott v. Board of Trustees, etc., 19 Ill. 326; Osborn v. the party assessed would know, under the law, that it had Staley, 5 W. Va. 89; and the cases cited in Sherman v. been made. All the acts of assessment may have Storey, [**96] and [*768] in those from the United transpired, and the assessment become final, before the States supreme court. In this case there is something first Monday of May. The board, however, is not more than an omission in the journals, for it affirmatively required to make it before [*769] that day, although it appears what the vote was, and that the bill did not pass might do so, and the party assessed can scarcely be by the vote required by the constitution. expected to watch its proceedings, from day to day, before the time fixed by the law. Statutory provisions, also, have been adopted, which appear to be designed to give effect to this change in the There being, then, no such statute as is relied on in constitution. Section 255 of the Political Code requires existence, the validity of the assessment must rest alone the minute clerks of the senate and assembly to "keep a upon the constitutional provision quoted, and the act of Page 29 13 F. 722, *769; 1882 U.S. App. LEXIS 2045, **98; 8 Sawy. 238 1880, adding sections 3664 and 3665 to the Political opportunity to be heard, other than to require him at some Code; and neither provides for notice of any kind, or for time, say a month anterior to the consideration and an opportunity to be heard in any stage of the determination of the amount to be paid, to furnish such proceedings. It was therefore made without due process board or court a similar statement as to the description of law, as we understand the meaning of that provision as and value of the property to that required [**101] by used in the fourteenth amendment in question. section 3664, which the party might do or omit to do; would a subsequent ex parte determination of the value, Section 3664 of the Political Code, as adopted in by the board or court, be in pursuance of due process of 1880, requires the president, or some other designated law within the meaning of the constitution? I apprehend officer of the class of corporations in question, to furnish that no court would sustain such a proceeding. I also the state board of equalization, [**99] on or before the think that a taking for the purposes of taxation under such first Monday of April in each year, a detailed statement an assessment, without notice or opportunity to be heard, of the whole number of miles of road operated, the would be equally without the protection of due process of number of cars, amount of rolling stock, and their value, law, and equally void. the gross earnings, and various other particulars; and requires the said board, on or before the first Monday in The state supreme court has held the provision in the May, to assess the franchise, road-way, road-bed, rails, constitution of California, authorizing the state board of and rolling stock. It is urged on the part of the plaintiff equalization to assess, finally, the railroads of the class in that this provision furnishes sufficient notice and question, to be self-executing, requiring no legislation of opportunity to be heard, to constitute due process of law any kind to carry it into full effect; also that the provision on this point, within the meaning of the constitutional is mandatory, S.F. & N.P.R.Co. 8 Pac. Coast Law J. provision. In our judgment, this position is clearly 1061. untenable. This is simply a mode adopted for obtaining information as to the amount and general value of the It is insisted by defendant that, this being so, it is property of the corporation, as a basis in part, at least, for incompetent for the legislature to add to or take from the their future consideration and action in making the requirements found in the constitution, and that the assessment. It is but a preliminary step and not the additional provision of section 3664, as adopted in 1880, assessment, or any part of the assessment. The board is is void. The view already expressed upon the section under no obligation to adopt either the statement as to renders it unnecessary now to determine that question, what the property is, or its value. It may reject i although presented [**102] by the record and argued by altogether and adopt an entirely different basis. The party counsel. It would seem, however, that there can be no interested is entitled, at some point of the proceeding, to constitutional objection to legislating upon details for the [**100] know what action the board takes, or proposes purpose of more effectually carrying out the scheme of to take; and to an opportunity to be heard, as to its the constitution, so far as the legislation is not propriety, before the assessment becomes fixed and inconsistent with any of its provisions. It is a general rule irrevocable. Other classes of property holders, also, are that a state legislature has all legislative power not required to file a statement of their property under oath, inhibited by the constitution, state or national. S.P.R. Co. yet in the scheme provided for their assessment an v. Orton, 6 Sawy. 186. opportunity to be afterwards heard is provided for. This being so, it would seem that the legislature The constitutions of the state and nation provide that might supplement the constitutional provision by private property shall not be "taken for public use without statutory provisions intended to more perfectly protect just compensation." When parties cannot agree, there the rights of the parties by other safeguards which are not must be some mode provided for [*770] ascertaining the inconsistent with the constitutional provision. But as this value of property so proposed to be taken for public use is a question more properly belonging to the state courts, under the sovereign right of eminent domain. Suppose a we do not deem it desirable to finally determine it now. statute should provide a board, or even a court, to assess [*771] 5. Is the provision of the state constitution, the value of property proposed to be taken under this under which the assessment in question was made, in power for railroad purposes, or other public use, and conflict with the provision of the fourteenth amendment should give the owner of the property no notice or to the national constitution which provides that no state Page 30 13 F. 722, *771; 1882 U.S. App. LEXIS 2045, **102; 8 Sawy. 238 "shall deny to any person the equal protection of the value of the property, and the other party, who is law?" The circuit justice has discussed this question so interested to the extent of one-half, upon none. A., a fully [**103] and satisfactorily that I shall have little to natural person, has $50,000 in cash -- all the property he add. The provision is: has -- and purchases of B., another natural person, a piece of real estate for $100,000, [*772] that being its actual "A mortgage, deed of trust, contract, or other value, paying one-half down, and giving a mortgage for obligation by which a debt it secured, shall for the $50,000 to secure the balance of the purchase money. purposes of assessment and taxation, be deemed and The constitution in effect says -- and in this instance such treated as an interest in the property affected thereby. is the real, actual state of facts -- that A. and B. each has Except as to railroad and other quasi public corporations, $50,000 in the property, one-half not having been paid in case of debts so secured, the value of the property for by A., and each shall be assessed and pay a tax upon affected by such mortgage, deed of trust, contract, or his own interest in it, amounting to $50,000. A., in this obligation, less the value of such security, shall be instance, is worth only $50,000, and if he pays taxes upon assessed to the owner of the property, and the value of a larger amount he pays taxes upon property he does not such security shall be assessed and taxed to the owner own -- upon property owned by somebody else. This thereof, in the county, city, or district in which the seems to be a self-evident proposition. property affected thereby is situate. The taxes so levied shall be a lien upon the property and security, and may be C., "a railroad or other quasi public corporation," paid by either party to such security. If paid by the owner also has $50,000 cash, and purchases of B., for its proper of such security, the tax so levied upon the property use, an adjoining piece of real estate for $100,000, which affected thereby shall become a part of the debt so is also its actual value, paying [**106] $50,000, and secured. If the owner of the property shall pay the tax so giving a mortgage to secure the balance of the purchase levied on such security, it shall constitute a payment money. In this case, as in the other, the actual interest of thereon, and to the extent of such payment a full each in the property is $50,000. They stand upon discharge thereof; provided, that if any such security or precisely the same footing in all particulars with indebtedness shall [**104] be paid by any such debtor or reference to the property. C. has only $50,000 in the debtors, after assessment and before the tax levy, the property, -- it not having paid for the other half, -- and B. amount of such levy may likewise be retained by such the rest. But in this case the constitution says that C. debtor or debtors, and shall be computed according to the shall, nevertheless, be assessed for, and pay taxes upon, tax levy for the preceding year." the whole property, double the amount he owns, and B. shall not be required to pay anything; that is to say, that Whatever the property, then, real or personal, C. shall not only pay the tax on its own property, but the mortgaged to secure a debt, the value of the debt so tax upon B's property; that money, to the amount of the secured, in the case of everybody except "a railroad and tax assessed upon $50,000 belonging to B., shall be taken other quasi public corporations," is to be deducted from by the state or county from C., and appropriated to the the value of the property mortgaged; and the value only use and for the benefit of B., to liquidate B.'s share of the of the property mortgaged, "less the value of such public burdens. This sum, being so much more than C.'s security, shall be assessed and taxed to the owner of the share of the public burdens, and being in fact B.'s share, property, and the value of such security shall be assessed the result of the operation is not only to take so much and taxed to the owner thereof;" that is to say, that, property from C. for public use without compensation, whatever the property, it shall be taxed to the real owner. but also to arbitrarily take it from C., and apply it to the But in the case of "a railroad or other quasi public use and benefit of another private party, B., [**107] corporation," there is to be no reduction of the value of without compensation. The result would be the same the mortgaged property, and the whole is to be taxed to whether the property of A., B., and C., thus situated and one party, whether he owns the whole or not. In one mortgaged is land, a railroad operated in one or more case, if property is mortgaged to the extent of half its counties, or any other kind of property. Does a law value, the owner is assessed upon one-half the value, and which authorizes such proceedings -- such the owner of the debt secured is taxed upon the other half. discriminations -- bear or press equally upon A. and C., But in the [**105] other case the owner of the legal title or equally upon B. and C.? Is C. equally protected in his to the property is assessed and taxed upon the whole rights of property with A., or equally protected with B.? Page 31 13 F. 722, *772; 1882 U.S. App. LEXIS 2045, **107; 8 Sawy. 238 Although situated precisely alike with reference to their well stated in Ah Kow v. Nunan, 5 Sawy. 562; In re Ah property, do they feel the pressure of the public burdens Fong, 3 Sawy. 144; Pearson v. Portland, 69 Me. 278; equally and alike? The question does not appear to me to Portland v. Bangor, 65 Me. 120; Missouri v. Lewis, 101 admit of argument. Upon the very statement of the U.S. 22. See, also, Live Stock, etc., Ass'n, v. Crescent City proposition it seems to me to be self-evident [*773] that Co. 1 Abb. 398; Parrott's Chinese Case, 6 Sawy. 377. a law authorizing and requiring such proceedings does That inequality and different principles of taxation of not afford, but expressly denies, the equal protection of persons similarly [*774] situated, as in this case, is a the law. The constitution in the one case says that "the violation [**110] of this provision seems to be already mortgage, deed of trust, contract, or obligation" shall be determined by the supreme court of the United States. "deemed and treated as an interest in the land affected The civil-rights act, as re-enacted in 1870, and again in thereby," which, in the cases supposed, together with the the Revised Statutes, provides that -- debt secured, it undoubtedly in fact is; but in effect the constitution says it is not so in the other case. Different "All persons within the jurisdiction of the United kinds of property [**108] may require to be taxed in States shall have the same right in every state and different forms and modes, in order to be equally taxed; territory * * * to the full and equal benefit of all laws and and classifications of property, for purposes of taxation, proceedings for the security of persons and property as is should have reference to the just equality of burdens, so enjoyed by white citizens, and shall be subject to like far as that is practically attainable. Classification should punishment, pains, penalties, taxes, licenses, and have reference to the different character, situation, and exactions of every kind, and to no other." 16 St. p. 144. § circumstances of the property, making a different form or 16; Rev. St. 1977. mode of taxation proper, if not absolutely necessary. It The congress which passed this act embraced many cannot be arbitrarily made with mere reference to the of the members who were in the congress which framed nationality, color, or character of the owners, whether and proposed the fourteenth amendment, and they may be natural or artificial persons, without any reference to a supposed to be well informed as to the purpose and scope difference in the character, situation, or circumstances of of that amendment. This act was passed in pursuance of the property. If the arbitrary discrimination and the last clause of the amendment, as a part of the classification found in this case can be legally made appropriate legislation to enforce its provisions. It is under the constitution and the law of the land, then the therefore a legislative construction as to the scope of the constitution or the law can be so framed as to dispose of a provision inhibiting the states from denying to any person man's rights in property of all kinds by arbitrary the equal protection of the law. The United States classification and definition, without regard to the real supreme court gives the amendment a similar facts, circumstances, or condition of the property. A construction [**111] as to its scope. In Strauder v. West person may be classified and defined out of the equal Virginia the court says that sections 1977 and 1978 of the protection of the law; and if so with reference to this Revised Statutes "partially enumerate the rights and provision, he can also be classified and [**109] defined out of uniformity in the operation of the law in other immunities intended to be granted by the constitution," and after quoting section 1977, as above set out, adds: particulars; out of the protection of due process of law, "This act puts in the form of a statute what had been and of the provision forbidding a law impairing the substantially ordained in the constitutional amendment. obligation of contracts, or taking property for public use It was a step towards enforcing the constitutional without just compensation; and, indeed, out of all the provision." 100 U.S. 311. guaranties of the constitution, state or national. I am not arguing that property of all kinds may not be taxed where In Ex parte Virginia the court, referring to Tennessee it is found; but in this case there is a personal liability v. Davis and Strauder v. West Virginia, said: sought to be enforced against the defendant for taxes not imposed upon others in like circumstances, without any "We held that the fourteenth amendment secures, means provided for reimbursement, such as are among other civil rights, to colored men, when charged applicable to others similarly situated, by the party who with criminal offenses against a state, an impartial jury ought to pay the tax. trial, by jurors indifferently selected, or chosen without discrimination against such jurors because of their color. What constitutes the equal protection of the law is We held that immunity from any such discrimination is Page 32 13 F. 722, *774; 1882 U.S. App. LEXIS 2045, **111; 8 Sawy. 238 one of the equal rights of all persons, and that any under the state constitution, the legislature is authorized withholding it by a state is a denial of the equal to alter or repeal the laws under which corporations are protection of the laws, within the meaning of the formed, -- they cannot be properly called charters, -- and amendment. We held that such an equal right to an that this [**114] mode of taxing corporations, in effect, impartial jury trial, and such an immunity from operates as an amendment of the act authorizing the unfriendly discrimination, are [**112] placed by the formation of corporations, and that corporations hold amendment under the protection of the general their franchises in subordination to that provision. government, and guarantied by it. We held, further, that this protection and this guaranty, as the fifth section of The proceeding in question is either taxation or the amendment expressly ordains, may be enforced by something else; either an exercise of the sovereign right congress by means of appropriate legislation." 100 U.S. of taxation, or the exercise of some other power; either 345. taxation or not taxation. The provision, in terms, purports on its face to provide for taxation. The convention that [*775] If discrimination in fixing the qualifications framed the article, and the people, when they adopted it, of jurors inferentially violates the provisions of the [*776] evidently must have supposed they were fourteenth amendment, as denying the equal protection of providing a scheme of taxation. The provision admits of the law, it is not easy to perceive why discriminations in no other construction. the assessment and collection of taxes expressly made are not equally so. The provision is found in the chapter entitled "Revenue and Taxation," and the section says: "For the Thus it appears that the supreme court regards the purpose of assessment and taxation," etc. If the section quoted as within the scope of the fourteenth proceeding is taxation, then it provides, and can only amendment, and the act provides that every person "shall provide, for taking from the defendant an amount of be subject to like * * * taxes, licenses, and exactions of money equal to its just share of the public burden relieved every kind, and to no other," as "white citizens;" and this by the taxation, and nothing more. Anything beyond that is held to be appropriate legislation to enforce the is taking private property for public use without amendment. We have already seen that this defendant is compensation. If the proceeding is taxation, there is no subjected to taxes and exactions other than and different necessity for resorting to any other provision [**115] of from those imposed upon "white citizens." We have the constitution. If it is not taxation, -- if the amount already held that the word "person," as to property rights, demanded, or the principle adopted, is imposed as a as used in the amendment in question, includes [**113] a condition of continued existence, or as a limitation of its corporation, and, as used in the provision of the statute rights to exercise its franchises, -- then it is an annual cited, it includes a corporation by express definition of bonus demanded for the franchise, or the privilege of the statute itself, which says, in terms: "In determining existence, such as was formerly often demanded and paid the meaning of the Revised Statutes * * * the word by corporations for the special privileges given by special 'person' may extend and be applied to partnerships and charters, when there were no restrictions upon the corporations." Page 1, tit. 1, c. 1, § 1. legislative power upon the subject, and is not taxation. If it is a bonus demanded and paid for this right, then, in The provision of the constitution of the state of addition, the corporation is subject to taxation upon its California in question, therefore, violates the provision of property; for under the constitution all property must be the fourteenth amendment in denying to defendant the taxed. "All property in the state," says the constitution, equal protection of the law. "An unconstitutional law is "not exempt under the laws of the United States, shall be void, and is no law." Ex parte Siebold, 100 U.S. 376. taxed in proportion to its value, to be ascertained as "The constitution and laws of the United States are the provided by law." Article 13, §§ 1, 6, says that "the supreme law of the land, and to those every citizen of the power of taxation shall never be surrendered or United States owes obedience, whether in his individual suspended by any grant or contract to which the state or offical capacity. * * * The laws of the state, in so far shall be a party." If, therefore, the provision of section 4 as they are inconsistent with the laws of congress on the relative to "railroad or other quasi public corporations" is same subject, cease to have effect as laws." Id. 392, 397. a term or condition of the contract upon which its existence [**116] and further exercise of its franchises 6. It is further urged on the part of plaintiff that, Page 33 13 F. 722, *776; 1882 U.S. App. LEXIS 2045, **116; 8 Sawy. 238 depend, then it must still be liable to taxation on its may, doubtless, grant to it, as well as to natural persons property in the proper mode. By a contract authorizing capable of taking, property rights; but such rights of certain persons to form a corporation and exercise its property, when once vested, can no more be withdrawn franchises, however valuable the consideration received, than the property acquired from other sources, or than the state cannot, as we have seen, surrender or suspend its property granted to, or acquired by, natural persons. The rights to tax its property besides, as all other property is property acquired in the exercise of its corporate taxed. Other tax-payers are entitled to have the property faculties, from whatever source derived, is the property of of corporations properly taxed. Again, if the submission the metaphysical being called the corporation, held, to this mode of what is called taxation becomes a valid however, in trust for the sole benefit of the corporators. condition of the continuance of the further existence of As such, it is protected like all other property, and can the corporation, and the further exercise of its franchises, only be taken by the law of the land, in some one of the then a refusal to pay the tax is a violation of the modes not inhibited by the constitution. It cannot, in my conditions of its being, and the courts, upon a proceeding judgment, be taken even as a further condition of for the purpose by the state in the nature of a quo corporate existence without the assent [**119] of the warranto, would probably adjudge the forfeiture of its corporation or its corporators. There is no consent in this charter and wind up its affairs. This would be the case to submit to any such conditions, and that is not the appropriate remedy. [*777] I apprehend that no court basis upon which the action is brought. There is no would so adjudge under the present constitution on that promise [*778] to pay a bonus set out in the complaint ground. It is clear to me, therefore, from these upon which an action can be maintained. I apprehend considerations and the express terms themselves of the that a mere provision in the form of a statute, or a state constitution, that the provision [**117] in question constitution adopted after the formation of a corporation, attempts to provide only for exercising the sovereign that corporations under the laws should cease to exist power of taxation, -- has no other end to accomplish, and unless they surrender to the state all the property accomplishes no other purpose, -- and that the rights of theretofore acquired by the corporation, would be void. the parties must be determined on that hypothesis alone. And power to demand a part, as a condition of existence, Again, the general act authorizing the formation of however small, is power to demand all. Such a statutory corporations confers upon those complying with its demand would be but a flimsy guise or pretext for provisions certain rights, franchises, and privileges. It evading all the guaranties of the constitution, which endows the parties as organized with certain faculties and would not for a moment be tolerated. It would be to seek capacities, the result being to give them in their united indirectly what could not be attained directly; the character, under a certain name, a capacity to do business accomplishment of an unlawful end by what, at best, is and acquire property. A law merely authorizing the but apparently lawful means. See, on this point, Parrott's formation of a corporation gives the corporation formed Chinese Case, 6 Sawy. 349; Opinion of Hoffman, J. In no property. That must be acquired by the corporation that case I had occasion to say: for itself. The legislature, under the various guaranties of the constitution, state and national, can only take away, "The end being unlawful and repugnant to the limit, enlarge, or modify that which it gave. And what is supreme law of the land, it is equally unlawful [**120] given in the creative act is, simply, its capacities; its legal and equally in violation of constitution and treaty faculties, including all such as are essential to its stipulations to use any means, however proper or within corporate existence; all those powers which are strictly the power of the state for lawful purposes, for the corporate, being those powers which can only be given attainment of that unlawful end, or accomplishment of by legislative act; powers not possessed by natural that unlawful purpose. It cannot be otherwise than [**118] persons or partnerships, acting in their natural, unlawful to use any means whatever to accomplish an individual, or associate characters, independent of unlawful purpose. This proposition would seem to be too legislation. These strict corporate powers I attempted to plain to require argument or authority. Yet there is an define in Orton's Case, 6 Sawy. 187. The powers thus abundance of authority on the point, although, perhaps, given, essential or otherwise, and their future exercise, not stated in this particular form. Brown v. Maryland, 12 may be modified, or otherwise affected, by subsequent Wheat. 419; Ward v. Maryland, 12 Wall. 431; Woodruff legislation. A corporation having been formed with v. Parham, 8 Wall. 130-140; Hinson v. Lott, Id. 152; capacity to acquire and hold property, the legislature Welton v. Missouri, 91 U.S. 279-282; Cook v. Page 34 13 F. 722, *778; 1882 U.S. App. LEXIS 2045, **120; 8 Sawy. 238 Pennsylvania, 97 U.S. 573." Again, this suit is for a tax and nothing else. It proceeds upon that idea, and the idea alone, that a valid The observations of Mr. Justice Field in Cummings tax has been assessed against the defendant, which this v. Missouri, 4 Wall. 325, are pertinent in this connection. action is brought under the statute to recover. The suit He said: cannot be maintained upon a liability imposed under other and different provisions of the constitution. If it "The deprivation is effected with equal certainty in cannot be maintained as for a tax it must fail. The the one case as it would be in the other, but not with recovery, if [**123] any is had, must be upon the cause equal directness. The purpose of the law-maker in the of action alleged. case supposed would be openly avowed; in the case existing it is only disguised. The legal result must be the We do not conceive that a provision for assessing same; for what cannot [**121] be done directly cannot railroads operated in more than one county, by the state be done indirectly. The constitution deals with substance, board of equalization, while other local property is not shadows. Its inhibition was leveled at the thing, not assessed by the local assessors, would be denying the the name. It intended that the rights of the citizen should equal protection of the law, provided the assessment in be secure against deprivation for past conduct by the former case is, in all respects, made upon the same legislative enactment under any form, however disguised. basis, under the same rules, and upon the same principles If the inhibition can be evaded by the form of the as to value, notice, opportunity to be heard, etc., as in the enactment, its insertion in the fundamental law was a vain latter. The presumption would be that all the officers and futile proceeding." See, also, Henderson v. Mayor of would perform their duties justly under the law, and that N.Y. 92 U.S. 268; Chy Lung v. Freeman, Id. 279; the assessments so made upon property, differently Railroad Co. v. Huson, 95 U.S. 472. circumstanced, would operate equally. Nor do we think that the assessment of the "franchise, road-way, road-bed, The foregoing observations apply equally well to any rails, and rolling stock of all railroads operated in more effort to obtain the property of corporations by irregular than one county in the state," "by the state board of means not applicable to natural persons. It seems to be equalization," as a unit, and apportioning the amount of that under our general system embodied in the the assessed value to the several counties, etc., in constitution, providing for corporations, which forbids proportion to the number of miles in each, is [*779] the granting of any special privileges not enjoyed objectionable, on the ground that it denies the equal by all other persons, it was intended to put corporations, protection of the law to the owner of the road. with respect to their property and to all other matters, except what is in fact granted by the laws, in all [*780] Indeed, this seems to be the only [**124] particulars upon the same footing as natural persons. practicable way of assessing such a road. It is owned and operated as a unit, and cannot be otherwise usefully In my judgment, the state constitutional provisions employed. Its income, expenses, and management, and under [**122] consideration, and the laws passed to all its operations, are as a unit. Its rolling stock is at one carry them out, violate the provision of the fourteenth point at one moment, and at another at a different point of amendment in question in two vital particulars: (1) They time, but it is all working together as a unit to the assess railroad and other quasi public corporations upon a accomplishments of one end. In fragments and isolated different basis from that adopted with respect to the parts, the road would be comparatively valueless as natural persons similarly situated, in the particulars herein property. It is only as a unit that it can be properly pointed out; (2) they provide, with respect to natural considered or properly taxed. To tax it otherwise would persons, notice and an opportunity to be heard in the be to tax it upon principles materially different from course of the proceeding to assess their property before those applicable to other property necessarily considered the assessment becomes fixed, while they afford no such and used as a unit. The character and circumstances of notice or opportunity to be heard to railroads and other the property are such as seem to justify a classification quasi public corporations; and in both these particulars for this purpose. These points, also, seem to be deny to the latter the equal protection of the law within determined in favor of the plaintiff in the State Railroad the meaning of the fourteenth amendment to the national Tax Cases, 92 U.S. 575. The other points determined in constitution. this case are not involved in those cases. Page 35 13 F. 722, *780; 1882 U.S. App. LEXIS 2045, **124; 8 Sawy. 238 Whatever public inconvenience may temporarily result If the life, liberty, property, and happiness of all the from our decision, -- and it must necessarily be great, -- people are to be preserved, then it is of the utmost being satisfied, as we are, that the provisions of the state importance to every man, woman, and child of this broad constitution now in question [**125] violate the land that every guaranty of our national constitution, inhibitions of the fourteenth amendment, our duty is [**127] whatever temporary inconvenience may be felt, plain, and we cannot, if we would, shrink from its be firmly and rigorously maintained at all times and performance. There must be judgment for the defendant. under all circumstances. In the language of the supreme court of the United States: Since the argument in these cases commenced, apparently in anticipation of what must necessarily be the "The constitution of the United States is a law for result, various means, more or less violent, have been rulers and people, equally in war and in peace, and covers suggested, through the public press and elsewhere, to with the shield of its protection all classes of men, at all prevent railroad corporations from escaping the payment times, and under all circumstances. No doctrine of their just share of the public burdens: such as taking involving more pernicious consequences was ever away their franchises; seizing and appropriating their invented by the wit of man, than that any of its provisions property first, and litigating the right afterwards; and can be suspended during any of the great exigencies of punishing by the severest penalties the officers of all such government. Such a doctrine leads directly to anarchy or corporations, in all cases where resistance to payment of despotism." Milligan's Case, 4 Wall. 120. a tax is made in the courts, however illegal the exaction or whatever the ground of complaint on their part may be. I concur in the judgment ordered by the circuit Violent counsels of this character usually result in justice. constitutional and statutory provisions such as those we ORDER STAYING PROCEEDINGS. have been considering and held void, which render it necessary to seek the protection of our national magna As the questions we have considered are of the charta. It would be idle -- utterly futile -- to insert a greatest importance, and their correct solution concerns provision in the national constitution guarantying to not merely the railroad corporation, which is the every person within [**126] its jurisdiction his life, his defendant, but corporations of every kind, other than liberty, and his property, if certain classes can be selected municipal, we shall order a stay in all the other cases (not out in the subordinate legislation of the country to be decided to-day) now pending in this court involving the visited with condign punishment if they even seek to same questions, until these cases can be brought before invoke the protection of this beneficient guaranty against the supreme court of the United States, and the questions discriminating and wrongful [*781] legislation. If a [**128] involved shall have received by its judgment single individual can be deprived of the protection of this their final and authoritative determination. If the decision provision by such means, so can all. If such things can now reached be there sustained, the state will be obliged be, wherein does the protection of the guaranty consist? to order a new assessment, in making which the defendant will be allowed a deduction in the valuation of A far wiser and more statesmanlike proceeding its property for the mortgage thereon, and also a hearing would seem to be, to avoid all occasion for resistance to before the state board of equalization with respect to the wrong in the guise of void laws, by coolly and calmly assessment. If, on the other hand, the decision be re-examining the subject in the light of past experience, reversed, [*782] the other cases can be at once disposed and so amending our state constitution and statutes as to of. By taking out a writ of error immediately on the bring them into entire harmony with all the guaranties of judgment now rendered, it is possible that the case may the fourteenth amendment, "the crowning glory of our be advanced on the calendar and be heard at the coming national constitution" -- that noblest and best written term. constitution ever devised by the wisdom of man. Page 1 RICK ALLAN RHOADES, Appellant v. THE STATE OF TEXAS, Appellee No. 71,595 COURT OF CRIMINAL APPEALS OF TEXAS 934 S.W.2d 113; 1996 Tex. Crim. App. LEXIS 205 October 2, 1996, DELIVERED October 2, 1996, filed SUBSEQUENT HISTORY: Rehearing denied by, contended the trial court erred when it refused to admit 11/20/1996 childhood photographs that depicted him as a normal, Writ of habeas corpus denied Ex parte Rhoades, 2014 happy child. Appellant argued that the trial court's Tex. Crim. App. Unpub. LEXIS 833 (Tex. Crim. App., preclusive ruling denied him the opportunity to present Oct. 1, 2014) relevant, mitigating evidence in his defense. The court held the photographs were irrelevant to appellant's moral PRIOR HISTORY: [**1] Appeal from the 179th blameworthiness for the commission of the District Court of Harris County. double-murder. The court affirmed the conviction. Other assignments of error lacked merit, were not preserved for DISPOSITION: AFFIRMED review, or were inadequately briefed. CASE SUMMARY: OUTCOME: The court affirmed appellant's conviction for capital murder because several of appellant's 18 points of error were not preserved for review and PROCEDURAL POSTURE: Appellant sought review appellant's other contentions were either not adequately of a judgment rendered by the 179th District Court of briefed or lacked merit. Harris County (Texas) that convicted appellant of capital murder and sentenced appellant to death. CORE TERMS: parole, prison, veniremember's, eligible, life sentence, capital murder, juror, mitigating, OVERVIEW: Appellant was convicted for capital commit, eligibility, special issue, sentencing, prosecutor, murder. Appellant sought review of the conviction on 18 furlough, sentence, future dangerousness, sentenced, life grounds. Appellant contended that his Sixth Amendment imprisonment, voir dire, mitigating evidence, emergency, right to counsel was impinged when the trial court violence, death penalty, questioning, culpability, precluded him from discussing, with veniremembers, the mitigation, inform, capital case, voir dire, photographs statutory 35-year minimum for individuals convicted of capital murder that are given a life sentence. The court LexisNexis(R) Headnotes overruled this error as it was inadequately briefed. Appellant claimed the trial court erred by providing false and misleading information about parole eligibility, during jury selection. Error was waived since appellant raised the argument for the first time on appeal. Appellant Criminal Law & Procedure > Criminal Offenses > Page 2 934 S.W.2d 113, *; 1996 Tex. Crim. App. LEXIS 205, **1 Homicide > Murder > General Overview Governments > Legislation > Effect & Operation > [HN1] See Tex. Penal Code Ann. § 19.03(a)(6). Amendments [HN7] See Tex. Const. art. III, § 36. Criminal Law & Procedure > Juries & Jurors > Voir Dire > Questions to Venire Panel Governments > Legislation > Effect & Operation > [HN2] A trial court commits error if it prohibits defense Amendments counsel from asking "proper" voir dire questions. A [HN8] See Tex. Gov't Code Ann. § 311.025 (b) and (c). natural corollary to the preceding rule is that a trial court commits no error if it precludes improper voir dire Criminal Law & Procedure > Juries & Jurors > Voir questioning. A "proper" question is one which seeks to Dire > Appellate Review discover a veniremember's views on an issue applicable Criminal Law & Procedure > Juries & Jurors > Voir to the case. Dire > Questions to Venire Panel Criminal Law & Procedure > Appeals > Standards of Criminal Law & Procedure > Juries & Jurors > Voir Review > Abuse of Discretion > General Overview Dire > Appellate Review [HN9] When a defendant challenges a trial court's Criminal Law & Procedure > Juries & Jurors > Voir limitation on voir dire questioning on appeal, the Dire > Questions to Venire Panel reviewing court must analyze the claim under an abuse of Criminal Law & Procedure > Appeals > Standards of discretion standard, the focus of which is whether Review > Abuse of Discretion > General Overview appellant proffered a proper question. A proper question [HN3] When an appellant challenges a trial court's voir is one which seeks to discover a veniremember's views dire limitation, the reviewing court must analyze the on an issue applicable to the case. If a proper question is claim under an abuse of discretion standard, the focus of disallowed, harm to appellant is presumed because he has which is whether the appellant proffered a proper been denied the ability to intelligently exercise his question. peremptory strikes. However, the trial court may restrict questions in which counsel attempts to commit a veniremember to a particular resolution based upon facts Criminal Law & Procedure > Postconviction peculiar to the trial. Proceedings > Parole [HN4] Parole, and the issues surrounding the minimum prison term necessary for parole eligibility, are not Criminal Law & Procedure > Juries & Jurors > matters for jury consideration in a capital murder Challenges to Jury Venire > Equal Protection prosecution. Challenges > General Overview Criminal Law & Procedure > Juries & Jurors > Peremptory Challenges > Proving Discriminatory Use Civil Procedure > Appeals > General Overview [HN10] The procedure to determine an equal protection [HN5] It is incumbent upon appellate counsel to cite violation has three prongs in the context of racial specific legal authority and to provide legal argument discrimination: First, the opponent of the peremptory based upon that authority. challenge has to prove a prima facie case of racial discrimination. If this burden is met, the burden of Criminal Law & Procedure > Appeals > Reviewability > production falls to the proponent of the strike to tender a Preservation for Review > Failure to Object race-neutral explanation. If a race neutral explanation is Criminal Law & Procedure > Appeals > Reviewability > tendered, the trial court must then determine if the Preservation for Review > Requirements opponent of the strike has proved purposeful racial Criminal Law & Procedure > Appeals > Reviewability > discrimination. Waiver > General Overview [HN6] For an issue to be preserved on appeal, there must Criminal Law & Procedure > Appeals > Standards of be a timely objection which specifically states the legal Review > Clearly Erroneous Review > General basis for that objection. Overview Page 3 934 S.W.2d 113, *; 1996 Tex. Crim. App. LEXIS 205, **1 [HN11] The court reviews the trial court's finding, vel Criminal Law & Procedure > Sentencing > Capital non, of purposeful discrimination under a clearly Punishment > Mitigating Circumstances erroneous standard. Criminal Law & Procedure > Appeals > Standards of Review > Abuse of Discretion > General Overview Evidence > Demonstrative Evidence > Photographs Criminal Law & Procedure > Juries & Jurors > Voir [HN15] Photographs of a defendant which depict a Dire > Appellate Review cheerful early childhood are irrelevant to appellant's Criminal Law & Procedure > Appeals > Standards of moral blameworthiness for the commission of a violent Review > Clearly Erroneous Review > General double-murder because such evidence has no relationship Overview to appellant's conduct in those murders. That a defendant [HN12] When applying the clearly erroneous standard, was once a child does not diminish his moral culpability the court will not disturb a trial court's ruling unless the for the act of murder. court is left with a definite and firm conviction that a mistake has been committed. In making this determination, the court will review voir dire, the state's Civil Procedure > Judicial Officers > Judges > General race-neutral explanations, the composition of the jury Overview panel, and appellant's rebuttal and impeachment Criminal Law & Procedure > Sentencing > Forfeitures evidence. > Proceedings Evidence > Procedural Considerations > Objections & Offers of Proof > Objections Criminal Law & Procedure > Trials > Judicial [HN16] The court has identified the prerequisites to an Discretion effective objection respecting the admissibility of Criminal Law & Procedure > Sentencing > Capital evidence. As regards specificity, all a party has to do to Punishment > Mitigating Circumstances avoid the forfeiture of a complaint on appeal is to let the [HN13] Within the meaning of Tex. Code Crim. Proc. trial judge know what he wants, why he thinks himself Ann. art. 37.071, § 2(a), evidence mitigates against the entitled to it, and to do so clearly enough for the judge to imposition of the death penalty if a reasonable juror could understand him at a time when the trial court is in a conclude that the evidence was a basis for a sentence less proper position to do something about it. Of course, when than death. Tex. Code Crim. Proc. Ann. art. 37.071, § 2(f) it seems from context that a party failed effectively to (4) provides further guidance when it defines mitigating communicate his desire, then reviewing courts should not evidence "to be evidence that a juror might regard as hesitate to hold that appellate complaints arising from the reducing the defendant's moral blameworthiness." If a event have been lost. reasonable juror could not conclude that the proffered evidence reduced the defendant's moral blameworthiness, then a trial court would be within its discretion to exclude Criminal Law & Procedure > Appeals > Reviewability > the evidence. Preservation for Review > Jury Instructions Evidence > Procedural Considerations > Objections & Offers of Proof > General Overview Criminal Law & Procedure > Sentencing > Capital [HN17] For an objection to be "timely", a party must Punishment > Mitigating Circumstances invoke it as soon as the ground for it becomes manifest. Evidence > Relevance > Relevant Evidence [HN14] Evidence about the defendant's background and character is relevant because of the belief, long held in Criminal Law & Procedure > Trials > Burdens of Proof society, that defendants who commit criminal acts that > Prosecution are attributable to a disadvantaged background, or to Criminal Law & Procedure > Sentencing > Capital emotional and mental problems, may be less culpable Punishment > Mitigating Circumstances than defendants who have no such excuse. The evidence Criminal Law & Procedure > Sentencing > Imposition is relevant because it relates to the moral culpability of a > General Overview defendant's act. By this logic, if evidence has no relation [HN18] In cases where mitigating evidence is presented, to a defendant's moral culpability for the charged crime, all that is constitutionally required is a vehicle by which then it is irrelevant to mitigation. the jury may give mitigating effect to appellant's Page 4 934 S.W.2d 113, *; 1996 Tex. Crim. App. LEXIS 205, **1 evidence. No burden of proof exists for either the state or further, declined to find mitigating circumstances under defendant to prove or disprove the mitigation question. Article 37.071 § 2(e). The trial court sentenced appellant to death. We will affirm the judgment of the trial court. Criminal Law & Procedure > Sentencing > Capital 1 Appellant was convicted for violation of what Punishment > Mitigating Circumstances was then [HN1] Texas Penal Code § 19.03(a) (6), Criminal Law & Procedure > Sentencing > Imposition which read in relevant part: > General Overview [HN19] There is no evidence that must be viewed by a (a) A person commits an offense juror as having a definitive mitigating effect, per se. if he commits murder as defined under Section 19.02 (b) (1) and: Criminal Law & Procedure > Jury Instructions > *** General Overview [HN20] An appellant is not entitled to jury instructions specifically informing the jury that certain evidence may be considered or how it may be applied. (6) the person murders more than one person: Criminal Law & Procedure > Sentencing > Capital Punishment > Mitigating Circumstances (A) during the same criminal [HN21] Each juror may or may not believe certain transaction; evidence is mitigating; however, the constitution only requires that where a juror believes there is relevant [**2] mitigating evidence, that juror must have a vehicle to 2 All Article references are to those in the Texas give his or her reasoned moral response to such evidence. Code of Criminal Procedure then in effect. The Federal Constitution does not require trial courts to Appellant raises eighteen points of error in his brief instruct juries regarding how they should consider, or on appeal. There are no evidentiary insufficiency points apply what they may or may not deem mitigating of error. Hence, we will address his points in evidence. chronological order where appropriate. COUNSEL: James Stafford, Houston. In point number one, appellant contends the trial Dan McCrory, Assist. DA, Houston. court impermissibly restricted his right to intelligent and effective use of peremptory challenges, when it JUDGES: Opinion Judge Mansfield (Judge Baird prohibited voir dire discussion of the statutory thirty-five concurs with note, Judge Maloney and Judge Meyers year minimum for Individuals sentenced to life concur in the result). Dissenting opinion Judge Clinton imprisonment. The substance of appellant's argument is (Judge Overstreet joins). Dissenting opinion Judge that his right to counsel -- as guaranteed by Article I, Overstreet Section 10, of the Texas Constitution -- was impinged when the trial court precluded voir dire discussion of the OPINION BY: MANSFIELD minimum calendar years appellant would have to serve before being eligible to parole were he sentenced to life OPINION imprisonment instead of death. See Ex parte McKay, 819 S.W.2d 478, 482 (Tex.Crim.App. 1990); Shipley v. State, 790 S.W.2d 604 (Tex.Crim.App. 1990). [*118] OPINION We have held that [HN2] a trial court commits error A Harris County jury convicted appellant, Rick if [**3] it prohibits defense counsel from asking Allan Rhoades, of capital murder. 1 At the punishment "proper" voir dire questions. Caldwell v. State, 818 phase of the trial, the jury unanimously found appellant to S.W.2d 790, 793 (Tex.Crim.App. 1991), cert. denied, 503 be a future danger under Article 37.071 § 2(b), 2 and, U.S. 990, 118 L. Ed. 2d 399, 112 S. Ct. 1684 (1992). A Page 5 934 S.W.2d 113, *118; 1996 Tex. Crim. App. LEXIS 205, **3 natural corollary to the preceding rule is that a trial court argued the Sixth Amendment issue, his position is commits no error if it precludes improper voir dire largely untenable. The federal constitutional right questioning. A "proper" question is one which seeks to to counsel has never been extended to provide discover a veniremember's views on an issue applicable such broad voir dire protection. For a discussion to the case. Id. [HN3] When an appellant challenges a of the cases in this area, see Ex parte McKay, 819 trial court's voir dire limitation, the reviewing court must S.W.2d 478, (Tex.Crim.App. 1991) (Clinton, J., analyze the claim under an abuse of discretion standard, dissenting to denial of rehearing). the focus of [*119] which is whether the appellant proffered a proper question. Id. In point three, appellant claims the trial court committed error by providing false and misleading We have held that [HN4] parole, and the issues information about parole eligibility, during the jury surrounding the minimum prison term necessary for selection process. We note that, in appellant's brief, the parole eligibility, are not matters for jury consideration in argument and authority for this point was combined with a capital murder prosecution. Smith v. State, 898 S.W.2d the argument and authority for points one, two, and four. 838, 846 (Tex.Crim.App. 1995) (plurality opinion), cert. Hence, it is difficult for [**6] this Court to ascertain denied, 116 S. Ct. 131 (1995); Broxton v. State 909 what information appellant believes the trial court S.W.2d 912, 919 (Tex.Crim.App. 1995); Sonnier v. State, erroneously provided to the veniremembers. 913 S.W.2d 511, 521 (Tex.Crim.App. 1995). Given that Nevertheless, appellant apparently complains of two juries are not to consider any aspect [**4] of parole, a instances. reasonable trial court could find that parole was not an issue applicable to the case. If parole was not an issue First, appellant complains the trial court, in response applicable to the case, a reasonable trial court could to a question from a veniremember, informed the correctly conclude that parole was not a "proper" area of veniremember that the decision regarding parole voir dire inquiry. Ford v. State, 919 S.W.2d 107 eligibility was within the exclusive jurisdiction of the (Tex.Crim.App. 1996). Point of error number one is Board of Pardons and Paroles. The exchange follows: overruled. THE COURT: Did you have a question? In his second point, appellant avers that his Sixth Amendment right to counsel was impinged when the trial VENIREMEMBER: Yes. When will court precluded him from discussing, with the they be eligible for parole? veniremembers, the statutory thirty-five year minimum THE COURT: I can't answer that. for individuals convicted of capital murder who are given a life sentence. Appellant simply declares that his right to APPELLANT: I ask the court to counsel was violated, and presents no argument or answer that. authority for this contention. THE COURT: I am not going to It is not sufficient that appellant globally cite the answer it. It's within the exclusive "Sixth Amendment," and nothing else, in support of his jurisdiction of the Board of Pardons and request for reversal. See Vuong v. State, 830 S.W.2d 929, Paroles and the governor of the State of 940 (Tex.Crim.App. 1992), cert. denied, 113 S. Ct. Texas. (1992). [HN5] It is incumbent upon counsel to cite specific legal authority and to provide legal argument PROSECUTOR: Shall I continue? based upon that authority. Id.; Tex.R.App.Proc. 74(f) and 210(b); Ex parte Granger, 850 S.W.2d [**5] 513, 515, THE COURT: Please. fn. 6 (Tex.Crim.App. 1993). This is especially important where, as in the case at bar, the relevant area of law is not Appellant contends that the time for parole eligibility is well defined. 3 This Court will not make novel legal not within the jurisdiction of the parole board at all. arguments for appellant. Point of error two is Rather, appellant avers, under the current statutory inadequately briefed, and it is, therefore, overruled. scheme, parole eligibility is within the jurisdiction of the Legislature. See Article 42.18. However, whether the trial 3 We note that, even if counsel had properly Page 6 934 S.W.2d 113, *119; 1996 Tex. Crim. App. LEXIS 205, **6 court's response constituted error is [**7] not an issue you overrule the State's motion [in limine before this Court because appellant failed to object to the regarding parole questions] and inform her statement. We have long held that, [HN6] for an issue to fully as to the full ramifications of it. be preserved on appeal, there must be a timely objection which specifically states the legal basis for that objection. THE COURT: No. At no time during Rezac v. State, [*120] 782 S.W.2d 869, 870 this exchange did appellant lodge an (Tex.Crim.App. 1990). Since, appellant is raising this objection claiming the trial court misled argument for the first time on appeal, any error is waived. Adams. Rather, appellant simply asked the 4 trial court to overrule the State's motion in limine. In his brief, appellant now seems 4 Appellant does not assert a right to present an to argue that the trial court misled Adams untimely objection under the guise of an "absolute by apprising her of the existence of parole right" or a claim of a "waivable-only right." See without then informing her of the intricacy Marin v. State, 851 S.W.2d 275 (Tex.Crim.App. of its operation. 1993). As his second basis for error, appellant contends the We do not have to address the merits of this [**9] trial court misled veniremember Adams when it told her point because the State exercised a peremptory challenge that a person sentenced to death was not eligible for against veniremember Adams. The alleged error could parole, while also stating that a defendant sentenced to not have influenced the trial in any conceivable manner. life in prison was eligible for parole. The relevant voir Point of error three is overruled. dire exchange follows: In his fourth point, appellant claims that Article VENIREMEMBER: . . . is he eligible 37.071 is unconstitutional if it is interpreted to deny a for parole? jury information of the thirty-five year minimum before parole eligibility. Appellant specifically claims that his THE COURT: Well I think it's due process rights protected under both the Fourteenth obvious [**8] if somebody is assessed the Amendment, and Article I, Section 19 of the Texas death penalty you don't get paroled on a Constitution, were violated when the trial court refused to death penalty. provide the jury with information of the minimum sentence before parole eligibility. See Smith; Broxton; VENIREMEMBER: That doesn't Sonnier, supra. seem to be what is happening, though. Or are we not knowing the full story when we Appellant also contends, under this point, that his hear things? Article I, Section 13 rights guaranteed by the Texas Constitution were violated. As to the latter argument, THE COURT: You probably don't appellant is presumably referring to the Texas right know the full story, but you aren't paroled against cruel or unusual punishment. In any event, on a death penalty. I think that is obvious. appellant does not designate in his brief, and we cannot I don't think anybody is going to object at find in the record, where appellant lodged his Article I, this point to my telling you that, which Section 13 objection in the trial court. Without such an leaves you with the other option, a life objection, any error in this regard has [**10] been sentence. forfeited. Rezac v. State, 782 S.W.2d at 870. VENIREMEMBER: And that's the As to appellant's federal due process claim, this one that you are eligible for parole at some Court has settled the issue unfavorably to appellant. stage, perhaps? Broxton, supra. With regard to his Texas due course of law contention, appellant presents no argument or THE COURT: Yes. authority as to how the protection offered by the Texas Constitution differs from the protection guaranteed by the APPELLANT: I would request that Federal Constitution. His claim is, therefore, inadequately Page 7 934 S.W.2d 113, *120; 1996 Tex. Crim. App. LEXIS 205, **10 briefed and presents nothing for our review. in this context, that an untimely objection -- under the Tex.R.App.Proc. 74(f) and 210(b); Smith v. State, supra, guise of an "absolute right" or a claim of a at 847; Ex parte Granger, supra, at 515, fn. 6. "waivable-only right" -- is applicable in this case. See Marin v. State, 851 S.W.2d 275 (Tex.Crim.App. 1993). 5 Appellant finally claims, under this point, that his right to equal protection, as protected by the Fourteenth 5 Appellant cites Almanza v. State, 686 S.W.2d Amendment, was violated. Appellant specifically claims 157 (Tex.Crim.App. 1984), for the proposition that capital defendants are treated disparately from that an objection is unnecessary if error is non-capital defendants. Appellant's argument [*121] egregious or fundamental. However, the Almanza was rejected in Smith v. State, supra. Point of error four holding is limited to charge error; Almanza has no is overruled. application to this context. In point eleven, appellant contends that two [**13] Appellant seems to argue -- for the first time inconsistent versions of Article 37.071, as enacted by the on appeal -- that even without a trial objection, this Court Texas Legislature, were in effect during the time of can review the jury charge to determine if there was a appellant's trial. Appellant argues that the existence of defect so egregious that it deprived appellant of a fair these two [**11] versions resulted in a conviction which trial. Appellant is correct. Almanza v. State, 686 S.W.2d violated his rights under the Fifth, Sixth, Eighth, and 157, 171 (Tex.Crim.App 1984). However, there was no Fourteenth Amendments to the Federal Constitution, and error in the Article 37.071 charge because it is plain that his rights under Article I, Sections 10 and 19 of the Texas there were never two versions of Article 37.071 in Constitution. existence. If there is no charge error, Almanza has no application. Specifically, appellant complains that two legislative amendments -- Senate Bill 880 and House Bill 9 -- both The Texas Constitution contains a provision which effective on September 1, 1991, are conflicting. See Tex. governs the amendment of statutes: H.B. 9, 72nd Leg., R.S. Ch. 652 and Tex. S.B. 880, 72nd Leg., R.S., Ch. 838. To establish this purported conflict, [HN7] Sec. 36. No law shall be revived appellant notes that Senate Bill 880 amended Article or amended by reference to its title; but in 37.071 so as to delete the special punishment issues such case the act revived, or the section or concerning "deliberateness" and "provocation," while sections amended, shall be re-enacted and such a deletion was not reflected in House Bill 9. published at length. Tex. Const. art. III, § Appellant argues that there is an "irreconcilable conflict" 36. between the two enactments such that the following rights were violated: First, appellant did not have Hence, to amend a statute, the Legislature must indicate effective assistance of counsel because he could not know changes by interlineating the modifications onto the text which enactment applied. Second, appellant claims he of the statute as the text was prior to amendment. The was unable to effectively prepare and conduct voir dire purpose of this requirement is straightforward: because of improper statutory uncertainty. Although An amendment which sought to insert appellant, in this appeal, presents a "laundry list" of words or substitute phrases by reference alleged constitutional violations, [**12] we will address with no publication could well mislead as only the two claims specifically argued in his brief. to its effect. [**14] Such was sometimes the intention. Great confusion was Appellant has failed to indicate in his brief, and we introduced into the law, and to eliminate cannot find in the record, where he lodged an objection to the uncertainty and confusion, the Article 37.071 in which he claimed "irreconcilable constitution wisely requires amended conflict." These objections were not raised with the trial statutes to be re-enacted and published so court; they are raised for the first on appeal. As we held, that their meaning may be known without supra, for an issue to be preserved on appeal, there must the necessity of examining the statute be a timely objection which specifically states the legal amended. basis for that objection. Rezac v. State, 782 S.W.2d at 870. Appellant has failed to argue, and we decline to hold Tex. Const. art. III, § 36 interp. Page 8 934 S.W.2d 113, *121; 1996 Tex. Crim. App. LEXIS 205, **14 commentary (Vernon 1984). Upon review of House Bill 9, and Senate Bill 880, we find [**16] the two enactments are perfectly House Bill 9 made a single substantive change to reconcilable. Each makes substantive changes the other Article 37.071. That change was the addition of Section does not; there is no conflict when one comprehends how One, in which the [*122] State might elect to decline statutory amendments are achieved. There being no pursuit of a death sentence in a capital case. Tex. H.B. 9, conflict, appellant's argument that there were two 72nd Leg., R.S. Ch. 652, § 4. To indicate this change, the inconsistent versions of Article 37.071 in effect during Legislature was compelled to "re-enact" the entire statute his trial is without basis. Point of error eleven is as it was before amendment. Article 37.071 did not yet overruled. contain the changes made by Senate Bill 880 because these changes were made during the same legislative In point seventeen, appellant claims the trial court session and had not yet taken effect. Hence, House Bill 9 erroneously restricted voir dire questioning regarding does not contain the changes made by Senate Bill 880. factors that particular veniremembers considered mitigating. Appellant simply cites page references where Senate Bill 880 made more extensive amendments. he claims such a restriction occurred and provides no These changes essentially involved the elimination of the argument or analysis in support. "deliberate" and "provocation" prongs of the jury charge, and the addition of the mitigation finding. To [**15] [HN9] When a defendant challenges a trial court's signify these changes, the Legislature was required to limitation on voir dire questioning on appeal, the "re-enact" the entire statute, as it was before amendment. reviewing court must analyze the claim under an abuse of House Bill 9 was not yet part of Article 37.071. discretion standard, the focus of which is whether appellant proffered a proper question. Caldwell v. State, The Legislature, anticipating appellant's argument, 818 S.W.2d 790, 793 (Tex.Crim.App. 1991), cert. denied, enacted the following provision in the Code Construction 503 U.S. 990, 118 L. Ed. 2d 399, 112 S. Ct. 1684 (1992). Act: A proper question is one which seeks to discover a veniremember's views on an issue applicable to the case. [HN8] (b) . . . If amendments to the 818 S.W.2d at 794. If a proper question [**17] is same statute are enacted at the same disallowed, harm to appellant is presumed because he has session of the legislature, one amendment been denied the ability to intelligently exercise his without reference to the other, the peremptory strikes. Id. However, the trial court may amendments shall be harmonized, if restrict questions in which counsel attempts to commit a possible, so that effect may be given each. veniremember to a particular resolution based upon facts peculiar to the trial. Coleman v. State, 881 S.W.2d 344, (c) In determining whether 350-51 (Tex.Crim.App. 1995), cert. denied, 130 L. Ed. amendments are irreconcilable, text that is 2d 660, 115 S. Ct. 763 (1995). reenacted because of the requirements of Article III, Section 36, of the Texas In appellant's first contention, he claims an improper Constitution is not considered to be voir dire restriction in the following exchange: irreconcilable with additions or omissions in the same text made by another APPELLANT: Drug usage, could that amendment. Unless clearly indicated to ever be mitigating factor to you in the the contrary, an amendment that reenacts proper situation? text in compliance with that constitutional requirement does not indicate legislative PROSECUTOR: Your Honor, again I intent that the reenacted text prevails over have to object to trying to commit Mr. changes in the same text made by another Tomlinson to exactly what things he amendment, regardless of the relative would consider mitigating . . . dates of the amendment. THE COURT: Okay. Let me reiterate. Tex.Gov't Code § 311.025 (b) and (c). Page 9 934 S.W.2d 113, *122; 1996 Tex. Crim. App. LEXIS 205, **17 APPELLANT: Can I ask the court to THE COURT: I understand. I don't rule on her motion so I could respond? understand the question to be trying to commit her. . . . So if you just want to talk THE COURT: I am sustaining it as about in general terms. far as committing. . . . The trial court then permitted appellant to continue This questioning occurred just after appellant told the questioning the veniremember in general terms. There veniremember that the law required him to consider drug was no voir dire limitation. use to be mitigating. Appellant was not asking whether [*123] the veniremember could consider drug [**18] Our review of appellant's fourth claim again usage in the punishment portion of the trial; rather, indicates that the trial court reasonably restrained appellant was asking whether the veniremember believed appellant's questioning. Appellant was attempting to it to be mitigating. See Penry v. State, 903 S.W.2d 715, commit the veniremember to drug use as a mitigating 736 (Tex.Crim.App. 1995). Indeed, the evidence adduced factor. As we held, supra, given the nature of this case, at trial indicated that appellant was intoxicated when he such a restriction was reasonable. Finally, upon review of committed the murders. In this context, the trial court appellant's final contention, we fail to find a voir dire could reasonably find such a question to be an [**20] restriction. Although the State objected to impermissible effort to commit the veniremember to a appellant's mitigation question, the trial court did not rule particular set of facts. Coleman v. State, supra. on the objection. Hence, appellant was permitted to ask the question. Upon review of appellant's second claimed voir dire restriction, we find the limitation to be within the trial The trial court legitimately exercised its discretion court's discretion. Appellant asked veniremember when it prevented appellant from asking questions which Tomlinson whether he thought good conduct in prison to committed veniremembers to particular factual findings be an aggravating factor or a mitigating factor. Appellant which were peculiar to the case on trial. Point of error was attempting to elicit, not whether the veniremember seventeen is overruled. could consider good conduct in prison at mitigation, but whether the veniremember would find good conduct in In point nine appellant claims the trial court erred prison to be mitigating. There was evidence presented at when it permitted the State to exercise a peremptory trial that appellant was a good prisoner before the challenge against veniremember Berniece Holiday, in killings. A rational trial court could find that such that the challenge was racially motivated and a violation questioning was an improper attempt to bind the of Batson v. Kentucky, 476 U.S. 79, 90 L. Ed. 2d 69, 106 veniremember to a particular finding based [**19] upon S. Ct. 1712 (1986). [HN10] Under Batson, the procedure the facts presented at trial. Id . to determine an equal protection violation has three prongs in the context of racial discrimination: First, the Our review of appellant's third claim fails to uncover opponent of the peremptory challenge has to prove a a voir dire limitation. The following exchange occurred: prima facie case of racial discrimination (step one). If this burden is met, the burden of production falls to the APPELLANT: What would be proponent of the strike to tender a race-neutral mitigating at the time of punishment? You explanation (step two). If a race neutral explanation is kind of ruled out bad childhood in a way. tendered, the trial court must then determine if the opponent [**21] of the strike has proved purposeful VENIREMEMBER: Oh, no, I mean, racial discrimination (step three). See also Purkett v. there could be a combination of things. Elem, 514 U.S. 765, 131 L. Ed. 2d 834, 115 S. Ct. 1769, 1770-71 (1995). [HN11] This court reviews the trial PROSECUTOR: Your Honor, I have court's finding, vel non, of purposeful discrimination to object to trying to commit Ms. Jones as under a clearly erroneous standard. Wheatfall v. State, to exactly what she would consider as 882 S.W.2d 829, 835 (Tex.Crim.App. 1994), cert. denied, mitigating. As long as she would consider 130 L. Ed. 2d 644, 115 S. Ct. 742 (1995). [HN12] When any mitigating evidence. applying the clearly erroneous standard, this Court will Page 10 934 S.W.2d 113, *123; 1996 Tex. Crim. App. LEXIS 205, **21 not disturb a trial court's ruling unless we are left with a ever determined that appellant met his prima facie definite and firm conviction that a mistake has been burden. In Texas, however, once a party articulates the committed. Vargas [*124] v. State, 838 S.W.2d 552, reasons for a peremptory challenge, and the trial court has 554 (Tex.Crim.App. 1992). In making this determination, ruled on the ultimate question of intentional this Court will review voir dire, the State's race-neutral discrimination, the preliminary issue of whether the explanations, the composition of the jury panel, and defendant had made a prima facie showing becomes appellant's rebuttal and impeachment evidence. Id. moot. Wheatfall v. State, 882 S.W.2d at 835. To make his prima facie case at trial, appellant made Upon review of the record, this Court is not left with several observations to the trial court. First, appellant a definite and firm conviction that error was committed. confirmed that veniremember Holiday was black. Appellant's showing of purposeful discrimination was Second, appellant noted that Holiday was the first black minimal. The State's race-neutral explanations were not veniremember to be interviewed from the fourth jury whimsical, Purkett, [**24] supra, and the record does panel. Appellant also noted that Holiday's [**22] not reflect that the State demonstrated a disparate pattern answers seemed very State-oriented. Finally, appellant of strikes against any suspect class. Point of error nine is contended that the State used a peremptory strike against overruled. Holiday only two minutes into appellant's voir dire questioning. Appellant claims that the State, by In point ten, appellant claims Batson error as to interrupting his voir dire examination to lodge a veniremember Gregory Randle. To support his prima peremptory strike, changed its pattern of asserting facie claim, appellant stated into the record that: (a) peremptory strikes. These were the only arguments Randle was black; (b) the Harris County District appellant advanced in his effort to demonstrate a prima Attorney's Office has had a history of trying to exclude facie case. blacks from juries; (c) Randle was observant and intelligent, and considerate of the prosecution; (d) Randle The State contested the legitimacy of appellant's was "protective as to society." The trial court ordered the prima facie case. The trial court, nevertheless, ordered the State to provide its race-neutral reasons without ruling State to provide its race-neutral reasons for the strike. The upon whether appellant properly made a prima facie case. State provided several race-neutral reasons: (a) Holiday "dozed off" during the State's group voir dire The State's explanations were: (a) Randle had a examination; (b) Holiday's answers were very succinct, in brother in prison, and although Randle had visited him a way which demonstrated a lack of candor; (c) Holiday recently, Randle professed that he did not know what only answered three of seventeen questions on a crime his brother committed. The prosecutor professed particular page of her juror questionnaire; (d) Holiday's that she was concerned Randle was being disingenuous, facial expressions led the prosecutor to believe that she and down-playing the effect his relationship with his was saying what she believed the prosecutor wanted to brother would have on him; (b) Randle vacillated on the hear; (e) Holiday was an elementary school teacher and kind of evidence he would require to find future danger. might identify too closely with evidence of appellant's Although this vacillation was not legally sufficient to difficult childhood; (f) Holiday indicated, with [**23] a [**25] subject Randle to a challenge for cause, he tone of pride, that, while previously serving on a jury, she nevertheless occasionally articulated that he would prefer "set free" the defendant; (g) Holiday had a first cousin evidence of past violent behavior to find future danger who was in prison. In addition, the State noted that over (the [*125] State had no evidence of past violent 64 veniremembers had been questioned to that point, and behavior); (c) Randle indicated during voir dire that he of those 64 this was the first black veniremember the thought the death penalty was wrong, although he State peremptorily challenged. conceded that it might be necessary for some crimes. The trial court, noting that it too had observed Appellant then disputed the State's interpretation of Holiday napping during voir dire, declared the State's Randle's voir dire answers. The judge found the State's rationale for striking Holiday to be racially neutral. The reasons to be race-neutral and overruled appellant's trial court then overruled appellant's Batson motion. objection. Given the utter lack of any real evidence that the State purposefully discriminated against Randle in the The record does not manifest whether the trial court record, and the relative strength of the State's Page 11 934 S.W.2d 113, *125; 1996 Tex. Crim. App. LEXIS 205, **25 explanations, we are not left with a definite and firm the evidence. Alvarado v. State, 912 S.W.2d at 217. conviction that a mistake was committed. Point of error ten is overruled. The U.S. Supreme Court has never suggested that sentencers be given -- in the context of mitigation -- In point eighteen, appellant contends the trial court "unbridled discretion in determining the fates of those erred when it refused to admit, during punishment, eleven charged with capital offenses." Franklin v. Lynaugh, 487 childhood photographs which depicted him as a normal, U.S. 164, 108 S. Ct. 2320, 101 L. Ed. 2d 155 (1988) happy child. Appellant argues that the trial court's (plurality opinion). As the Supreme Court observed in preclusive ruling denied him the opportunity to present Franklin, supra: relevant, mitigating evidence in his defense. When the trial court asked appellant to demonstrate [**26] We find unavailing petitioner's reliance relevance, he made the following argument: on this Court's statement in Eddings v. Oklahoma, 455 U.S. 104, 114, 71 L. Ed. My point is the State has introduced 2d 1, 102 S. Ct. 869, that the sentencing photographs throughout the dehumanizing jury may not be precluded from stage of their punishment hearing, considering "any relevant, mitigating showing various photographs of him when evidence." This statement leaves he was arrested at the time of seventeen, unanswered the question: relevant to eighteen, throughout, mug shots. To aid what? While [**28] Lockett, supra, the jury to understand the development of answers this question at least in part -- the defendant though his various stages of making it clear that a State cannot take out his life, we also have the right to show the of the realm of relevant sentencing human side of the defendant as much as considerations the questions of the the State has attempted to dehumanize and defendant's "character," "record," or the turn him into some sort of monster. I "circumstances of the offense" -- Lockett think, under Penry and under the does not hold that the State has no role in mitigation portion stage of the trial, the structuring or giving shape to the jury's jury should be entitled to see the defendant consideration of these mitigating factors. grow and what various stages [sic]. Franklin v. Lynaugh, 108 S. Ct. at 2330. Talking about elementary school and how [citations omitted]. he appeared, et cetera, et cetera. And let them give whatever weight they think is The Franklin plurality recognized a relevance necessary. It's very material to our lawsuit. requirement to evidence bearing on the jury's mitigation determination. Thus, appellant was trying to "humanize" his client by demonstrating that he was once a normal child. Indeed, Justice O'Connor provides further guidance to the issue of relevancy by [*126] placing a limit on the [HN13] Within the meaning of Article 37.071, § categories of evidence which are conceivably mitigating. 2(a), evidence "mitigates against the imposition of the She provides a prism with which to determine the death penalty" if a reasonable juror could conclude that relevance of proposed mitigating evidence: the the evidence was a basis for a sentence less than death. culpability of the defendant. As she explained in Alvarado v. [**27] State, 912 S.W.2d 199, 217 Franklin, supra, and later in Penry v. Lynaugh, 492 U.S. (Tex.Crim.App. 1995) (plurality opinion). Article 37.071, 302, 109 S. Ct. 2934, 106 L. Ed. 2d 256 (1989): § 2(f) (4) provides further guidance when it defines mitigating evidence "to be evidence that a juror might [HN14] Evidence about the defendant's regard as reducing the defendant's moral background and character is relevant blameworthiness." As we observed in Alvarado, if a because of the belief, long held in society, reasonable juror could not conclude that the proffered that defendants who commit criminal acts evidence reduced the defendant's moral blameworthiness, that [**29] are attributable to a then a trial court would be within its discretion to exclude disadvantaged background, or to Page 12 934 S.W.2d 113, *126; 1996 Tex. Crim. App. LEXIS 205, **29 emotional and mental problems, may be could I have a running objection to all of less culpable than defendants who have no this? such excuse. Franklin, 108 S. Ct. at 2333. [citing California v. Brown, 479 U.S. 538, THE COURT: Just a moment. 93 L. Ed. 2d 934, 107 S. Ct. 837 (1987)] Approach the bench, please. [emphasis added]. (Counsel went to the bench for an off-the-record conference; then the To Justice O'Connor, the evidence is relevant because it reporter was called to the bench, and the relates to the moral culpability of a defendant's act. By following proceedings were had:) this logic, if evidence has no relation to a defendant's moral culpability for the charged crime, then it is DEFENSE COUNSEL: Judge, to irrelevant to mitigation. allow her to go into this stuff and not let me allude to -- let the jury know he is [HN15] In our view, photographs of appellant which going to stay locked up for thirty-five depict a cheerful early childhood are irrelevant to years is a gross miscarriage of justice. appellant's moral blameworthiness for the commission of a violent double-murder because such evidence has no THE COURT: I [**31] don't know relationship to appellant's conduct in those murders. That where your objection is in there. I appellant was once a child does not diminish his moral understand what your previous objection culpability for the act of murder. Thus, we find no abuse was. She has been admonished. of discretion on the part of the trial court in refusing to admit these photographs. Point of error eighteen is DEFENSE COUNSEL: I object to overruled. any further questions along this line. In point five, appellant claims the trial court erred THE COURT: I am going to allow when it admitted evidence, during the punishment phase her to complete her line of questioning. of the trial, that appellant would be [**30] eligible for That is all I am going to say. unaccompanied emergency furlough from prison if he were assessed a life sentence for the offense of capital Q: I am not even sure I remember murder. The State elicited this evidence from Roy what the last question was. Smithy, who was employed by the Huntsville prison: DEFENSE COUNSEL: Talking about Q: If an inmate is in prison and behaves furlough. himself for a certain period of time, even Q: Thank you. I think I had asked you if he has been convicted of capital murder, what is a furlough? and of course, is there on just a life sentence, is there an opportunity for him to A: A furlough is when an inmate is get furloughed? allowed to leave the prison unit unescorted to attend whatever reason it is that he has A: If he obtains SAT status, state requested to leave the unit, things such as approved trustee 3 status, then he is funeral, family emergency and things of eligible for furloughs. that sort where he, in essence, signs a Q: Just exactly what does a furlough piece of paper that says that he is going to mean? be released a certain time and that he will go to wherever this emergency is and that A: You have different types. You he promises that he will be back and turn have emergency furloughs. You have himself back into the unit. other --. Q: Like just for the weekend or DEFENSE COUNSEL: Your Honor, something or for a day or so? Page 13 934 S.W.2d 113, *126; 1996 Tex. Crim. App. LEXIS 205, **31 [*127] A: Yes, ma'am. It may not be In point six, appellant again contends error resulting just a weekend. It could very well be for a from the admission of evidence with respect to three day period in the middle of the week. unescorted emergency furlough. In this point, however, appellant claims the trial court erred when it overruled Q: Depending on the circumstances? appellant's motion for new trial based upon the admission of such evidence. As we held in point five, appellant A: Yes, ma'am. waived his objection to evidence of unescorted emergency furlough. Appellant, by failing to object This [**32] discussion encompasses the entire testimony correctly, waived his right to complain of the admission regarding furlough. of this evidence. Hence, the admission of evidence regarding [**34] unescorted emergency furlough could We do not have to address the merits of appellant's not form the basis of a motion for new trial. Point of error contention because he failed to object to the line of six is overruled. questioning with ample specificity to notify the trial court of his contention. See Zillender v. State, 557 S.W.2d 515, In point seven, appellant again contends error 517 (Tex.Crim.App. 1977). [HN16] This Court has resulting from the admission of evidence with respect to identified the prerequisites to an effective objection unescorted emergency furlough. However, in this point, respecting the admissibility of evidence. As we held in appellant claims the trial court erred when it overruled his Lankston v. State, 827 S.W.2d 907, 909 (Tex.Crim.App. requested jury instruction at punishment that the jury not 1992): consider the possibility of furlough during deliberations. Appellant is again attempting to avoid the consequence of As regards specificity, all a party has to his procedural default regarding emergency furlough. do to avoid the forfeiture of a complaint Appellant failed to object to, or request the court to limit, on appeal is to let the trial judge know the jury's consideration of this evidence. Indeed, what he wants, why he thinks himself appellant also failed to request that the trial court strike entitled to it, and to do so clearly enough the evidence at the time it was offered, waiting until the for the judge to understand him at a time jury charge was prepared. when the trial court is in a proper position to do something about it. Of course, when The motion to strike is itself subject to a requirement it seems from context that a party failed of timeliness. See S. Goode, et al., Guide to the Texas effectively to communicate his desire, then Rules of Evidence: Civil and Criminal § 103.2 at 18 (2nd reviewing courts should not hesitate to ed. 1993). [HN17] For an objection to be "timely", a hold that appellate complaints arising from party must invoke it as soon as the ground for it becomes the event have been lost. manifest. Id. In the case at bar, the basis for a motion to strike became manifest as soon [**35] as the State In the instant case, appellant objected only to the trial elicited the testimony regarding emergency furlough. Yet, court's decision to preclude issues of parole eligibility appellant failed to request that the jury be instructed not from the trial; appellant [**33] did not actually object to to consider the evidence when it was elicited. The motion the State's question regarding emergency furlough. to strike, in the guise of a requested jury instruction, was untimely. The trial court therefore did not err when it Indeed, the trial court flatly told appellant that it did overruled appellant's requested instruction. Point of error not comprehend the nature of appellant's objection. seven is overruled. Rather than rephrasing the objection in a way that the trial court could fathom, appellant lodged another [*128] In point eight, appellant avers that the trial non-specific objection. Appellant failed to effectively court erred when it overruled his requested jury communicate his objection. Appellant then declined to instruction regarding the minimum time served on a life rephrase it when the trial court informed him that it did sentence before parole eligibility. At the outset we note, not understand his objection. We therefore hold that that this Court has considered this argument in prior cases appellant's complaint regarding the State's questioning is and ruled unfavorably to appellant. Smith; Broxton, waived for failure to object with specificity. Point of error supra. Appellant, however, contends that the parole five is overruled. Page 14 934 S.W.2d 113, *128; 1996 Tex. Crim. App. LEXIS 205, **35 instruction became necessary when evidence respecting (Tex.Crim.App. 1994), cert. denied, U.S. , 130 L. Ed. unescorted emergency furlough was introduced to the 2d 110, 115 S. Ct. 174 (1994). No burden of proof exists jury: for either the State or defendant to prove or disprove the mitigation question. Id; Penry v. State, 903 S.W.2d 715, The trial court erred in allowing the jury 765 (Tex.Crim.App. 1995). Point of error thirteen is to consider testimony regarding the overruled. procedures applicable to discretionary prison release. This is the type of evidence In point fourteen, appellant claims the trial court which courts have consistently ruled erred when it refused to give a punishment instruction inadmissible and which the legislature which accurately placed the burden of proof as to would still keep from jury deliberation. mitigation on the State. As we held in the prior point of error, no burden of proof exists for either the State or The essence [**36] of appellant's argument is that he defendant to prove or disprove the mitigating question. should be permitted to notify the jury regarding Barnes v. State, [**38] supra. Hence, the trial court did procedures surrounding discretionary prison release if the not err when it overruled appellant's erroneous request to State is permitted to do so. However, the jury was instruct the jury that the burden of proof was on the State authorized to consider evidence of unescorted emergency to prove mitigation. Point of error fourteen is overruled. furlough because appellant failed to object properly to its In point sixteen, appellant contends the trial court admission. That the jury could consider emergency erred when it overruled his objection to the punishment furlough does not necessitate that it be informed of the charge. In his objection, appellant claimed that the charge factors surrounding parole eligibility. This is because the failed to identify and define which factors presented by jury's knowledge of whether appellant was eligible for the evidence could be considered mitigating. Indeed, parole in thirty-five years does not serve to rebut the appellant bases this contention upon the notion that there possibility that appellant could be released on emergency are some factors which are mitigating as a matter of law. furlough within two days of entering prison. The two issues are unrelated. Hence, the trial court did not err [HN19] There is no evidence that must be viewed by when it refused to give a parole instruction. Point of error a juror as having a definitive mitigating effect, per se. eight is overruled. Robertson v. State, 871 S.W.2d 701, 712 (Tex.Crim.App. 1994), cert. denied, 130 L. Ed. 2d 94, 115 S. Ct. 155 In point thirteen, appellant contends that Article (1994). As we have previously held: [HN20] "[Appellant] 37.071 is unconstitutional because it fails to place the is not entitled to jury instructions specifically informing burden of proof, with respect to mitigation, upon the the jury that certain evidence may be considered or how it State. Appellant's argument follows: may be applied." Id. Hence, appellant's request for an instruction informing the jury that certain evidence was [Article 37.071] limits and inhibits the mitigating, [*129] per se, was properly denied. Point of jury's consideration of mitigating evidence error sixteen is [**39] overruled. in violation of the Eighth and Fourteenth Amendments of the [**37] United States In point fifteen, appellant claims Article 37.071 Constitution. Said infirmity results by the violates the Eighth and Fourteenth Amendments to the statute's failure to place the burden of U.S. Constitution because it fails to direct or inform the proof on the State for the mitigation jury regarding the nature of mitigating or aggravating special issue as mandated by Art. 37.071 evidence that would call for or against the application of (e). the death penalty. As we held in Robertson, supra: [HN18] In cases where mitigating evidence is presented, [HN21] Each juror may or may not all that is constitutionally required is a vehicle by which believe certain evidence is mitigating; the jury may give mitigating effect to appellant's however, the constitution only requires evidence. Penry v. Lynaugh, supra; Walton v. State, 497 that where a juror believes there is U.S. 639, 110 S. Ct. 3047, 3055, 111 L. Ed. 2d 511 relevant mitigating evidence, that juror (1990); Barnes v. State 876 S.W.2d 316, 330 must have a vehicle to give his or her Page 15 934 S.W.2d 113, *129; 1996 Tex. Crim. App. LEXIS 205, **39 reasoned moral response to such evidence. DISSENT BY: CLINTON; OVERSTREET Robertson v. State, 871 S.W.2d at 712. (citing Johnson DISSENT v. Texas, 509 U.S. 350, 113 S. Ct. 2658, 125 L. Ed. 2d 290 (1993). The Federal Constitution does not require trial courts to instruct juries regarding how they should DISSENTING OPINION consider, or apply what they may or may not deem CLINTON, Judge mitigating evidence. Point of error fifteen is overruled. I dissent to the majority's dogged determination to In point twelve, appellant claims the trial court erred give the slip to Simmons v. South Carolina, 512 U.S. when it overruled his contention that Article 37.071 was 154, 114 S. Ct. 2187, 129 L. Ed. 2d 133 (1994). In my unconstitutional, in violation of the Eighth and view a requirement that trial courts inform juries about Fourteenth amendments to the U.S. constitution. the earliest possible release date attached to a life Appellant specifically [**40] asserts that an untrained sentence obtains if a defendant has shown other evidence jury was incapable of predicting whether a defendant that, in combination with the information about release might commit future acts of violence which would dates, tends to show that a capital defendant will not be a constitute a continuing threat to society. Appellant, future danger to society. Willingham v. State, 897 therefore, argues that Article 37.071 fails "to meet the S.W.2d 351, 359 (Tex.Cr.App. 1995) (Clinton, J., constitutional requirement that the death penalty not be concurring). Unlike most appellants raising Simmons arbitrarily or capriciously rendered." This Court claims, appellant here offered precisely such evidence at addressed and rejected appellant's argument in Lackey v. trial. During punishment, appellant adduced State, 819 S.W.2d 111, 121 (Tex.Crim.App. 1989). Point uncontroverted expert testimony from a psychologist to of error twelve is overruled. the effect that his tendency to violence would be greatly Having found no reversible error, we AFFIRM the mollified by the time he reached the age of sixty-three. judgment of the trial court. Of course the full significance of this testimony will be lost on a jury that does not know that appellant cannot be MANSFIELD, J. released into society until at least that age. It escapes [**42] me how this Court can gainsay the force of the DELIVERED OCTOBER 2, 1996 reasoning in Simmons when presented with such evidence, evidence that in my view makes information EN BANC about the earliest potential release date available to appellant should he be sentenced to life imprisonment BAIRD, J., concurring unquestionably relevant to future dangerousness. 1 MALONEY and MEYERS, JJ., concur in the result. 1 My resolution of this point of error casts doubt on the propriety of the trial court's refusal to CONCUR BY: BAIRD permit appellant to question members of the CONCUR venire panel on the issue of earliest possible release dates. But if this is indeed voir dire error, BAIRD, J., concurring with the following note: I am it is no doubt error affecting punishment only and sympathetic to the views expressed in Judge Overstreet's thus requires a remand only for a new punishment well reasoned dissent. Post, 934 S.W.2d at 131 hearing. See Article 44.29(c); Ransom v. State, (Overstreet, J., dissenting). However, for the reasons 920 S.W.2d 288 (Tex.Cr.App. 1996). As my stated in Smith v. State, 898 S.W.2d 838, 856 resolution of the predicate issue would already (Tex.Cr.App. 1993) (Baird, J., concurring), and because require the Court to remand for a new punishment the Supreme Court has not revisited its opinion in hearing, however, there is no need to resolve the Simmons v. South Carolina, 512 U.S. 154, 114 S. Ct. voir dire question. 2187, 129 L. Ed. 2d 133 (1994), I am [**41] constrained to join only the judgment of the Court. [*130] I also write to express disagreement with the majority's discussion of appellant's eighteenth point Page 16 934 S.W.2d 113, *130; 1996 Tex. Crim. App. LEXIS 205, **43 [**43] of error. At punishment, the trial court refused to jury instruction called for by § 2(f) (4) on the admit eleven photographs presented by appellant definition of mitigating evidence in § 2(e) depicting him at various points throughout his childhood. presents a problem that has not been resolved by The majority affirmed the trial court's decision on the Court. Article 37.071 § 2(e) arguably allows a grounds that I find unnecessary, inadequately discussed, much broader range of mitigating evidence than § and simply wrong. 2(f) (4). Though it has been presented to the Court on prior occasions, the issue has not yet been The majority states that mitigating evidence must decided in my opinion. The Court has touched on relate to a defendant's personal moral culpability. It thus it, though incompletely and even inconsistently. holds that the trial court was correct in refusing to admit See Lawton v. State, 913 S.W.2d 542, 555-6 the photographs because they do not reflect upon (Tex.Cr.App. 1995); McFarland v. State, 928 appellant's moral culpability. As I have iterated S.W.2d 482, 1996 Tex. Crim. App. LEXIS 19 previously, I do not believe that Supreme Court caselaw (Tex.Cr.App., 1996); Alvarado v. State, 912 answers this very difficult question as the majority, in a S.W.2d 199, 217 (Tex.Cr.App. 1995) (plurality few brief paragraphs, does. opinion); Goff v. State, 931 S.W.2d 537, 1996 Tex. Crim. App. LEXIS 68 (Tex.Cr.App., 1996). By way of the majority's discussion in this regard we essentially revisit the nexus requirement, Lackey v. State, [**45] Moreover, other portions of the Penry 819 S.W.2d 111 (Tex.Cr.App. 1991) (On appellant's opinion support my long-held belief -- based on my motion for rehearing), in a new setting. This court-created reading of the Court's caselaw -- that there can be no such admissibility threshold is again urged by the majority, limitation on the scope of mitigating evidence. For though not in the precise terms. In my opinion, the instance, the Court cited the holding in Lockett v. Ohio, fundamental problem with such a relevancy requirement 438 U.S. 586, 98 S. Ct. 2954, 57 L. Ed. 2d 973 (1978), persists. Lackey, 819 S.W.2d at 136 (Clinton, J., "that the Eighth and Fourteenth Amendments require that dissenting); Goss v. State, 826 S.W.2d 162, 169 the sentencer 'not be precluded from considering, as a (Tex.Cr.App. [**44] 1992) (Clinton, J., dissenting); see mitigating factor, any aspect of a defendant's character or also Ex parte Bower, 823 S.W.2d 284, 288-295 record and any of the circumstances of the offense that (Tex.Cr.App. 1991) (Clinton, J., dissenting). By the defendant proffers as a basis for a sentence less than upholding the trial court's exclusion of the eleven death.'" Id., 492 U.S. at 317, 109 S. Ct. at 2946, 106 L. photographs on the basis that the photographs do not Ed. 2d at 277 (emphasis in original) (citation omitted) pertain to appellant's moral culpability, the majority The Court also cited Eddings v. Oklahoma, 455 U.S. 104, continues to ignore the Supreme Court's jurisprudence to 102 S. Ct. 869, 71 L. Ed. 2d 1 (1982), for the proposition the contrary. For the same reasons I criticized the nexus that "[a] State may not by statute preclude the sentencer requirement, I dissent in this cause as well. from considering any mitigating factor . . ." Penry, 492 U.S. at 318, 109 S. Ct. at 2946, 106 L. Ed. 2d at 278. To justify its position, the majority has seized on Indeed, as Penry noted, our death penalty scheme language in Franklin v. Lynaugh, 487 U.S. 164, 108 S. survived constitutional scrutiny in Jurek because this Ct. 2320, 101 L. Ed. 2d 155 (1988) (plurality opinion), Court "broadly interpreted the second [special issue] . . . and Penry v. Lynaugh, 492 U.S. 302, 109 S. Ct. 2934, so as to permit [**46] the sentencer to consider whatever 106 L. Ed. 2d 256 (1989), that indicates that the mitigating circumstances the defendant might be able to appropriate punishment in a capital trial is purely a offer." Id., 492 U.S. at 317, 109 S. Ct. at 2946, [*131] function of the defendant's personal moral culpability. 2 106 L. Ed. 2d at 277 (internal quotations and citations Slip op., at 15-16. While this language indicates that omitted) (emphasis added). mitigating evidence is relevant only if it reflects on the moral culpability of the defendant, the comments only In any event, the Supreme Court has never appear to be dicta. The Supreme Court has never renounced its decision in Skipper v. South Carolina, 476 explicitly arrived at that conclusion in a holding of a U.S. 1, 106 S. Ct. 1669, 90 L. Ed. 2d 1 (1986). In majority opinion. Skipper, the Court held that it violates the Eighth and Fourteenth Amendments for the trial court to refuse to 2 The majority also cites Article 37.071 § 2(f) admit evidence of the petitioner's post-arrest, pre-trial (4) to support its conclusion. Yet the effect of the Page 17 934 S.W.2d 113, *131; 1996 Tex. Crim. App. LEXIS 205, **46 good conduct and adjustment during incarceration. The capital murder." Point number four asserts that if Article Court arrived at this conclusion even though expressly 37.07, V.A.C.C.P. "was properly interpreted as recognizing that the mitigating effect of the evidence did preventing the trial court from fully informing the jury of not derive from its relation to the petitioner's culpability the statutory sentencing provisions for capital murder, the for the offense he committed. Despite language to the section violated the due process rights afforded by the contrary in Penry, supra, I continue to believe that: Fourteenth Amendment to the United States Constitution and Article I, Sections 13 and 19 of the Texas "the principle of Skipper [that proffered Constitution." Both points complain about the trial court's evidence does not necessarily have to refusal to inform the jury that a life sentence after relate specifically to culpability for the conviction of capital murder statutorily required service charged crime to be relevant to serve as a of 35 years incarceration before becoming eligible for valid basis for a sentence less than death] parole. The majority concludes that "the trial court did remains intact . . . and applies beyond the not err when it refused give a parole instruction." context of good conduct [**47] in jail." Rhoades v. State, 934 S.W.2d 113, 1996 Tex. Crim. App. LEXIS 205 (Tex.Cr.App. 1996). I respectfully disagree Lackey, 819 S.W.2d at 137 (Clinton, J., dissenting). and believe that appellant was entitled to his requested instruction informing the jury that he would not be Accordingly, the photographs adduced by appellant eligible for parole for 35 years if he received a life should have been admitted by the trial court, even if the sentence. only purpose of their introduction was to solicit the mercy of the jury. The dispensation of mercy is a Appellant sought to inform veniremembers about the "fundamental tradition of our system of criminal statutory requirement of 35 [**49] years incarceration jurisprudence," and one of the jury's core prerogatives. before becoming eligible for parole, but the trial court Boyd v. State, 811 S.W.2d 105, 130 n.5 (Tex.Cr.App. refused to allow such and instead granted the State's 1991) (Clinton, J., dissenting) (citations omitted). The motion in limine restricting the discussion of such during majority is wrong to conclude that the photographs are voir dire. Appellant points out that he presented inadmissible on the rationale that they do not relate to testimony from a psychologist that the risk level for appellant's personal moral culpability. Moreover, the violence decreases with age and that a 65-year-old majority decides this intractable, complicated, very inmate's risk level would have gone way down from important constitutional question with but a wave of a whatever it may have been before and should hand and a brushing aside of Supreme Court precedent approximate that of the general population. He suggests inconsistent with its holding. that such testimony had no relevant meaning to the jury on the issue of future dangerousness, nor could it be To the short-shrift the majority gives a pair of given any mitigating effect, without the jury's knowledge Supreme Court cases from South Carolina, I dissent. of the mandatory 35 years. CLINTON, Judge After the close of evidence at punishment, appellant requested that the jury charge include an instruction (Delivered: October 2, 1996) informing the jury that he would have to serve a mandatory 35 years [*132] before becoming eligible for EN BANC parole and objected to the jury charge not including an Overstreet, J., joins. instruction as to such. The trial court refused to include such an instruction. DISSENTING OPINION The State does not specifically dispute the fact that OVERSTREET, JUDGE pursuant to Article 42.18, § 8(b) (2), V.A.C.C.P., had appellant been sentenced to life rather than death [**50] Appellant's eighth point of error alleges that "the trial for the instant offense he would indeed have been legally court erred in overruling appellant's requested [**48] required to serve 35 years incarceration before becoming instruction in the jury charge regarding the minimum eligible for parole. However, the State asserts that the law time served for a life sentence assessed for the offense of Page 18 934 S.W.2d 113, *132; 1996 Tex. Crim. App. LEXIS 205, **50 prohibits a jury from being informed of the Additionally, we determined that an instruction on parole statutorily-mandated minimum amount of time that a in a capital case would violate Article 4, section 11, of person convicted of capital murder, who receives a life the Texas Constitution. Elliott, 858 S.W.2d at 489, n.7; sentence, must serve before becoming eligible for parole. see also Garcia v. State, 887 S.W.2d 846, 860 However, while Art. 37.07, § 4, V.A.C.C.P., provides for (Tex.Cr.App. 1994), cert denied, U.S. , 115 S. Ct. the jury to be informed of various matters as to parole 1317, 131 L. Ed. 2d 198 (1995). eligibility in non-capital punishment proceedings, by its language it does not even apply to capital punishment 1 Actually, in King v. Lynaugh the en banc court proceedings; thus it does not prohibit such information did not decide the issue of whether a parole from being provided to juries in capital proceedings. instruction should have been given. The en banc Appellant correctly notes that Art. 37.07, § 4 does not court held that this issue was procedurally barred prohibit the trial court from including information about because King did not request such a charge at the requirement of serving 35 calendar years before trial. King v. Lynaugh, 850 F.2d at 1056 n.1. The becoming eligible for parole in the punishment jury issue addressed by the en banc court was whether charge of a capital murder case, but rather requires an King should have been allowed to voir dire the appropriate instruction in non-capital felony cases. jury on the twenty-year requirement for parole eligibility under a life sentence for capital murder. A. Texas cases Id. at 1058. First, I shall examine Texas cases, prior to Smith v. [**53] Even before Elliott this Court consistently State, 898 S.W.2d 838 (Tex.Cr.App. 1995) (plurality rejected arguments that the trial court should instruct the opinion), cert. denied, [**51] U.S. , 116 S. Ct. 131, jury about parole in the context of a life sentence for 133 L. Ed. 2d 80 (1995), on this and related issues. This capital murder. Boyd v. State, 811 S.W.2d 105, 130 Court has held that a trial court properly refused to (Tex.Cr.App. 1991), cert. denied, 502 U.S. 971, 112 S. instruct the jury at the punishment stage of a capital Ct. 448, 116 L. Ed. 2d 466 (1991); Knox v. State, 744 murder trial on the parole laws in Texas. Elliott v. State, S.W.2d 53, 62-64 (Tex.Cr.App. 1987), cert. denied, 486 858 S.W.2d 478, 490 (Tex.Cr.App. 1993), cert. denied, U.S. 1061, 108 S. Ct. 2834, 100 L. Ed. 2d 934 (1988); 510 U.S. 997, 114 S. Ct. 563, 126 L. Ed. 2d 463 (1993); Andrade v. State, 700 S.W.2d 585, 587-88 (Tex.Cr.App. see also Hughes v. State, 897 S.W.2d 285 (Tex.Cr.App. 1985), cert. denied, 475 U.S. 1112, 106 S. Ct. 1524, 89 L. 1994). In Elliott the defendant claimed the denial of the Ed. 2d 921 (1986). instruction violated the Eighth and Fourteenth Amendments to the United States Constitution, relying [*133] Similarly we have held that a defendant in a on California v. Ramos, 463 U.S. 992, 103 S. Ct. 3446, capital case is not permitted to present evidence of parole 77 L. Ed. 2d 1171 (1983), and King v. Lynaugh, 828 F.2d procedures applicable to life sentences for capital murder. 257 (5th Cir. 1987), vacated in part, 850 F.2d 1055 (5th Jones v. State, 843 S.W.2d 487, 495 (Tex.Cr.App. 1992). Cir. 1988) (en banc). We observed that neither this Court See also Stoker v. State, 788 S.W.2d 1, 16 (Tex.Cr.App. nor the Fifth Circuit had interpreted California v. Ramos 1989), cert. denied, 498 U.S. 951, 111 S. Ct. 371, 112 L. as requiring an instruction on parole laws in the Ed. 2d 333 (1990) (no error in failing to appoint expert to punishment phase of a capital case. Elliott, 858 S.W.2d testify on issue of parole in a capital case). In Jones the at 490. While recognizing that Fifth Circuit opinions have defendant sought to introduce evidence that he would be no precedential value for this Court, we were persuaded confined a minimum of twenty years. 2 Jones argued that by the en banc opinion in King v. Lynaugh which found the [**54] jury should be aware of the length of time he [**52] no federal constitutional requirement for such an would have to be confined in prison so the jury could instruction. 1 Elliott, 858 S.W.2d at 490. This Court intelligently decide whether he was a continuing threat to quoted from the Fifth Circuit's en banc opinion stating society. 3 This Court stated that a jury should not that in California v. Ramos the Supreme Court consider parole during punishment deliberation in a determined that a jury instruction on a capital defendant's capital murder case. Jones, 843 S.W.2d at 495. Jones eligibility for parole or commutation of sentence does not also attempted to present expert testimony showing he raise a constitutional issue. Elliott, 858 S.W.2d at 490, would never be paroled, arguing that he would never be a citing King v. Lynaugh, 850 F.2d 1055, 1061. threat to society. We observed that "society" includes Page 19 934 S.W.2d 113, *133; 1996 Tex. Crim. App. LEXIS 205, **54 prison inmates as well as free citizens, so the length of Legislature enacted Art. 37.07, § 4, V.A.C.C.P., time a person remains incarcerated was not relevant to which provides for such instruction by the courts, the special issue on future dangerousness. Id. but does not mention capital cases. See Boyd, 811 S.W.2d at 121; Felder, 758 S.W.2d at 762 (both 2 See former Art. 42.18, § 8(b), V.A.C.C.P. cases construing former Art. 37.07, § 4). 3 See former Art. 37.071(b) (2), V.A.C.C.P., now Arts. 37.0711, § 3(b) (2), and 37.071, § 2(b) B. Simmons v. South Carolina (1) ("whether there is a probability that the defendant would commit criminal acts of violence In a supplemental brief appellant points out that the that would constitute a continuing threat to Supreme Court recently issued its opinion in Simmons v. society"). South Carolina, 512 U.S. 154, [**57] 114 S. Ct. 2187, 129 L. Ed. 2d 133 (1994). Appellant argues that under We have held that a trial court does not err in a Simmons the failure to inform the jury of when he would capital murder [**55] trial by instructing the jury not to be eligible for parole violated the Due Process Clause and consider how long a defendant would be required to serve the Eighth Amendment of the United States Constitution. to satisfy a life sentence, because parole is not a proper consideration for the jury's deliberations at punishment. In Simmons, because of prior convictions for violent Ramirez v. State, 815 S.W.2d 636, 653 (Tex.Cr.App. crimes, the defendant would have been ineligible for 1991); Williams v. State, 668 S.W.2d 692, 701 parole if he were given a life sentence. Simmons, U.S. (Tex.Cr.App. 1983), cert. denied, 466 U.S. 954, 104 S. at , 114 S. Ct. at 2191 n.2, 129 L. Ed. 2d at 139 n.2. Ct. 2161, 80 L. Ed. 2d 545 (1984). Before jury selection, the trial court granted the prosecutor's motion, over Simmons' objection, and In voir dire, prospective jurors may not be told about ordered the defense not to voir dire the venire about the specifics of parole law relating to life sentences for parole or even mention the subject of parole. In the capital murder. Boyd, 811 S.W.2d at 118-19. A potential punishment phase, the prosecutor asked the jury to juror who is unable to disregard parole in determining the consider Simmons' future dangerousness. In response, special issues is challengeable for cause. Felder v. State, Simmons presented evidence [*134] that he would not 758 S.W.2d 760, 762-67 (Tex.Cr.App. 1988), cert. commit acts of violence once he was isolated in a prison denied, 510 U.S. 829, 114 S. Ct. 95, 126 L. Ed. 2d 62 setting. Simmons' attorney asked the trial court to instruct (1993). the jury that Simmons would be ineligible for parole and, if sentenced to life imprisonment, he in actuality would The constant in these Texas cases has been that be sentenced to imprisonment for the balance of his parole is not a proper matter for consideration in the natural life. jury's deliberation in the punishment stage of a capital murder trial. This was due primarily to two reasons: (1) Outside the presence of the jury, Simmons [**58] prior to the 1989 amendment of Art. IV, § 11 of the presented evidence showing he was ineligible for parole. Texas Constitution, parole was never a proper matter for There was evidence from Simmons and the prosecution the jury to consider in Texas; 4 and (2) [**56] until about furloughs and early release programs. Simmons recently, the United States Supreme Court had never held offered results of a survey showing that few people in that there was a federal constitutional requirement that South Carolina believed that a person sentenced to life the jury ever be given any information about parole. See imprisonment actually would spend the rest of his life in California v. Ramos, supra. prison; that almost half believed a convicted murderer might be paroled within twenty years; that almost 4 "The Legislature shall have authority to enact three-fourths believed a convicted murderer would be parole laws and laws that require or permit courts released within thirty years; and that more than to inform juries about the effect of good conduct three-fourths said that if they had to decide a sentence in time and eligibility for parole or mandatory a capital case, the amount of time the defendant actually supervision on the period of incarceration served would have to spend in prison would be either extremely by a defendant convicted of a criminal offense." important or very important in choosing between life and Tex.Const., Art. IV, § 11(a). As a result of the death. The trial court denied Simmons' request for an 1989 amendment to Art. IV, § 11(a), the instruction. Page 20 934 S.W.2d 113, *134; 1996 Tex. Crim. App. LEXIS 205, **58 During deliberation the jury sent a note to the judge information that the sentencing authority inquiring about the possibility of parole for a life considered, and upon which it may have sentence. Over Simmons' objection the trial court relied, in imposing the sentence of death. instructed the jury not to consider parole or parole The State raised the specter of petitioner's eligibility. The court also informed the jury that life future dangerousness generally, but then imprisonment and death sentence were to be understood thwarted all efforts by petitioner to in their plain and ordinary meaning. The jury [**59] demonstrate that, contrary to the returned a sentence of death. prosecutor's intimations, he never would be released on parole and thus, in his view, The Supreme Court held that when a defendant's would not pose a future danger to society. future dangerousness is an issue and the defendant is The logic and effectiveness of petitioner's ineligible for parole, due process requires that the jury argument naturally depended on the fact assessing punishment be told that about the defendant's that he was legally ineligible for parole parole ineligibility. 5 Simmons, U.S. at , 114 S. Ct. at and thus would remain [**61] in prison if 2190, 129 L. Ed. 2d at 138. "The Due Process Clause afforded a life sentence. Petitioner's efforts does not allow the execution of a person 'on the basis of to focus the jury's attention on the question information which he had no opportunity to deny or whether, in prison, [*135] he would be a explain.'" Simmons, .S. at , 114 S. Ct. at 2192, 129 L. future danger were futile, as he repeatedly Ed. 2d at 141, citing Gardner v. Florida, 430 U.S. 349, was denied any opportunity to inform the 362, 51 L. Ed. 2d 393, 97 S. Ct. 1197 (1977). The Court jury that he never would be released on observed that the jury may have believed Simmons could parole. The jury was left to speculate be released on parole if he were not executed. The Court about petitioner's parole eligibility when noted: evaluating petitioner's future dangerousness, and was denied a straight To the extent this misunderstanding answer about petitioner's parole eligibility pervaded the jury's deliberations, it had the even when it was requested. effect of creating a false choice between sentencing petitioner to death and Simmons, 512 U.S. at , 114 S. Ct. at 2194-95, 129 L. sentencing him to a limited period of Ed. 2d at 143-44 (footnote omitted). incarceration. This grievous misperception was encouraged by the trial court's refusal 5 The Supreme Court declined to decide whether to provide the jury with accurate appellant's rights under the Eighth Amendment information regarding petitioner's parole were also violated. Simmons, 512 U.S. at , 114 ineligibility, and by the [**60] State's S. Ct. at 2193 n.4, 129 L. Ed. 2d at 141 n.4. But repeated suggestion that petitioner would see Simmons, 512 U.S. at , 114 S. Ct. at 2198, pose a future danger to society if he were 129 L. Ed. 2d at 147 (Souter, J., concurring). not executed. . . . The State thus succeeded in securing a death sentence on the The Supreme Court observed in Simmons that ground, at least in part, of petitioner's "prosecutors in South Carolina, like those in [**62] other future dangerousness, while at the same States that impose the death penalty, frequently time concealing from the sentencing jury emphasize a defendant's future dangerousness in their the true meaning of its non-capital evidence and argument at the sentencing phase; they urge sentencing alternative, namely, that life the jury to sentence the defendant to death so that he will imprisonment meant life without parole. not be a danger to the public if released from prison." We think it is clear that the State denied Simmons, 512 U.S. at , 114 S. Ct. at 2193, 129 L. Ed. petitioner due process. 2d at 142, citing Eiseberg & Wells, "Deadly Confusion: Juror Instructions in Capital Cases," 79 Cornell L.Rev. 1, Simmons, 512 U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 4 (1993). Moreover, "in assessing future dangerousness, 2d at 141. The Court further observed: the actual duration of the defendant's prison sentence is Petitioner was prevented from rebutting indisputably relevant. Holding all other factors constant, Page 21 934 S.W.2d 113, *135; 1996 Tex. Crim. App. LEXIS 205, **62 it is entirely reasonable for a sentencing jury to view a instruction from the court. defendant who is eligible for parole as a greater threat to society than a defendant who is not. Indeed, there may be Simmons, U.S. at , 114 S. Ct. at 2196, 129 L. Ed. 2d no greater assurance of a defendant's future at 145-46. nondangerousness to the public than the fact that he never will be released on parole." Simmons, U.S. at , 114 S. Consequently, the Supreme Court found Simmons' Ct. at 2194, 129 L. Ed. 2d at 142. right to due process was violated because his future dangerousness was at issue but he was not allowed to The Supreme Court noted in Simmons that the State inform the jury of his parole ineligibility. Simmons, may still argue that a parole ineligible defendant would U.S. at , 114 S. Ct. at 2198, 129 L. Ed. 2d at 147. be a future danger to others in prison, "but the State may [**63] not mislead the jury by concealing accurate C. Applicability of Simmons to Texas Capital information about the defendant's parole ineligibility. The Punishment Scheme Due Process Clause will not tolerate placing a capital i. Statutes defendant in a straitjacket by barring him from rebutting the prosecution's arguments of future dangerousness with In Texas, the jury must answer the the fact that he is ineligible for parole under State law." following special issue: Simmons, 512 U.S. at , 114 S. Ct. at 2194-95 n.5, 129 L. Ed. 2d at 143-44 n.5. Whether there is a probability that the defendant [**65] would commit criminal South Carolina argued in Simmons that there was no acts of [*136] violence that would statutory prohibition of Simmons' eventual release into constitute a continuing threat to society. society and that he could be released through legislative reform, commutation, and clemency. Simmons, U.S. at Art. 37.071, § 2(b) (1), V.A.C.C.P. 6 Under the statute in , 114 S. Ct. at 2195, 129 L. Ed. 2d at 144. The Court effect for the date of this offense: rejected this argument because the instruction sought by If a prisoner is serving a life sentence for Simmons was legally accurate and was certainly more a capital felony, the prisoner is not eligible accurate than no instruction at all. Simmons, U.S. at , for release on parole until the actual 114 S. Ct. at 2195, 129 L. Ed. 2d at 144. calendar time the prisoner has served, The Court distinguished Simmons from California v. without consideration of good conduct Ramos. The Court explained that Ramos indicates the time, equals 35 calendar years. Supreme Court generally defers to a State's determination about what parole information should be provided to a Former Art. 42.18, § 8(b) (2), V.A.C.C.P. 7 jury. The Court [**64] continued: 6 The offense in this case occurred on September 13, 1991. But if the State rests its case for 7 The minimum amount of time a person serving imposing the death penalty at least in part a life sentence for capital murder must serve on the premise that the defendant will be before becoming eligible for parole has evolved dangerous in the future, the fact that the from twenty (20) years, to fifteen (15) years, to alternative sentence to death is life without thirty-five (35) years, and to forty (40) years. See parole will necessarily undercut the State's Act 1985, ch. 427, 1985 Tex. Gen. Laws 1531; argument regarding the threat the Act 1987, ch. 384, 1987 Tex. Gen. Laws 1887; defendant poses to society. Because Act 1991, ch. 652, 1991 Tex. Gen. Laws 2394; truthful information of parole ineligibility Act 1993, ch. 900, 1993 Tex. Gen. Laws 3586. allows the defendant to "deny or explain" the showing of future dangerousness, due ii. Discussion of Texas [**66] Capital Sentencing process plainly requires that he be allowed in Simmons to bring it to the jury's attention by way of argument by defense counsel or an In Simmons the Supreme Court noted that Texas Page 22 934 S.W.2d 113, *136; 1996 Tex. Crim. App. LEXIS 205, **66 does not have a life-without-parole sentencing alternative These questions are rhetorical, but they to capital punishment. Simmons, 512 U.S. at , 114 S. underscore the ambivalence of a bright-line rule. Ct. at 2196 n.8, 129 L. Ed. 2d at 145 n.8. The Court said, "In a State in which parole is available, how the jury's [**67] iii. "Society" under the Texas Special Issue knowledge of parole availability will affect the decision The Supreme Court has observed that "the question whether or not to impose the death penalty is speculative, of a defendant's likelihood of injuring others in prison is and we shall not lightly second-guess a decision whether precisely the question posed by the second Texas Special or not to inform a jury of information regarding parole." Issue." Franklin v. Lynaugh, 487 U.S. 164, 169 n.9, 108 Simmons, U.S. at , 114 S. Ct. at 2196, 129 L. Ed. 2d S. Ct. 2320, 2330, 101 L. Ed. 2d 155, 169 (1988). at 145. Justice O'Connor's concurring opinion observed According to Justice O'Connor, a Texas capital that in a State in which parole is available there is no sentencing jury may give mitigating effect to evidence of constitutional requirement that the jury be informed about the lack of any prison disciplinary record, as this is the parole law. Simmons, U.S. at , 114 S. Ct. at 2200, evidence that the defendant exist in the highly structured 129 L. Ed. 2d at 150. 8 environment of a prison without endangering others. 8 Of course, the Supreme Court in Simmons was Franklin v. Lynaugh, 487 U.S. at 186, 108 S. Ct. at not concerned with a situation in which a 2333-34, 101 L. Ed. 2d at 174 (O'Connor, J., concurring). defendant was eligible for parole, albeit after However, this is only one facet of the term "society" in serving a substantial period of time. The Supreme the special issue. Court remarked it would not lightly second-guess This Court has examined the meaning of "society" as a state's decision whether or not a jury should be used in the special issue in several cases. See, e.g., informed about parole. The Court did not opine Rougeau v. State, 738 S.W.2d 651 (Tex.Cr.App. 1987), that the United States Constitution did not require cert. denied, 485 U.S. 1029, 108 S. Ct. 1586, 99 L. Ed. 2d the jury to be provided with parole eligibility 901 (1988), overruled on other grounds, Harris v. State, information. 784 S.W.2d 5 (1989). The defendant in Rougeau If there were a bright-line rule that such contended the prosecutor was improperly allowed to information is available only if the sole alternative comment that society [**68] within the meaning of the to death were life without parole, then several special issue includes [*137] prison society. We stated questions would be raised. What of a sentencing that a juror is free to give the term "society" the meaning scheme in which there are three alternatives: that is ordinarily acceptable in common language. 738 death; life without parole; and life with parole, in S.W.2d at 660. This Court held that "society" includes the which the precise date of parole eligibility would penitentiary, and the prosecutor properly attempted to be relevant? See Simmons, U.S. at , 114 S. Ct. learn whether prospective jurors would exclude from at 2202, 129 L. Ed. 2d at 152 (Scalia, J., "society" inmates and non-inmates within the Texas dissenting). Suppose a state wished to provide Department of Corrections. Id. In this context we assurance that capital murder prisoners serving observed, "It is obvious to us that in deciding whether to life sentences would never be released on parole, answer the second special issue in the negative the jury but did not want to have the jury instructed on would clearly focus its attention on the 'society' that that matter. Could the state accomplish this by would exist for the defendant and that 'society' would be requiring such a prisoner to serve ninety-nine the 'society' that is within the Texas Department of years before attaining parole eligibility? If a Corrections." Id. (emphasis in original). See also Boyd, defendant is sixty years old and would have to 811 S.W.2d at 118 n.12. serve forty years before being eligible for parole, In another case, the defendant contended the could the jury constitutionally be kept from prosecutor's argument, that the defendant would commit knowing the unlikelihood that he could ever be another murder, was a comment that the defendant would released on parole, even though the defendant be paroled at some point. Sterling v. State, 830 S.W.2d might argue this is tantamount to life without 114 (Tex.Cr.App. 1992), cert. denied, 506 U.S. 1035, 113 parole? S. Ct. 816, 121 L. Ed. 2d 688 (1992). This Court held that the argument [**69] did not necessarily imply that the Page 23 934 S.W.2d 113, *137; 1996 Tex. Crim. App. LEXIS 205, **69 defendant would be paroled, but that he would commit (1993). another murder in prison. 830 S.W.2d at 120-21. However, we noted that the term "society" as used in the In answering the special issue, a Texas jury must special issue includes both inmate and non-inmate determine whether the defendant would, more likely than populations. Id. at 120 n.5. See also Boyd, 811 S.W.2d at not, commit violent criminal acts in the future so as to 121 ("Appellant fails to cite us to a single case which constitute a continuing threat to society whether in or out arguably supports his theory that a potential juror's 'view of prison. Muniz, 851 S.W.2d at 250. "Society" means is supposed to be that a defendant sentenced to life will both free citizens and people in prison. Jones, 843 serve the rest of his life in prison.'"). S.W.2d at 495. "'Society' includes not only free citizens but also Under the facts of a given case, the jury may well inmates in the penitentiary. Jones, 843 S.W.2d at 495. believe that a defendant does not pose a threat to prison Under the special issue, the State must show the society due to the regimented environment, but that the defendant "would, more likely than not, commit violent defendant may be a future danger to society outside of criminal acts in the future so as to constitute a continuing prison. However, under our previous case law, the jury is threat to society whether in or out of prison." Muniz v. not allowed to know that such a defendant would not be State, 851 S.W.2d 238, 250 (Tex.Cr.App. 1993) released into society outside of prison for a minimum of (emphasis added), cert. denied, 510 U.S. 837, 114 S. Ct. thirty-five years. This would be particularly useful 116, 126 L. Ed. 2d 82 (1993). information if a jury believed a defendant would not be a future danger to society [*138] within prison, would iv. Application of Simmons' Rationale to Texas currently present a threat to society outside of prison if he Capital Sentencing Scheme were eligible for release [**72] anytime soon, but could be rehabilitated in prison to where he would not be a There is an obvious distinction between the facts in danger to society outside of prison thirty-five years in the Simmons and in the present case. In Simmons the future. Without knowing that a capital murderer defendant [**70] was not eligible for parole under a life sentenced to life is ineligible for parole until serving at sentence, whereas in this case had appellant received a least thirty-five years, the jury does not have all of the life sentence, he would have been eligible for parole after relevant information available on the issue. "In assessing thirty-five years. 9 However, a review of Simmons leads future dangerousness, the actual duration of the me to conclude that the underlying rationale of that case defendant's prison sentence is indisputably relevant." compels a similar result under our statutory sentencing Simmons, 512 U.S. at , 114 S. Ct. at 2194, 129 L. Ed. scheme. 2d at 142. 9 Another distinction is that in Texas, unlike When the prosecution relies on the future South Carolina, a jury must answer a special issue dangerousness of the defendant to seek the death penalty, about whether there is a probability that a elemental due process requires that the defendant be defendant would commit criminal acts of violence given an opportunity to introduce evidence on this point. that would constitute a continuing threat to Skipper v. South Carolina, 476 U.S. 1, 5 n.1, 106 S. Ct. society. Thus, future dangerousness is always an 1669, 1671, 90 L. Ed. 2d 1, 7 (1986). In Skipper the issue in a Texas capital case. Court also found an Eighth Amendment requirement. "Evidence that the defendant would not pose a danger if In a capital trial, a defendant is entitled to offer spared (but incarcerated) must be considered potentially evidence concerning recidivism rates relating to length of mitigating." Skipper, 476 U.S. at 5, 106 S. Ct. at 1671, 90 incarceration and age of the offender, along with expert L. Ed. 2d at 7. "[A] defendant's disposition to make a opinion through hypothetical questions based on the well-behaved and peaceful adjustment [**73] to life in particular circumstances of the individual defendant. prison is itself an aspect of his character that is by its Matson v. State, 819 S.W.2d 839, 848-54 (Tex.Cr.App. nature relevant to the sentencing determination." Skipper, 1991). Rehabilitation is obviously [**71] a proper 476 U.S. at 7, 106 S. Ct. at 1672, 90 L. Ed. 2d at 8. If a consideration under the pertinent special issue. Jackson rule has "the effect of precluding the defendant from v. State, 822 S.W.2d 18, 25 (Tex.Cr.App. 1990), cert. introducing otherwise admissible evidence for the explicit denied, 509 U.S. 921, 113 S. Ct. 3034, 125 L. Ed. 2d 722 Page 24 934 S.W.2d 113, *138; 1996 Tex. Crim. App. LEXIS 205, **73 purpose of convincing the jury that he should be spared reality, known to the 'reasonable juror,' the death penalty because he would pose no undue danger that, historically, life-term defendants have to his jailers or fellow prisoners and could lead a useful been eligible for parole." life behind bars if sentenced to life imprisonment, the rule would not pass muster under Eddings [v. Oklahoma, 455 An instruction directing juries that life U.S. 104, 102 S. Ct. 869, 71 L. Ed. 2d 1 (1982)]." imprisonment should be understood in its Skipper, 476 U.S. at 7, 106 S. Ct. at 1672, 90 L. Ed. 2d at "plain and ordinary" meaning does 8. nothing to dispel the misunderstanding reasonable jurors may have about the way The Texas death penalty statute is constitutional, in which any particular State defines "life premised on the jury having all possible relevant imprisonment." See Boyde v. California, information about the individual defendant. Matson, 819 494 U.S. 370, 380, 108 L. Ed. 2d 316, 110 S.W.2d at 850, citing Jurek v. Texas, 428 U.S. 262, 96 S. S. Ct. 1190 (1990) (where there is a Ct. 2950, 49 L. Ed. 2d 929 (1976). A jury must not be "reasonable likelihood that the jury has instructed to disregard relevant mitigating evidence. applied the [*139] challenged instruction Matson, 819 S.W.2d at 850 n.8, citing Eddings v. in a way that prevents the consideration of Oklahoma, 455 U.S. 104, 102 S. Ct. 869, 71 L. Ed. 2d 1 constitutionally relevant evidence," the (1982). "Clearly then, for the [**74] Texas death penalty defendant is denied due process). statutes to meet constitutional muster, the sentencing authority in a capital case must be allowed to consider Simmons, 512 U.S. at , 114 S. Ct. at 2197, 129 L. Ed. and give effect to all relevant mitigating evidence." 2d at 146 (citations omitted). Matson, 819 S.W.2d at 851. The Supreme Court addressed South Carolina's It would be difficult at best for a jury to give effect to argument that the jury was not misled, as the trial court the type of evidence authorized in Matson, rehabilitation admonished the jury not to consider parole and that and recidivism rates, without knowing that the defendant parole is not a proper issue [**76] for the jury's will remain incarcerated for at least thirty-five years consideration. before even being considered for placement back into society outside of prison. The problem associated with Far from ensuring that the jury was not this lack of information provided to a jury is exacerbated misled, however, this instruction actually by general, though not always accurate, knowledge of the suggested that parole was available but existence of parole. that the jury, for some unstated reason, should be blind to this fact. Undoubtedly, In Simmons the Supreme Court reviewed the the instruction was confusing and question of whether the trial court's Instruction, that life frustrating to the jury, given the arguments imprisonment was to be understood in its plain and by both the prosecution and the defense ordinary meaning, adequately instructed the jury about relating to petitioner's future Simmons' parole ineligibility. The Court capsulized the dangerousness, and the obvious relevance history of parole and juries in the United States: of petitioner's parole ineligibility to the jury's formidable sentencing task. While It can hardly be questioned that most juries ordinarily are presumed to follow juries lack accurate information about the the court's instructions, we have precise meaning of "life imprisonment" as recognized that in some circumstances defined by the States. For much of our "the risk that the jury will not, or cannot, country's history, [**75] parole was a follow instructions is so great, and the mainstay of state and federal sentencing consequences of failure so vital to the regimes, and every term (whether a term defendant, that the practical and human of life or a term of years) in practice was limitations of the jury system cannot be understood to be shorter than the stated ignored." term. . . . It is impossible to ignore "the Page 25 934 S.W.2d 113, *139; 1996 Tex. Crim. App. LEXIS 205, **76 Simmons, 512 U.S. at , 114 S. Ct. at 2197, 129 L. Ed. allowed to serve such a short period of 2d at 147 (citations omitted). time, and if people like that can do -- go to that point, people that have already Although Simmons involved the failure to inform committed horrendous crimes, it just jurors that the defendant would not be eligible for parole seems a little scary that they might do the under a life sentence, a jury in Texas faces a similar same thing again, or be a hazard to dearth of information when it comes to intelligently society. answering the special [**77] issue referencing the probability that a defendant would commit criminal acts Another veniremember discussed the matter as follows: of violence that would constitute a continuing threat to DEFENSE COUNSEL: The way the society outside of prison. question reads: Do you agree or disagree that life imprisonment is more effective In Texas, this Court has observed it is common than capital punishment? And you knowledge that from time to time inmates of the Texas disagreed with that statement. . . . Could Department of Criminal Justice are released on parole. you share with me why? Felder, 758 S.W.2d at 762. Experience demonstrates the best likelihood is that a jury will consider the existence of VENIREMEMBER: I guess the parole. Arnold v. State, 786 S.W.2d 295, 300 reason I answered it in that response (Tex.Cr.App. 1990), cert. denied, 498 U.S. 838, 111 S. [**79] was that basically [*140] we Ct. 110, 112 L. Ed. 2d 80 (1990). Jurors often succumb to know that even though they get life the temptation to consider parole. 786 S.W.2d at 311. imprisonment they are up for parole within While jurors conceive of parole, they can, and often do, ten or twenty years and that life misperceive its application. "It can hardly be questioned imprisonment doesn't mean life that most juries lack accurate information about the imprisonment. Basically the words don't precise meaning of 'life imprisonment.'" Simmons, 512 mean anything. U.S. at , 114 S. Ct. at 2197, 129 L. Ed. 2d at 146. Portions of the voir dire involving several veniremembers In response to a veniremember's concern about early in the present case are illustrative. 10 release, the trial court responded, "Question relating to leniency within the penal institution or criminal laws, and VENIREMEMBER: Life is life: correct? you mentioned early release. Almost everybody does. It's not what we hear on TV? That is one of the most popular answers." VENIREMEMBER: What does life The trial court told the panel that it would instruct them mean? Can they get out in three years or not [**78] to consider the issue of parole in making their four years with life? decision. PROSECUTOR: Does anything pop into The trial court explained to this veniremember that this your mind that is important, or I mean was not something that could be considered in the why that must be, why we need the death punishment phase. 11 The colloquy continued: penalty, if we do? VENIREMEMBER: I don't think I really got an answer. VENIREMEMBER: I just -- there is so much about people that are turned loose COURT: You didn't get a correct after serving such a short period of time in answer because I can't tell you. All I can a prison for minor crimes and then go out tell you is you can't consider it. and commit murder, and it's just really scary to hear things like that, that they are Another veniremember was asked about the potential for put away for not so serious crimes and a person being a continuing threat to society. then turn around and do much worse VENIREMEMBER: Most of them do. crimes after being just sentenced for such Most of them -- I watch the news every a short period, or not sentenced but night. Early parolees and everything, they Page 26 934 S.W.2d 113, *140; 1996 Tex. Crim. App. LEXIS 205, **79 get out of jail and they commit [**80] when a person sentenced to life could be paroled, but the another crime the next day. court declined to answer. Another veniremember expressed a problem with a 10 These are quoted for illustrative purposes. person convicted of a crime who was suddenly released This is not to suggest that these veniremembers to commit another crime. She asked if that were possible were unqualified. in a capital murder case. 11 I point out that there is indeed a statutory COURT: Well I think it is obvious if definition of what life means for "a prisoner somebody is assessed the death penalty serving a life sentence for a capital felony" per you don't get paroled on a death penalty. Art. 42.18, § 8(b) (2), V.A.C.C.P. - "life" means the prisoner is not eligible for release on parole VENIREMEMBER: That doesn't until the actual calendar time the prisoner has seem to be what is happening, though. Or served, without consideration of good conduct are we not knowing the full story when we time, equals 35 calendar years. The trial court hear things? could have answered the veniremember's question about what life means by relating the statutory COURT: You probably don't know language; and could have excised the word the full story, but you aren't paroled on a "parole" in phrasing the answer, e.g., "Per our death penalty. I think that is obvious. I statutes, a life sentence for capital murder means don't think anybody is going to object at that the defendant is not eligible for release until this point to my telling you that, which he has served 35 years of actual calendar time leaves you with the other option, a life without consideration of good conduct time." sentence. There is absolutely nothing statutory or constitutional, state or federal, that requires such VENIREMEMBER: And that's the information to remain a "state secret" hidden from one that you are eligible for parole at some jurors - and as I discuss further, there are indeed stage perhaps? constitutional considerations that in some situations require that jurors be informed of such. COURT: Yes. [**82] The voir dire in this case exemplifies the difficulties and misperceptions potential jurors have with This veniremember was told that she would be parole, especially in the context of a life sentence for instructed not to consider parole. capital murder. Thirty-five years is not an insubstantial length of time. A jury reasonably may believe [*141] VENIREMEMBER: See I think that is that a person convicted of capital murder could be wrong. I think that if -- I think that if the sentence I am going to -- if the way I vote released on parole long before he serves thirty-five years if he were not executed. Cf. Simmons, 512 U.S. at , 114 on this affects whether he is going to be S. Ct. at 2193, 129 L. Ed. 2d at 141. To the extent this out in two years versus thirty years, then I misperception pervades the jury's deliberation, it would think I should really have the right to have the effect of creating a false choice between know that up front [**81] because I think sentencing the defendant to death and sentencing him to a that changes can occur and sometimes relatively short period of incarceration. Cf. Simmons, changes don't occur, and if they get back U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 2d at 141. This out again and they repeat the offense then misunderstanding would be heightened by the I am really angry about that. prosecutor's urging the jury that the defendant would be a danger to society on the streets if he were not executed. A veniremember was concerned that a "person is put in Simmons, U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 2d prison and he is released within just a few months for a at 141. crime that he should be in there for a number of years." Several other veniremembers expressed concerns about "There may be no greater assurance of a defendant's parole and early release. Other veniremembers asked Page 27 934 S.W.2d 113, *141; 1996 Tex. Crim. App. LEXIS 205, **82 future nondangerousness to the public than the fact that Constitution prohibits a parole instruction in a capital he never will be released on [**83] parole." Simmons, murder trial. Garcia, 887 S.W.2d at 860; Elliott, 858 512 U.S. at , 114 S. Ct. at 2194, 129 L. Ed. 2d at 142. It S.W.2d at 489 n.7; but see discussion of the 1989 stands to reason that the fact that a capital murder amendment to Tex.Const. Art. IV, § 11(a) and Art. 37.07. defendant in Texas would not be considered for release V.A.C.C.P., supra at p. 5 n.4. However, it is a firmly on parole for thirty-five years would provide greater entrenched pillar of federalism that when there is a assurance of the defendant's future nondangerousness to constitutional conflict, a federal constitutional right society outside of prison than any misunderstanding that prevails over a state constitutional restriction. Since I he would be eligible for parole considerably earlier. believe that in the instant cause the failure to inform the When a defendant presents evidence that he could be jury about the thirty-five year parole eligibility plateau rehabilitated in prison and that the risk of violence is violated appellant's federal constitutional right to due substantially reduced when the defendant reaches an process, such federal right prevails. advanced age, and the prosecutor argues that the defendant would be a danger to society on the streets, the D. Application to Present Case fact that the defendant could not be released from prison Previously I have set out illustrative portions of the for thirty-five years will often be the only way that a jury voir dire wherein parole was discussed. violent criminal can successfully rebut the State's case. Veniremembers were very interested in parole. In fact, Cf. Simmons, U.S. at , 114 S. Ct. at , 129 L. Ed. 2d several of the veniremembers who ultimately served as at 150-51 (O'Connor, J., concurring). jurors in this case inquired about parole during voir dire. Without being allowed to have the jury informed of Specifically, I observe that during questioning Juror the thirty-five year requirement for parole eligibility, a Flanakin said, defendant may be prohibited from rebutting information that the jury considers in answering the special [**84] [*142] I just [**86] -- there is so much issue. Cf. Simmons, 512 U.S. at , 114 S. Ct. at 2194, about people that are turned loose after 129 L. Ed. 2d at 143. The risk that the jury may consider serving such a short period of time in a misinformation about parole eligibility is great, and the prison for minor crimes and then go out consequences are vital to the defendant. Simmons, U.S. and commit murder, and it's just really at , 114 S. Ct. at 2197, 129 L. Ed. 2d at 146-47. scary to hear things like that, that they are put away for not so serious crime and then A jury's task at the punishment phase of a capital turn around and do much worse crimes murder trial is to answer the special issues. Stoker, 788 after being just sentenced for such a short S.W.2d at 16. Generally, parole is a matter within the period, or not sentenced but allowed to exclusive jurisdiction of the Board of Pardons and serve such a short period of time, and if Paroles and is not a matter of concern for the jury. people like that can do -- go to that point, Felder, 758 S.W.2d at 762. However, the relevance of people that have already committed parole information in a capital case is not so the jury can horrendous crimes, it just seems a little determine a number of years to assess as punishment to scary that they might do the same thing circumvent the Executive branch and ensure the again, or be a hazard to society. defendant remains incarcerated for a period of time the jury deems proper. Information concerning the thirty-five Juror Garcia said that he watched the news every night year parole eligibility requirement is directly relevant to and that "early parolees and everything, they get out of the special issue about whether the defendant would be a jail and they commit another crime the next day." He continuing threat to society, notwithstanding our indicated that he guessed that he could follow the judge's statement to the contrary in Jones, 843 S.W.2d at 495. instructions that the early parole thing should not be considered in reaching the sentence. v. The Texas Constitutional Question Juror Strohbeck stated that she had "a problem with Returning [**85] to the matter of the Texas so many people who have thirty-five years and spend a Constitution mentioned previously, 129 L. Ed. 2d at 138, few years, and because of overcrowding, they are let I again note that prior cases hold that the Texas Page 28 934 S.W.2d 113, *142; 1996 Tex. Crim. App. LEXIS 205, **86 out." Juror Mallard, expressing concern about parole, said point by holding that appellant failed to correctly he felt "like that it would [**87] serve the criminal and object to such evidence, thus waiving his right to rehabilitation system better if generally fines were fixed complain of its admission. Rhoades, supra, 934 or sentences were fixed within a very narrow range, . . .; S.W.2d at 126, 128. but, . . . that should be up to the sentencing at the time of sentence, not necessarily probation later, or parole later." [**89] At punishment phase jury argument, the Jurors Mitchell, Wilkinson, Englund and Miller, when prosecutor encouraged the jury to consider appellant's asked about having previously mentioned concerns about risk to society on the streets. The prosecutor argued: the revolving door and early parole and about how long somebody would be locked away, indicated that they [Defense counsel] wants you -- and I could follow the judge's instructions to not consider such. understand what he wants you -- to focus Thus 8 jurors, i.e. two-thirds of the jury that would decide only on prison society, and I am not whether appellant lived or died, expressed a keen interest suggesting that society does not include in the amount of time that this capital defendant would prison society. It includes all. He wants have to serve if he were sentenced to life rather than you to forget society on the street; and I'm death. saying, no, don't do that. This question doesn't say, "if he gets a life sentence." In the punishment phase of the trial, the State That's getting the cart before the horse. presented evidence of prisoners' eligibility for release on [*143] You answer this question to furlough under a life sentence for capital murder. 12 Also determine what the sentence is going to at the punishment stage, appellant submitted evidence be. You determine, whether it's today or that he would not be a danger to prison society. Appellant tomorrow, next week, next year, inside was twenty-eight years old at the time of his trial. prison, outside prison, wherever he may Appellant also presented expert testimony from a be, in whatever aspect of society he may psychologist, who had been the chief [**88] mental find himself: Is there a probability that he's health officer for the entire Texas Department of going to commit future acts of violence Corrections system, that indicated that when a person that would constitute a continuing threat? grows older his risk level for violence decreases and that the risk level of violence for a sixty-five-year-old inmate The prosecutor also argued that appellant would be a is significantly lower than that for a eighteen to danger to people in prison. twenty-five-year old. That psychologist specifically testified that he did not want to see appellant on the Another prosecutor argued, "Now we have to look at street, and that he did not think that it was in their or society's rights, and we look at how that defendant appellant's interest to be on the street, but that he did not functions in society. The prosecutor traced appellant's believe that he would be a danger in prison society. The history, pointing out the numerous crimes appellant had State in rebuttal presented testimony from an officer who [**90] committed. The prosecutor argued, unless than investigated offenses within the prison system about how 24 hours after his release from prison he slaughters two a capital murderer who received a life sentence would be men." This prosecutor also argued that appellant would classified upon entry into the system and would be be violent in prison. reclassified, depending upon behavior, with such "In assessing future dangerousness, the actual classifications depending "on the amount of time that duration of the defendant's prison sentence is indisputably they are pulling good time" and that it basically depended relevant." Simmons, 512 U.S. at , 114 S. Ct. at 2194, on disciplinary history while in the penitentiary that 129 L. Ed. 2d at 142. The jury reasonably may have determined how one was assigned, "either to your trustee believed appellant would be released on parole well status or whether you remain line class and not pull any before serving thirty-five years if he were not executed. good time." Cf. Simmons, U.S. at , 114 S. Ct. at 2193, 129 L. Ed. 12 Appellant raises a separate point of error 2d at 141. The trial court did not allow appellant an contending that this furlough evidence should not opportunity to deny or explain whatever misinformation have been admitted. The majority overrules that the jury had about the operation of the parole laws. Cf. Page 29 934 S.W.2d 113, *143; 1996 Tex. Crim. App. LEXIS 205, **90 Simmons, U.S. at , 114 S. Ct. at 2192-94, 129 L. Ed. time, the jury was required to answer the pertinent special 2d at 140-44. The State argued that appellant would be a issue with the State urging the jury to find that appellant danger to prison society. Cf. Simmons, U.S. at , 114 would be a threat in and out of prison and appellant S. Ct. at 2194-95 n.5, 129 L. Ed. 2d at 143-44 n.5. contending that, although he would be a threat out of However, the State also argued that appellant would be a prison anytime soon, he would pose no danger in prison threat to society outside of prison. The State urged the and he would not be a threat in his sixties. jury to answer the special issue "whether it's today or tomorrow, [**91] next week, next year, inside prison, In this context, appellant's parole eligibility was outside prison, wherever he may be, in whatever aspect obviously [**93] relevant to the jury's sentencing task in of society he may find himself." The State reminded the answering the future dangerousness special issue. "In jury that appellant "slaughtered two men" less than some circumstances, 'the risk that the jury will not, or twenty-four hours after he was released from prison. cannot, follow instructions is so great, and the Appellant was not allowed to rebut the State's argument consequences of failure so [*144] vital to the defendant, that he would commit criminal acts of violence that that the practical and human limitations of the jury would constitute a continuing threat to society outside of system cannot be ignored.'" Simmons, 512 U.S. at , 114 prison with information that the earliest he could even be S. Ct. at 2197, 129 L. Ed. 2d at 147 (citations omitted). considered for release into society outside of prison was As this Court has observed, experience demonstrates the in thirty-five years when he would be in his sixties. best likelihood is that a jury will consider the existence of parole. Arnold, 786 S.W.2d at 300. Moreover, even if the Appellant's efforts to convince the jury that he would instruction kept the jury from considering parole, it not be a danger to society beyond the prison walls were would not have satisfied due process as appellant was thwarted, as he was prevented from allowing the jury to entitled to have the jury consider all relevant information know that under Texas law he could not be released on in answering the special issue. Cf. Simmons, U.S. at , parole until he was at an age when, according to defense 114 S. Ct. at 2198, 129 L. Ed. 2d at 147. While being evidence, he would not endanger that society. Cf. incarcerated until reaching over sixty years of age Simmons, 512 U.S. at , 114 S. Ct. at 2194, 129 L. Ed. certainly does not preclude a finding of future 2d at 142-43. This effectively limited appellant's attempts dangerousness, the fact of such a lengthy incarceration is to focus the jury's attention on whether he would be a evidence which, in the instant case, would be very future danger in prison. Cf. Simmons, U.S. at , 114 S. relevant to the jury's answering of the future Ct. at 2195, 129 [**92] L. Ed. 2d at 144. The jury was dangerousness special [**94] issue. left to speculate about the date of appellant's parole eligibility when evaluating the special issue. Cf. E. Conclusion Simmons, 512 U.S. at , 114 S. Ct. at 2195, 129 L. Ed. Under the record in this case, and in light of 2d at 144. Simmons, I believe that the trial court's failure to allow In the punishment charge the trial court instructed appellant to have the jury informed at some point that a the jury: person sentenced to life for capital murder would not be eligible for parole until he serves thirty-five years During your deliberations, you are not to violated appellant's right to due process. I do not believe consider or discuss any possible action of that a capital murder defendant is always entitled to have the Board of Pardons and Paroles Division the jury so informed; this issue is case specific to the of the Texas Department of Criminal facts of each particular case. But based upon the evidence Justice or of the Governor, or how long presented in this particular case, I believe that appellant the Defendant would be required to serve has shown a due process violation. 13 Accordingly, I to satisfy a sentence of life imprisonment. respectfully dissent to the majority holding of no error in refusing to give a parole instruction as was requested by This instruction suggested to the jury that parole was appellant. Such a holding is particularly ironic in these available, but that the jury should be blind to when days of clamor for "truth-in-sentencing" - it would seem appellant could be released. Cf. Simmons, U.S. at , that the majority, in violation of constitutional due 114 S. Ct. at 2197, 129 L. Ed. 2d at 147. At the same process, is approving and encouraging "untruth" or Page 30 934 S.W.2d 113, *144; 1996 Tex. Crim. App. LEXIS 205, **94 "ignorance" in sentencing in situations involving the the facts of the instant offense, would be ultimate punishment, death. I respectfully refuse to go considered in making such a determination. along with such ignorance. [**95] OVERSTREET, JUDGE 13 Even such a constitutional error is subject to a harmless error analysis per Tex.R.App.Pro. 81(b) Delivered: October 2, 1996 (2). Of course all of the evidence, including EN BANC appellant's prior criminal record and offenses and Page 1 EDMUND F. SHEEHY, CATHERINE N. SHEEHY, JUNIUS CHADWICK, LILLIAN PAUL, and BEN JOHNS, on behalf of themselves, and all other similarly situated taxpayers, Plaintiffs and Appellants, v. PUBLIC EMPLOYEES RETIREMENT DIVISION, TEACHERS RETIREMENT DIVISION, DEPARTMENT OF ADMINISTRATION; STATE OF MONTANA; and DEPARTMENT OF REVENUE, STATE OF MONTANA, Defendants and Respondents, v. ASSOCIATION OF MONTANA RETIRED PUBLIC EMPLOYEES, et al., Defendants and Respondents. No. 92-499 SUPREME COURT OF MONTANA 262 Mont. 129; 864 P.2d 762; 1993 Mont. LEXIS 358; 50 Mont. St. Rep. 1477 April 28, 1993, Heard on; July 27, 1993, Submitted on November 23, 1993, Decided SUBSEQUENT HISTORY: Rehearing Denied violated 4 U.S.C.S. § 111; and that the retirement December 23, 1993. Released for Publication December adjustment payment of 1991 Mont. Laws ch. 823 violated 27, 1993. 4 U.S.C.S. § 111. The trial court granted the state summary judgment. The court affirmed the trial court's PRIOR HISTORY: [***1] APPEAL FROM: judgment in part and reversed it in part. The court held District Court of the First Judicial District, In and for the that state employees who retired prior to the effective County of Lewis and Clark, The Honorable Thomas C. date of 1991 Mont. Laws ch. 823 did not have a Honzel, Judge presiding. contractual right to continued exemption from state taxation because the statute the retirees relied upon CASE SUMMARY: contained no manifestation of legislative intent to create private and enforceable contract rights. The provision of ch. 823 phasing out the exemption did not violate 4 PROCEDURAL POSTURE: Appellant taxpayers and U.S.C.S. § 111 because it did not discriminate as to intervenor retiree association challenged the judgment of source of income; however, an adjustment payment to the First Judicial District, In and for the County of Lewis state retirees did violate § 111 because it constituted and Clark (Montana), which granted summary judgment discriminatory taxation based solely on the source of their to respondent state in the taxpayers' declaratory judgment retirement income. The court concluded that the invalid action challenging the validity of 1991 Mont. Laws ch. provisions of 1991 Mont. Laws ch. 823 could be severed. 823, which brought all income, including state and federal pensions, within the Montana income tax. OUTCOME: The court affirmed the grant of summary judgment to the state in the taxpayers' declaratory OVERVIEW: The taxpayers contended that ch. 823 judgment action as to the trial court's findings that the impaired private contractual rights that exempted their challenged legislation did not impair private contractual pensions from state taxation in violation of Mont. Const. rights and that a provision phasing out a tax exemption art. II, § 35; that a provision phasing out an exemption Page 2 262 Mont. 129, *; 864 P.2d 762, **; 1993 Mont. LEXIS 358, ***1; 50 Mont. St. Rep. 1477 did not violate federal law. The court reversed the finding In addition, 1991 Mont. Laws ch. 823, § 5 grants to state that a retirement adjustment payment did not violate retirees who are Montana residents, and who are now to federal law, but the court found that the provision was be taxed, an annual retirement adjustment payment. severable. CORE TERMS: retiree, taxation, retirement benefits, Constitutional Law > Congressional Duties & Powers > exemption, pension, retirement, severable, retired, Contracts Clause > General Overview invalid, income tax, teacher, Montana Laws, legislative Governments > State & Territorial Governments > intent, severability, significant differences, equalization, Employees & Officials contractual right, discriminatory, discriminate, resident, Pensions & Benefits Law > Governmental Employees > retirement income, severability clause, phase-out, State Pensions retirement systems, pension benefits, sovereign, severed, [HN3] Mont. Const. art. II, § 31 (1972) prohibits the invalid part, inducement, remainder legislature from passing any law impairing the obligation of contracts. LexisNexis(R) Headnotes Evidence > Inferences & Presumptions > General Overview Governments > Legislation > Interpretation Governments > Federal Government > Employees & Governments > State & Territorial Governments > Officials Employees & Officials Governments > State & Territorial Governments > [HN4] When the legislature enacts a statute fixing certain Employees & Officials terms and conditions of public employment, such as Pensions & Benefits Law > Governmental Employees > salaries and compensation, it is presumed that the statute State Pensions does not create contractual rights, but is intended merely [HN1] 4 U.S.C.S. § 111 waives the immunity retired to declare a policy to be pursued until the legislature federal employees otherwise would enjoy from state declares otherwise. taxation of retirement benefits received as a result of their employment with the federal government, except to the Governments > Legislation > Interpretation extent such state taxation discriminates on the basis of the [HN5] If contractual rights are to be created by statute, source of the retirement benefits. the language of the statute and the circumstances must manifest a legislative intent to create private rights of a Pensions & Benefits Law > Governmental Employees > contractual nature enforceable against the State. State Pensions Tax Law > Federal Taxpayer Groups > Individuals > Tax Law > State & Local Taxes > Income Tax > Adjustments to Income (IRC secs. 62, 71, 215, 911) > Individuals, Estates & Trusts > General Overview General Overview [HN6] The United States consents to the taxation of pay Tax Law > State & Local Taxes > Income Tax > or compensation for personal service as an officer or Individuals, Estates & Trusts > General Overview employee of the United States, a territory or possession or [HN2] 1991 Mont. Laws ch. 823 restructures the income political subdivision thereof, the government of the tax on pension benefits by equalizing the taxation of all District of Columbia, or an agency or instrumentality of pension benefits. In lieu of extending the total exemption one or more of the foregoing, by a duly constituted taxing from taxation previously available to state retirement authority having jurisdiction, if the taxation does not income to federal retirement income, the legislature opted discriminate against the officer or employee because of in ch. 823 to bring all retirement income - including both the source of the pay or compensation. 4 U.S.C.S. § 111. state and federal pensions - within the Montana income tax. Chapter 823 exempts from taxation the first $ 3,600 of all pension and annuity income received, except that Tax Law > State & Local Taxes > Income Tax > the exemption is reduced or phased out by $ 2 for every $ Individuals, Estates & Trusts > General Overview 1 of federal adjusted gross income in excess of $ 30,000. [HN7] A taxation exemption truly intended to account for Page 3 262 Mont. 129, *; 864 P.2d 762, **; 1993 Mont. LEXIS 358, ***1; 50 Mont. St. Rep. 1477 differences in retirement benefits would not discriminate Overview on the basis of the source of those benefits; rather, it Governments > Legislation > Interpretation would discriminate on the basis of the amount of benefits Governments > Legislation > Severability received by individual retirees. [HN12] The presumption is against the mutilation of a statute, and that the legislature would not have enacted it except in its entirety. The incorporation of a severability Pensions & Benefits Law > Governmental Employees > clause creates a presumption to the contrary; namely, that State Pensions the legislature would have enacted the law without its Tax Law > State & Local Taxes > Income Tax > invalid portions being incorporated therein. Individuals, Estates & Trusts > General Overview [HN8] To determine if disparate state taxation of pension COUNSEL: For Plaintiffs and Appellants: Edmund F. benefits is justified requires a two-pronged analysis of the Sheehy, Jr. (argued); Cannon & Sheehy, Helena. legislation at issue: 1) Does it constitute discriminatory taxation against federal retirees or in favor of state For Defendants and Respondents: David W. Woodgerd, retirees on the basis of source of income? and 2) If so, is Dep't of Revenue, R. Bruce McGinnis (argued), Tax the different treatment directly related to, and justified by, Counsel, Brenda Nordlund (argued), Dep't of significant differences between the two classes? Administration; Leo Berry, Browning, Kaleczyc, Berry & Hoven, (Association of Montana Retired Public Employees), Helena. Governments > Legislation > Expirations, Repeals & Suspensions JUDGES: KARLA M. GRAY, J. A. TURNAGE, [HN9] 1991 Mont. Laws ch. 823, § 20 provides that if a BYRON L. ROBB District Judge, sitting for Justice John part of the legislation is invalid, all valid parts that are C. Harrison, JOHN WARNER District Judge, sitting in severable from the invalid part remain in effect. the seat vacated by the retirement of Justice R.C. McDonough, PETER L. RAPKOCH District Judge, Governments > Legislation > Expirations, Repeals & sitting for Justice William E. Hunt, Sr., TERRY N. Suspensions TRIEWEILER, FRED J. WEBER Governments > Legislation > Interpretation Governments > Legislation > Severability OPINION BY: KARLA M. GRAY [HN10] The inclusion of a severability clause is an indication that the drafters desired judicial severability OPINION policy to apply. [*131] [**764] This is an appeal from the grant of summary judgment to defendants by the First Judicial Governments > Legislation > Expirations, Repeals & District Court, Lewis and Clark County. We affirm in Suspensions part and reverse in part. Governments > Legislation > Interpretation Governments > Legislation > Severability We consider the following issues on appeal: [HN11] If an invalid part of a statute is severable from the rest, the portion which is constitutional may stand 1. Did the District Court err in while that which is unconstitutional is stricken out and concluding that no contractual right rejected. A statute is not destroyed in toto because of an existed [***2] in certain state retirees to improper provision, unless such provision is necessary to continued exemption from taxation of the integrity of the statute or was the inducement to its state retirement benefits, and that Ch. 823, enactment. If, when an unconstitutional portion of an act 1991 Mont. Laws, does not violate Article is eliminated, the remainder is complete in itself and II, Sec. 31 of the Montana Constitution? capable of being executed in accordance with the apparent legislative intent, it must be sustained. 2. Did the District Court err in concluding that the provision of Ch. 823, 1991 Mont. Laws, phasing out the $ 3,600 Evidence > Inferences & Presumptions > General exemption does not violate 4 U.S.C. § Page 4 262 Mont. 129, *131; 864 P.2d 762, **764; 1993 Mont. LEXIS 358, ***2; 50 Mont. St. Rep. 1477 111? The Montana legislature subsequently passed [HN2] Chapter 823, 1991 Montana Laws, which, according to [*132] its title, restructures the income tax on pension benefits by equalizing the taxation of all pension benefits. In lieu 3. Did the District Court err in of extending the total exemption from taxation previously concluding that the retirement adjustment available to state retirement income to federal retirement payment contained in Ch. 823, 1991 Mont. income, the legislature opted in Chapter 823 to bring all Laws, does not violate 4 U.S.C. § 111? retirement income -- including both state and federal pensions -- within the Montana income tax. Chapter 823 4. Are the retirement adjustment does exempt from taxation the first [*133] $ 3,600 of all payment and related implementation pension and annuity income received, except that the provisions severable from Ch. 823, 1991 exemption is reduced or phased out by $ 2 for every $ 1 Mont. Laws? of federal adjusted gross income in excess of $ 30,000. In addition, section 5 of Chapter 823 grants to state For many years, the State of Montana exempted from retirees who are Montana residents, and who now were to income taxation all retirement benefits paid through its be taxed in response to Davis, an annual retirement various retirement systems to teachers and state adjustment payment. government retirees, while taxing retirement benefits paid Appellants, who are primarily federal retirees but by the United States to federal retirees. In 1989, the who include one or more state and teacher retirees United States Supreme Court decided Davis v. Michigan (hereafter Taxpayers), filed the instant declaratory Dep't of Treasury (1989), 489 U.S. 803, 109 S.Ct. 1500, judgment action against two state retirement divisions 103 L.Ed.2d 891. The Supreme Court determined that [***5] [**765] of the Montana Department of [HN1] 4 U.S.C. § 111 waives the immunity retired Administration and the Montana Department of Revenue federal employees otherwise would enjoy from state (hereafter the State), challenging Chapter 823 on a taxation [***3] of retirement benefits received as a result number of grounds. The Association of Montana Retired of their employment with the federal government, except Public Employees was allowed to intervene. The parties to the extent such state taxation discriminates on the basis entered into an agreed statement of facts and submitted of the source of the retirement benefits. Because the the case to the District Court on cross motions for Michigan tax at issue favored retired state employees summary judgment. based on the source of their retirement benefits, the Supreme Court concluded that the tax violated principles The District Court granted summary judgment to the of intergovernmental tax immunity. Davis, 489 U.S. at State on all issues. Taxpayers appeal from portions of 810, 817, 109 S.Ct. at 1505, 1509, 103 L.Ed.2d at 901, that judgment. 906. I Although Davis was decided during Montana's 1989 legislative session, the legislature did not amend Did the District Court err in concluding that no Montana's tax laws in response to Davis prior to contractual right existed in certain state retirees to adjourning. As a result, a group of federal retirees filed a continued exemption from taxation of state retirement declaratory judgment action to have the existing taxation benefits, and that Ch. 823, 1991 Mont. Laws, does not scheme declared unconstitutional; they also sought a violate Article II, Sec. 31 of the Montana Constitution? retroactive application of Davis for purposes of entitlement to a refund of taxes illegally collected by the Taxpayers argue that as to state employees who State. By the time that case reached this Court, the retired on or before the effective date of Chapter 823 and district court had adopted the parties' stipulation that the began receiving retirement benefits at a time when those tax was invalid for tax years beginning after December benefits were fully exempt from taxation, Chapter 823 31, 1988; only the issue of retroactive application of violates [HN3] Article II, Section 31 of the 1972 Davis was before us. See [***4] Sheehy v. State, Dep't Montana Constitution, which prohibits the legislature of Revenue (1991), 250 Mont. 437, 820 P.2d 1257. from passing any law impairing the obligation of contracts. The thrust of the argument is that, by taxing Page 5 262 Mont. 129, *133; 864 P.2d 762, **765; 1993 Mont. LEXIS 358, ***6; 50 Mont. St. Rep. 1477 [***6] these retirees' state pensions, Chapter 823 impairs Taxpayers assert that the provisions of §§ 19-4-706 and private contractual rights codified at §§ 19-4-706 and 19-3-105, MCA (1989), clearly manifest legislative intent 19-3-105, MCA (1989), that exempted their pensions to create private contractual rights enforceable against the from taxation. State. We disagree. The State counters that the pre-Chapter 823 statutes Notwithstanding their bald assertion of clearly did not create private contractual rights, and could not manifested legislative intent, Taxpayers offer no analysis create a right in state retirees never to be taxed because it of the statutes to support the assertion. Thus, it is is prohibited from surrendering or contracting away its necessary only to point out that § 19-4-706, MCA (1989), taxing power by Article VIII, Section 2 of the 1972 provides that state retirement benefits are exempted from Constitution. Thus, the State contends, Article II, Section state tax. The use of the present tense "are" indicates that 31 is inapplicable here. the statute is a statement of current policy regarding public [***8] employment. The statute contains no The District Court correctly relied on Wage Appeal manifestation of legislative intent to create private and v. Board of Personnel Appeals (1984), 208 Mont. 33, 676 enforceable contractual rights as contemplated in Wage P.2d 194, in concluding that §§ 19-4-706 and 19-3-105, Appeal; nor does it make or imply any promises MCA (1989), constituted current policy [*134] regarding ongoing or future tax treatment of state statements regarding public employment, rather than a retirement benefits. Taxpayers have not met their burden contract providing that state retirement benefits would under Wage Appeal. never be taxed. In Wage Appeal, a statewide pay plan was challenged on the basis that it impaired employment [**766] Moreover, Taxpayers' reliance on Clarke v. contracts entered into before it took effect. We stated: Ireland (1948), 122 Mont. 191, 199 P.2d 965, and State ex rel. Sullivan v. State (1977), 174 Mont. 482, 571 P.2d 793, as support for their theory that §§ 19-4-706 and 19-3-105, MCA (1989), created a contract right to [HN4] [W]hen the Legislature enacts a continued exemption from taxation of state retirement statute fixing certain terms and conditions benefits is misplaced. Both cases involved an effort to of public employment, such as salaries and deny the plaintiffs therein an actual retirement benefit compensation, it is presumed that [***7] provided by the Teachers' Retirement Act at the time the the statute does not create contractual plaintiffs became members of the teachers' retirement rights, but is intended merely to declare a system; [*135] our conclusions in Clarke and Sullivan policy to be pursued until the Legislature that contract rights existed were based on those facts. declares otherwise. Here, we have no issue concerning efforts to deny or limit state retirees' actual retirement benefits. The question before us relates to a taxation provision entirely Wage Appeal, 676 P.2d at 199 (citations omitted). While separate from state [***9] retirement programs and recognizing the "presumption" language in Wage Appeal, entitlements thereunder. Furthermore, the taxation Taxpayers rely on additional language therein: characteristic which distinguishes this case from Clarke and Sullivan also brings into play Article VIII, Section 2 of the 1972 Constitution, which prohibits the state from [HN5] If contractual rights are to be surrendering or contracting away the power to tax. Under created by statute, the language of the that constitutional provision, the state cannot promise any statute and the circumstances must group of taxpayers that it will never tax them. manifest a legislative intent to create private rights of a contractual nature We hold that the District Court correctly concluded enforceable against the State. that state employees retiring prior to the effective date of Chapter 823 did not have a contractual right to continued exemption from taxation of their state retirement benefits. On that basis, the District Court also correctly determined Wage Appeal, 676 P.2d at 199 (citations omitted). that Chapter 823 does not violate Article II, Section 31 of Page 6 262 Mont. 129, *135; 864 P.2d 762, **766; 1993 Mont. LEXIS 358, ***9; 50 Mont. St. Rep. 1477 the Montana Constitution. When Davis was decided, it became clear that Montana's income tax statutes regarding state versus II federal retirement benefits also violated federal law. In responding to Davis and restructuring the taxation of Did the District Court err in concluding that the pension benefits in Chapter 823, the Montana legislature provision of Ch. 823, 1991 Mont. Laws, phasing out the provided a $ 3,600 exemption from taxation to all $ 3,600 exemption does not violate 4 U.S.C. § 111? retirees; the exemption is phased out beginning at the $ 30,000 income level. Taxpayers contend that the Prior to adoption of the Public Salary Tax Act of phase-out violates 4 U.S.C. § 111 by discriminating 1939 (the Act), compensation of both state and federal against federal retirees [**767] based on the source of employees generally was thought to be exempt from their income. This is so, they contend, because federal taxation by another sovereign under the doctrine of pensions are larger than state pensions and, as a result, intergovernmental tax immunity. [***10] The purpose federal retirees will lose all or part of the exemption. The of the Act was to impose federal income tax on the State contends that the phase-out exemption treats state salaries of all state and local government employees. In and federal retirees' pensions equally and that any order to ensure that federal employees did not remain difference is based [***12] on amount, not source, of immune from state taxation while state employees were income. being required to pay federal income taxes, Congress enacted § 4 of the Act -- now 4 U.S.C. § 111 -- waiving As discussed above, the controlling federal statute immunity which might otherwise have shielded federal does not prohibit all differences in state taxation of state employees from state taxation, but retaining immunity and federal pensions. Rather, it precludes taxation which from discriminatory taxation based on the source of the discriminates against federal retirees because of the income: source of the pension. 4 U.S.C. § 111. Here, the phase-out exemption is neutral on its face; it applies to all [HN6] The United States consents to the taxpayers equally. Any difference in impact on federal taxation of pay or compensation for and state retirees is based entirely on the amount of personal service as an officer or employee income received by each individual taxpayer, without of the United States, a territory or regard to the source of that income. possession or political subdivision thereof, the government of the District of Indeed, the Supreme Court in Davis tacitly approved Columbia, or an agency or instrumentality differences in taxation such as the phase-out exemption of one or more of the foregoing, by a duly before us: constituted taxing authority having jurisdiction, if the taxation does not discriminate [*136] against the officer or employee because of the source of the pay [HN7] A taxation exemption truly or compensation. intended to account for differences in retirement benefits would not discriminate 4 U.S.C. § 111 (emphasis added). on the basis of the source of those benefits . . .; rather, it would discriminate on the In 1989, the United States Supreme Court decided basis of the amount of benefits received by Davis, which involved a Michigan income tax system individual retirees. discriminating in favor of state retirees [***11] and against federal retirees by exempting only state retirement benefits from taxation. The Supreme Court determined that the discriminatory tax was based on the Davis, 489 U.S. at 817, 109 S.Ct. at 1508, 103 L.Ed.2d source of the retirement benefits and was not justified by at 906 (emphasis added). The phase-out exemption significant differences between the two classes of contained in Chapter 823 treats individual retirees retirees. Davis, 489 U.S. at 817, 109 S.Ct. at 1509, 103 differently based on differences in the [*137] amount of L.Ed.2d at 906. retirement [***13] income received. Taxpayers' strained Page 7 262 Mont. 129, *137; 864 P.2d 762, **767; 1993 Mont. LEXIS 358, ***13; 50 Mont. St. Rep. 1477 interpretation that because federal pensions generally are part: larger than state pensions and, thus, that the phase-out discriminates as to source rather than amount, simply An Act to Restructure the Income Tax does not square with Davis. on Pension Benefits by Equalizing the Taxation of All Pension [***15] Benefits; We conclude that the phase-out exemption does not To Provide an Exemption of $ 3,600 from discriminate as to source of income. Therefore, we hold Taxation of Benefits from Federal, State, that the District Court correctly concluded that the [*138] [**768] and Private Retirement, provision of Chapter 823 phasing out the $ 3,600 Annuity, Pension, and Endowment Plans exemption does not violate 4 U.S.C. § 111. or Systems; To Provide That the Amount of the Exemption be Reduced by $ 2 for III Every $ 1 of Federal Adjusted Gross Income Received by the Taxpayer in Did the District Court err in concluding that the Excess of $ 30,000; To Provide for an retirement adjustment payment contained in Ch. 823, Adjustment Payment to Retirees of State, 1991 Mont. Laws, does not violate 4 U.S.C. § 111? Local, and Teacher Retirement Systems Observing that Davis does not limit the State's ability Who are Montana Residents. . . . to set the terms and conditions of public employment, the District Court concluded that the adjustment constitutes a Reading the title makes it clear that the overall purpose of legitimate increased retirement benefit to state retirees. It this bill was to tax state and federal pensions in a manner relied primarily on Clark v. United States (7th Cir. 1982), that does not violate 4 U.S.C. § 111 as interpreted in 691 F.2d 837. Davis. Rather than comply with 4 U.S.C. § 111 by extending the total exemption from state income taxation Taxpayers argue that the adjustment is part of the previously granted to state retirement benefits to include taxation scheme and that it impermissibly discriminates federal retirement benefits, the legislature chose to against them. They also argue that Clark is inapplicable. equalize the burden by taxing all retirement benefits, The State contends that the adjustment is unrelated to the subject to the phase-out exemption discussed above. [***14] tax and that, pursuant to Clark, it is a valid Within the same legislative enactment, the legislature retirement benefit. provided for an adjustment payment to state retirees who are Montana residents. The State's argument that the two [HN8] Davis requires a two-pronged analysis of the portions of the bill are not related defies [***16] logic. legislation at issue here: 1) Does it constitute discriminatory taxation against federal retirees or in favor Moreover, the relationship between the tax of state retirees on the basis of source of income? and 2) equalization provisions of the bill, with their negative If so, is the different treatment "directly related to, and impacts on state retirees, and the adjustment intended to justified by, 'significant differences between the two make up, in part, for that equalization cannot be gainsaid. classes'"? Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 The adjustment -- while purporting to be an adjustment to L.Ed.2d at 905 (citation omitted). Application of Davis state retirement benefits -- is, in fact, an adjustment to the to the case before us mandates our conclusion that the equalization achieved via the first sections of Chapter retirement adjustment payment (hereafter adjustment) 823. This conclusion is inescapable given the inclusion contained in section 5 of Chapter 823 violates 4 U.S.C. § of the adjustment in, and as part of, the tax equalization 111. program. No other interpretation of these two portions of Chapter 823 comports with our duty to construe statutes It is clear that the revenue, equalization and in a reasonable manner. adjustment provisions of Chapter 823 are related parts of a comprehensive income tax program encompassing all It is clear that the adjustment is not an actual and pension income. The provisions were all included in and legitimate pension or retirement benefit. If it were a part of the same bill, originally introduced as Senate Bill pension benefit, the State would have provided it to all of 226 in the 1991 Montana legislature. The title of the bill, its retirees in recognition of their years of public service subsequently enacted as Chapter 823, reads in pertinent rather than just those living in Montana. There was no Page 8 262 Mont. 129, *138; 864 P.2d 762, **768; 1993 Mont. LEXIS 358, ***16; 50 Mont. St. Rep. 1477 need to do so because the sole purpose of the adjustment Montana residents. Further, the adjustment provided in was to partially recompense state retirees living in Clark was entirely independent of, and unrelated to, any Montana for the tax they now must pay under the tax provisions. [***19] Here, it is part of a tax equalizing provisions of Chapter 823. equalization scheme mandated by federal law. Further evidence that the adjustment is not an actual Because the adjustment contained in section 5 of [***17] increased retirement benefit for retired state Chapter 823 violates 4 U.S.C. § 111, the disparate tax employees is the fact that the funding of the section 5 treatment of state and federal retirement income is adjustment bears no resemblance to the funding of actual justified only if it is "directly related to, and justified by, state retirement benefit adjustments previously enacted 'significant differences between the two classes.'" Davis, by the legislature. Such actual retirement adjustments as 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905. those contained in the Public Employees' Retirement Application of this test mandates the conclusion that the System at § 19-3-1603, MCA, and in the Teachers' adjustment contained in Chapter 823 cannot stand. Retirement System at § 19- [*139] 20-713, MCA, are funded by investment income produced by the retirement The State makes no real argument that significant fund made up of employee and employer contributions. differences in fact exist between the two classes of See §§ 19-3-1602 and 19-20-712, MCA. Here, the retirees that justify the discriminatory adjustment. funding for the so-called retirement adjustment payment Perhaps this is to the State's credit, since it is [*140] is statutorily appropriated from the general fund pursuant clear that no such articulable differences exist which to section 4 of Chapter 823 -- that is, from the taxes could withstand Davis scrutiny. The most obvious collected from all Montana taxpayers. The money to pay contention to be made regarding differences between the the adjustment never goes into the state retirement funds, classes is the State's interest in inducing and retaining but is simply paid by the state treasurer to the retirement qualified state government workers. While this position boards, to be distributed by the boards in accordance with is not asserted here, it is precisely the argument made by the provisions of Chapter 823. While this evidence is not the state of Michigan in Davis to justify the preferential conclusive as to the nature of the adjustment at issue treatment of its retired employees, and is the argument here, it undercuts any notion that the adjustment is a [***20] squarely rejected by the Davis Court: legitimate increase in retirement benefits [***18] for state retirees. We conclude that the adjustment is a partial tax This argument is wholly beside the point, rebate denominated otherwise in an attempt to evade the however, for it does nothing to requirements of federal law. The discriminatory aspect demonstrate that there are "significant of the adjustment is clear: the adjustment favors state differences between the two classes" retirees living in Montana based solely on the source of themselves; rather, it merely demonstrates their retirement income; that is, those retirees living in that the State has a rational reason for Montana and receiving state retirement income receive discriminating between two similar groups the adjustment, while federal retirees living in Montana of employees. The State's interest in and receiving federal retirement income do not. Thus, adopting the discriminatory tax, no matter the adjustment constitutes discriminatory taxation based how substantial, is simply irrelevant to an solely on the source of the respective retiree's income, in inquiry into the nature of the two classes violation of 4 U.S.C. § 111. receiving inconsistent treatment. [**769] The State's reliance on Clark for the proposition that the adjustment is merely an allowable increased retirement benefit is misplaced. Clark involved Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d a cost-of-living adjustment provided to all federal retirees at 905 (emphasis added). as an actual and legitimate pension adjustment. Clark, 691 F.2d at 841. Here, the adjustment was provided not Moreover, no reasonable argument can be made that to all state retirees, but only to state retirees who are the adjustment is necessary or intended (a) to retain retired residents in Montana in order to provide a critical Page 9 262 Mont. 129, *140; 864 P.2d 762, **769; 1993 Mont. LEXIS 358, ***20; 50 Mont. St. Rep. 1477 mass of retired people to use those services and facilities desired judicial severability policy to apply. Montana that are important to retired people; or (b) to entice other Automobile Assoc. v. Greely (1981), 193 Mont. 378, 399, retired people into the state. Such arguments would 632 P.2d 300, 311. Thus, we begin our analysis with apply to all retired people and would support the stated legislative intent favoring severability. We then similarities between state and federal retirees rather than apply severability principles in determining whether the establishing any significant differences between the two invalid provisions can be severed or whether the entire classes. legislative act must be stricken: Here, as noted, the State does not address or attempt [HN11] If an invalid part of a statute is to meet [***21] the Davis requirement that it justify severable from the rest, the portion which disparate treatment on the basis of significant differences is constitutional may stand while that between the two classes of retirees. The reason is clear: which is unconstitutional is stricken out the "adjustment" is not based on any difference in the and rejected. . . . A statute "is not [***23] nature of the two classes before us. The disparate destroyed in toto because of an improper treatment is based entirely on the State's desire to provision, unless such provision is continue to provide an advantage to those of its own necessary to the integrity of the statute or retirees losing a pre-Davis advantage -- namely, state was the inducement to its enactment." . . . retirees who reside in Montana and whose state pensions If, when an unconstitutional portion of an are now subject to income tax pursuant to Chapter 823. act is eliminated, the remainder is While the desire is understandable and perhaps even complete in itself and capable of being laudable, it is legally insufficient under Davis as a executed in accordance with the apparent justification for taxation which discriminates against legislative intent, it must be sustained. federal retirees. We conclude that the adjustment contained in section 5 of Chapter 823 constitutes discriminatory taxation Greely, 632 P.2d at 311 (citations omitted). which is not related to, or justified by, significant differences between state and federal retirees. [*141] Here, the income tax provisions of Chapter 823 We hold that the District Court erred in determining that clearly are not destroyed in toto by striking the the retirement adjustment payment does not violate 4 adjustment provisions contained in sections 4 and 5; U.S.C. § 111. indeed, they are not impacted in any way. The income tax still may be imposed and the exemption may be given IV effect without the adjustment for state retirees living in Montana. Nor was the adjustment the inducement for Are the retirement adjustment payment and related enacting the legislation; the "inducement" for Chapter implementation provisions severable from Chapter 823, 823 was 4 U.S.C. § 111 and the Supreme Court's Davis 1991 Mont. Laws? decision. [***22] Having concluded that the adjustment [*142] The income taxes and exemption contained provision contained in section 5 of Chapter [**770] 823 in Chapter 823 remain complete in themselves and violates 4 U.S.C. § 111, it is necessary to determine capable of being executed in accordance with the overall whether that provision and related implementing legislative intent, which was to equalize taxes. Granted, provisions can be severed from Chapter 823, or whether the legislature also intended to continue an advantage for the entirety of Chapter 823 must be stricken. We certain [***24] state retirees through the adjustment. conclude that the invalid provisions can be severed. But where we have invalidated the adjustment portion of Chapter 823, it is clear that the legislature intended, [HN9] Section 20 of Chapter 823 provides that if a through the severability clause it included in Chapter 823, part of the legislation is invalid, all valid parts that are to preserve all valid parts. severable from the invalid part remain in effect. We previously have concluded that [HN10] the inclusion of a Our earlier determination that the revenue, severability clause is an indication that the drafters equalization and adjustment provisions of Chapter 823 Page 10 262 Mont. 129, *142; 864 P.2d 762, **770; 1993 Mont. LEXIS 358, ***24; 50 Mont. St. Rep. 1477 are related parts of a comprehensive income tax program provisions excepted, Chapter 823, 1991 Montana Laws, encompassing all pension income does not negate our remains valid and in full force and effect. conclusion here regarding severability. The fact that the provisions are related from the standpoint of whether they Affirmed in part and reversed in part. can withstand 4 U.S.C. § 111 and Davis scrutiny does not mean that they are not, and cannot be, separate and CONCUR BY: PETER L. RAPKOCH (In Part); FRED independent from a severability standpoint. From an J. WEBER administrative and operational perspective, it is clear that sections 4 and 5 are segregable from the income tax and DISSENT BY: PETER L. RAPKOCH (In Part); FRED exemption provisions. J. WEBER Finally, and returning again to the legislature's DISSENT specific intent that invalid portions of Chapter 823 be severed, we note that, absent a severability clause: DISTRICT JUDGE RAPKOCH specially concurring in part and dissenting in part. I concur in the majority opinion on Issue I, that state employees retiring before the effective date of Chapter [HN12] [T]he presumption is against the 823, 1991 Laws of Montana, did not have a contractual mutilation of a statute, and that the right to continued exemption from taxation of their state legislature would not have enacted it retirement benefits. except in its entirety. The incorporation of a provision [***25] such as section 20 I also agree that the provision of Chapter 823 [severability clause] creates a presumption phasing out the $ 3600 exemption does not violate 4 to the contrary; namely, that the legislature U.S.C. § 111 (1966). would have enacted the law without its invalid portions being incorporated Nor do I disagree with the majority that the therein. adjustment contained in section 5 of Chapter 823 constitutes discriminatory taxation and therefore violates 4 U.S.C. § 111 (1966). State v. Holmes (1935), 100 Mont. 256, 291, 47 P.2d It is, however, my opinion that the adjustment 624, 636 (citation omitted). See also Ingraham v. payment provision is not severable from the rest of Champion Int'l (1990), 243 Mont. 42, 49, 793 P.2d 769, Chapter 823, and therefore, I dissent from the majority's 773. The presumption operates here in support of the opinion on that point. legislature's intent that the remainder of Chapter 823 remains valid even where the adjustment provisions are Section 20 of Chapter 823 is the severability determined to be invalid. Nothing in Chapter 823 provision here. The incorporation of that provision raises indicates any intent that the tax and exemption provisions a presumption that the Legislature would have [***27] are dependent on the validity of the adjustment for state enacted the law without its invalid portions. Williams v. retirees living in [**771] Montana; thus, no Standard Oil Co. (1929), 278 U.S. 235, 241-42, 49 S.Ct. inconsistency between such a provision and the contrary 115, 116-17, 73 L.Ed. 287; State v. Holmes (1935), 100 and clearly-stated severability clause exists in Chapter Mont. 256, 291, 47 P.2d 624, 636; Ingraham v. 823 which might require us to depart from the plain Champion Int'l. (1990), 243 Mont. 42, 49, 793 P.2d 769, language used by the legislature and delve into the 773. legislative history to resolve the issue before us. That is a rebuttable presumption though, and a weak We conclude that sections 4 and 5 are severable from one at that; rebuttable by the nature of the statute being Chapter 823, 1991 Montana Laws. We hold that those considered: its purpose manifested by its provisions sections are severed and [*143] excised from Chapter before severance as compared to its apparent purpose, as 823 and, with those invalid [***26] and severed manifested by the provisions remaining after amputation. Can it be said that the purpose is the same after surgery as Page 11 262 Mont. 129, *143; 864 P.2d 762, **771; 1993 Mont. LEXIS 358, ***27; 50 Mont. St. Rep. 1477 it was before? (4) the remainder is capable of being executed in accordance with the apparent legislative intent. Greely, The majority cites and quotes Montana Automobile 632 P.2d at 311. Association v. Greely (1981), 193 Mont. 378, 399, 632 P.2d 300, 311 as follows: I submit that the surgery here performed on Chapter 823 fails to meet condition 1 above in that sections 4 and 5, the adjustment provisions, are necessary to the integrity of the entire Chapter 823 as originally enacted. A statute "is not destroyed in toto because It is correct that the equalization provisions may be of an improper provision, unless such imposed and the exemption given effect without the provision is necessary to the integrity of adjustment to income for Montana resident retirees. But the statute or was the inducement to its what would then be imposed and given effect would be a enactment." If, when an unconstitutional law completely different from what is clearly intended in portion [*144] of an act is eliminated, the the original act. It may even be a better law, but that is remainder is complete in itself and capable not our business; such would be judicial legislation. of being executed in accordance with the apparent legislative intent, it must be It also seems that the adjustment provision is part of sustained. [Citation omitted; [***28] an enactment that is a byzantine effort to avoid Davis v. emphasis added]. Michigan Department of Treasury (1989), 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. I stand in awe and admiration of such effort, but we are subject to 4 U.S.C. § This cannot be done here. "Apparent legislative 111 (1966) and Davis and must apply logic to the intent" must be that intent manifested by the language of premises therein set forth. I, therefore, believe that the the statute before severance. It is true that neither the adjustment provision is an [***30] inseparable income tax provisions nor the equalization parts are not inducement to the enactment of Chapter 823, thereby themselves destroyed or affected by striking the failing the second condition above. adjustment provisions. But the former cannot in this case be considered separate and apart from the amputated [*145] The remainder of the statute, after adjustment provision. And "amputated" is the right word. eliminating the adjustment provision is complete in itself, What remains and will be enforced under the majority but only in itself. It is not what the Legislature enacted or opinion will not be the same as what clearly appears to be intended. There go conditions 3 and 4 above. the intent of the Legislature in the original enactment. What remains after our decision is not, as stated ad The Legislature did not, in enacting Chapter [**772] nauseam above, capable of being executed in accordance 823, set out to do no more than equalize the income tax with the apparent legislative intent. We cannot cut out a on all retirees. It went on and set out, by the adjustment third of the legislation where that third completely provision, to remove or lessen that impact on resident changes the effect of the whole enactment and say that Montana retirees. what is left is what the Legislature started with. The general statement of the severability rule in Greely is not on point. There the purpose of the Act Greely is an accurate statement. Portions of a statute are was to regulate lobbying. The Legislature indulged in severable if: overkill by, for instance, defining the proscribed practice (1) the invalid part is not necessary to the integrity of so a person of normal intelligence could not figure out the statute; or what he could not do. Several sections were therefore held void; others, because the subject matter of some of (2) the invalid part was not the inducement to its the sections was not embraced in the title of the Initiative, enactment; contrary to Article V, Section 11, Clause 3, of the Montana Constitution. (3) the remainder of the statute is complete [***29] in itself; and (conjunctive) This Court stated: Page 12 262 Mont. 129, *145; 864 P.2d 762, **772; 1993 Mont. LEXIS 358, ***30; 50 Mont. St. Rep. 1477 The Initiative, while being lengthy, is enacting the statute, the purpose of the statute, as basically [***31] amendatory in nature. indicated by its provisions. The intent to make portions Its purpose was to expand Chapter 7, Title severable is an interim intention, a procedural means, not 5, of Montana's Lobbying Act, to provide the end. This Court has stated: for the disclosure of money spent to influence action of public officials and to require elected officials to disclose their business interests. This purpose is not The inclusion of a severability clause in frustrated by our limitations of the the Initiative is an indication that its Initiative. Even after our excisions, drafters [***33] and the voters desired Chapter 7, Title 5, as amended by the this judicial policy [the severability rule] Initiative is complete in itself and capable to be applied to the Initiative. [Emphasis of being executed in accordance with the added]. intention of the people of Montana. [Emphasis added]. Greely, 632 P.2d at 311. Greely, 632 P.2d at 311-12. Lastly, section 20, Chapter 823, reads as follows: The legislation there considered is of a different Severability. If a part of [this act] is nature than Chapter 823, where the parts are meaningful invalid, all valid parts that are severable only in internal conjunction with each other. The whole from the invalid part remain in effect. If a of Chapter 823 was enacted as a unit. part of [this act] is invalid in one or more of its applications, the part remains in I must disagree with the view expressed that the effect in all valid applications that are legislative intent is clearly expressed in section 20, severable from the invalid applications. Chapter 823, which is the severability clause, and [Emphasis added]. provides that if a part of the Act is invalid, all invalid parts of the Act are severable, and valid parts remain in effect. This is not the legislative intent that is relevant That language, I think, is clear. That section speaks here. In fact, it is [**773] not the legislative intent at all not of physical parts of provisions. It speaks of that the act is severable; [***32] the intent is that if the applications of those parts. To apply the equalization act is severable. . . . By use of the word "if" the portions without the adjustment portion is to apply the Legislature recognizes the fact that severance, or former portions at a divergence of 180 degrees, more or declaration of severability is a judicial act, not legislative. less, from the application intended by the Legislature as If the Legislature had intended the severed statute, it the act is presently constituted. A severability clause is could and should and would have legislated accordingly. an appeal to the judiciary. [*146] This may, as is stated and shown earlier, It is, therefore, my opinion that the whole of Chapter raise a presumption that the Legislature would have 823 is invalid and the adjustment provisions are not enacted the law without its invalid portions being severable. incorporated. But that presumption is, I believe, a rebuttable presumption, here rebutted. Also, the JUSTICE WEBER specially concurs and dissents as inclusion of a severability provision is to seek a judicial follows: act. Before it can be given effect, the judicial branch I concur with issues I and II of [***34] the majority, must do the severing. but dissent on issues III and IV. Issue III asks if the The relevant intent for the judiciary to look at in District Court erred in concluding that the retirement considering severability is not the legislative intent to adjustment payment contained in Chapter 823, 1991 provide for severability, but the legislative intent in Montana Laws, violates 4 U.S.C. § 111. I do not find Page 13 262 Mont. 129, *146; 864 P.2d 762, **773; 1993 Mont. LEXIS 358, ***34; 50 Mont. St. Rep. 1477 such discrimination. employees who become superannuated or incapacitated to retire and, to that end, to The majority states: provide sufficient benefits to provide for retirement; and [*147] WHEREAS, the Legislature wishes to It is clear that the revenue, encourage all retired persons to remain equalization and adjustment provisions of within Montana to provide a critical mass Chapter 823 are related parts of a of retired persons who use certain services comprehensive income tax program and facilities that are important to retired encompassing all pension income. persons and that may keep and perhaps [***36] entice other retired persons into I agree that Chapter 823 is a comprehensive income tax the state; and program; however, this does not preclude this statute from encompassing other issues. The majority quotes WHEREAS, the Legislature has in the verbatim the "pertinent" part of the bill's title. The first past granted increases in retirement part of the title of the restructuring plan indicates that the benefits in a manner designed to provide legislature attempted to "equalize" the taxes on all relatively greater increases to those pension benefits. Although, listed after this in sequence, retirees who were employed during the the provision indicating the legislature's intent to provide years of low wages and whose benefits are the adjustment payment to State retirees living in relatively small; and Montana is an integral part of the Act as seen by the title's wording: [*148] WHEREAS, the Legislature . . . . To Provide for an Adjustment therefore grants an increase in benefits to Payment to Retirees of State, Local, and its former public employees who are Teacher Retirement Systems Who are residents of the state to provide Montana Residents . . . . compensation to encourage them to remain in Montana. (Emphasis added.) [***35] It is not necessary to rely upon the title to determine the intent of the legislature. The chapter starts The above statement of intent was added because the with the following list of seven WHEREAS'S, and with legislature knew that the Davis decision mandated that all the exception of the taxation of benefits referred to in the pension holders must be taxed equally. The Act does first WHEREAS, all of the remaining WHEREAS's set that. At the same time, the legislature knew that such an forth an intent directly [**774] relating to the increase in taxes on State pensions could create a adjustment payment and the reasons for the adjustment situation where many retirees would leave the State. payment: Acting through its legislature and governor, Montana as a WHEREAS, the State of Montana sovereign and as an employer expressed a desire to desires to tax federal, state, and private provide an incentive for Montana retirees to remain in the retirement benefits equally; and State. Without subterfuge of any type the legislature declared this intent. Unfortunately, that openness appears WHEREAS, the State of Montana has to have been a basis for the majority to conclude [***37] in the past provided its employees with a there was discrimination. benefit of employment through its tax system; and If the same adjustment payment provided in the Act were provided in another act in some future year, and WHEREAS, the Legislature desires denominated a cost of living, no one would even raise the and encourages qualified employees to discrimination argument. I do not find a basis to enter and remain in public service; and condemn the adjustment merely because it is included with the tax. WHEREAS, it is the policy of the State of Montana to encourage public The adjustment payment is paid to State retirees who Page 14 262 Mont. 129, *148; 864 P.2d 762, **774; 1993 Mont. LEXIS 358, ***37; 50 Mont. St. Rep. 1477 already are receiving retirement benefits. I find nothing in public instruction, a public institution of the record which demonstrates a corresponding obligation the state of Montana, a unit of the by the State of Montana to make some sort of payment to Montana university system, or the federal retirees whose retirement benefits are paid by the Montana state school for the deaf and United States. I do not understand how the payment by blind, the legislature shall appropriate to the State to its retirees can lead to a "clear" determination the employer an adequate amount to allow of discrimination, as compared to a federal increase to payment of the employer's contribution. federal retirees which would not be such discrimination. (Emphasis added.) The fact that federal retirees do not get this Section 3, amended § 19-20-605(3), MCA. With this adjustment is not discrimination as to source. The same annuity type system, the employers' part of the cost of adjustment is not given to private retirees either. living increase for "certain" retirees is paid by the State of Montana. How is that different from the present Act? The basic intent of 4 U.S.C. § 111 has been lost. That intent is that the income taxation of Montana should I conclude there is no discrimination "as to source" tax federal and State retirement benefits at the same rates. within the 1991 Act. As a matter of policy, Montana The Act does that. An increase in pay to encourage provides its own retirees an "incentive" without an [***38] State retirees to remain in the state is not intention to discriminate in any manner. discrimination as contemplated in § 111. An incentive to stay is not discrimination as to source. There is a The Davis test of significant differences between the recognition on the part of the legislature that the new tax classes is not even reached here. One only has to on Montana public employee pensions might cause them determine the significant [***40] difference between to leave the State. Such a recognition, stated up front and classes if discrimination has occurred. Here, there is no in the open, does not equal the discrimination that the agreement as to even what the appropriate classes are. majority characterizes as "clear." The only classes that are pertinent to 4 UCS § 111 are "state retirees" and "federal retirees." Both of these [*149] The fact that this adjustment payment comes classes are taxed equally under this Act. It is only the from the general fund is also of no consequence. Any segment of State retirees that receive the benefit. other cost of living increase for State public employees comes from the same source. This adjustment payment is While the majority merely mentions that the no different than any other [**775] benefit which the discrimination is "clear" it does not go on to explain how State as an employer has a right to offer a group of its the "incentive" or "adjustment" is discriminatory. Nor retirees. does it explain how the Davis quote applies to what we have before us: The majority refers to § 19-20-713, MCA, which provides a cost of living increase for teachers in the Teachers' Retirement System. The title of Chapter 658 of Montana Laws 1985 shows that only "certain" teachers Under our precedents, "[t]he imposition of within the retirees from this system would be benefitted a heavier tax burden on [those who deal by the increase. I do not understand how the majority with one sovereign] than is imposed on condemns the 1991 Act because it is made applicable to [those who [*150] deal with the other] "certain" retirees and yet refers to the Teachers' [***39] must be justified by significant differences Retirement Act as nondiscriminatory where it also between the two classes." (Emphasis benefits only "certain" teacher retirees. added.) In addition, the Teachers' Retirement Act uses the "general fund" as the source of funds with which to pay teachers who retired from the various units of the Davis, 489 U.S. at 815-816, 109 S.Ct. at 1508. The University System and other schools, stating: federal retirees have no heavier "tax burden" than do State retirees. The tax burden on both State and federal If the employer is the superintendent of retirees is identical. The exemption of $ 3,600 is Page 15 262 Mont. 129, *150; 864 P.2d 762, **775; 1993 Mont. LEXIS 358, ***40; 50 Mont. St. Rep. 1477 identical as are the tax rates applicable to both State and this was done. federal retirees. The range at which the exemption begins [***41] is $ 30,000 for both State and federal retirees. [**776] I also disagree with the [***42] The only difference is that State retirees who reside in conclusion that the adjustment is severable from the Act. Montana are given an "incentive" to stay within the State Both the title and the statement of intent make it obvious that has employed them and from whom their pensions that the adjustment or incentive to stay in Montana is an are derived. I point out here that the "incentive" is still integral part of this Act. The incentive, based upon the subject to tax at the same rates as any amounts received fact that public retirees will now be receiving less money by the retirees. because of the mandatory taxation, should not be divorced from the tax plan itself. The tax plan explains The District Court determined that the adjustment why the employer State of Montana is granting this was part of a policy decision on the part of the State incentive. I do not believe the intention of granting some toward its employees. I would affirm the court on this additional monies can be divorced from the taxation analysis. The State acting as an employer has every right which applies to the retiree benefits and the adjustment. to act in concert with the sovereign and the legislature to As demonstrated clearly in the WHEREAS clauses at the provide an incentive to retired public employees to stay beginning of the Act, the taxation and the granting of the within the State that has been their home for years. This adjustment are not severable. The action of the majority policy decision does not constitute discrimination against is punitive in nature, taxing all benefits equally while the retirees of any other sovereign or any other group of eliminating the additional benefit awarded under the Act. retirees. In this case, the other sovereign's retirees are taxed identically with those of the State sovereign. I I also concur in the portion of Judge Rapkoch's conclude that instead of condemning the legislature and concurrence and dissent in which he concludes that the the governor for their openness in enacting the Act, they adjustment payment is not severable from the rest of should be commended for the forthright way in which Chapter 823. Page 1 STANDARD OIL COMPANY OF CALIFORNIA (a Corporation), Appellant, v. CHARLES G. JOHNSON, as State Treasurer, etc., Respondent Sac. Nos. 5144, 5145 Supreme Court of California 10 Cal. 2d 758; 76 P.2d 1184; 1938 Cal. LEXIS 256 February 25, 1938 SUBSEQUENT HISTORY: [***1] Rehearing jurisdiction of the park lands back to the federal Denied. government by 1905 Cal. Stat. 54, the State reserved its taxing power in 1919 Cal. Stat. 74 and an acceptance of PRIOR HISTORY: APPEALS from judgments of the the act by congress in 41 Stat. 731 (1920). The court held Superior Court of Sacramento County. Dal M. Lemmon, that the express recognition by both sovereigns clearly Judge. established the existence of the right of the State to tax in the areas designated in accordance with the power as DISPOSITION: Affirmed. reserved and defined in both acts.The court also held that the exercise of the reserved power by the imposition of CASE SUMMARY: retail sales and gasoline taxes did not create an interference with the exercise of the jurisdiction acquired by the United States pursuant to the grants. PROCEDURAL POSTURE: Plaintiff oil company appealed from judgments of the Superior Court of OUTCOME: The court affirmed the trial court Sacramento County (California) that sustained defendant judgments that were entered in favor of the State in the State's demurrers and entered judgment for the State in oil company's action to recover gasoline taxes paid under the oil company's actions seeking to recover gasoline protest which were imposed for the distribution and sale taxes paid under protest, which were imposed for the of gasoline within the boundaries of national parks distribution and sale of gasoline within the boundaries of located within the territorial limits of California. national parks located within the territorial limits of California. CORE TERMS: national park, exclusive jurisdiction, ceded, reservation, taxing power, reserved, cession, OVERVIEW: An oil company filed several actions valley, recession, taxation, license fees, fishing, right to seeking to recover gasoline taxes paid under protest, fix, gasoline taxes, reserved power, enumerated, which were imposed by the Motor Vehicle Fuel License franchises, saving, public lands, territorial limits, right to Tax Act, 1923 Cal. Stat. 577, for the distribution and sale tax, federal government, territory, gasoline, retail, excise, of gasoline within the boundaries of national parks national government, legislative act, sales tax, comprising located within the territorial limits of California. The trial court entered judgment for the State and the oil company LexisNexis(R) Headnotes appealed. The court affirmed the trial court judgments. The court held that although the State ceded exclusive Page 2 10 Cal. 2d 758, *; 76 P.2d 1184, **; 1938 Cal. LEXIS 256, ***1 Environmental Law > Natural Resources & Public [HN4] The legislative act, 1919 Cal. Stat. 54 in part Lands > Public Trust Doctrine provides: Exclusive jurisdiction shall be and the same is Governments > Federal Government > Property hereby ceded to the United States over and within all of Governments > Public Lands > National Parks the territory which is now or may hereafter be included in [HN1] On June 30, 1864, in 13 Stats. 325 (1864), that those several tracts of land in the State of California set portion of Yosemite National Park designated in the act aside and dedicated for park purposes by the United as the "Cleft" or "George" in the Granite Peak of the States as "Yosemite National Park," "Sequoia National Sierra Nevada mountains situated in the county of Park" and "General Grant National Park" respectively; Mariposa and the headwaters of the Merced River, and saving, however, to the State of California the right to known as the Yosemite valley, was granted to the State of serve civil or criminal process within the limits of the California upon the express condition that the premises aforesaid parks and saving further, to the said State the shall be held for public use, resort, and recreation. By the right to tax persons and corporations, their franchises and same act "Mariposa Big Tree Grove", comprising four property on the lands included in said parks, and the right sections of land, was granted upon like conditions. to fix and collect license fees for fishing in said parks. Estate, Gift & Trust Law > Trusts > General Overview Governments > Public Lands > National Parks Governments > Public Lands > National Parks Tax Law > State & Local Taxes > Franchise Tax > Real Property Law > Trusts > Holding Trusts Imposition of Tax [HN2] On March 3, 1905, in 1905 Cal. Stat. 54, Tax Law > State & Local Taxes > Real Property Tax > California receded and re-granted to the United States Collection > Methods & Timing without reservation the "Cleft" or "Gorge" known as [HN5] The 1920 Act of Acceptance, 41 Stat. 731 (1920), Yosemite Valley, and the "Mariposa Big Tree Grove", reads: Be it enacted by the Senate and House of and resigned the trusts created and granted by the act of Representatives of the United States of America in congress of June 30, 1864, upon condition that the lands Congress assembled, That the provisions of the act of the be held by the United States for public use, resort and legislature of the State of California (approved April 15, recreation. This recession was accepted by congress on 1919), ceding to the United States exclusive jurisdiction June 11, 1906, in 34 Stat. 831, and the areas by the same over the territory embraced and included within the act were included as part of Yosemite National Park. Yosemite National Park, Sequoia National Park, and General Grant National Park respectively, are hereby accepted and sole and exclusive jurisdiction is hereby Civil Procedure > Jurisdiction > Subject Matter assumed by the United States over such territory, saving, Jurisdiction > Jurisdiction Over Actions > General however, to the said State of California, the right to serve Overview civil or criminal process within the limits of the aforesaid Governments > State & Territorial Governments > parks and saving further to the said State the right to tax Property persons and corporations, their franchises and property on [HN3] 1891 Cal. Stat. 262 provides: The State of the lands included in said parks, and the right to fix and California hereby cedes to the United States of America collect license fees for fishing in said parks. exclusive jurisdiction over such piece or parcel of land as may have been or may be hereafter ceded or conveyed to the United States, during the time the United States shall Civil Procedure > Jurisdiction > Subject Matter be or remain the owner thereof, for all purposes except Jurisdiction > Jurisdiction Over Actions > General the administration of the criminal laws of this State and Overview the service of civil process therein. Governments > Federal Government > Property Military & Veterans Law > Servicemembers > General Overview Governments > Public Lands > National Parks [HN6] U.S. Const. art. I, § 8, cl. 17 provides: Congress Real Property Law > Ownership & Transfer > Transfer shall have power to exercise exclusive legislation in all Not By Deed > Dedication > General Overview cases whatsoever over all places purchased by the Tax Law > State & Local Taxes > Franchise Tax > consent of the legislature of the State in which the same Imposition of Tax shall be, for the erection of forts, magazines, arsenals, Page 3 10 Cal. 2d 758, *; 76 P.2d 1184, **; 1938 Cal. LEXIS 256, ***1 dockyards, and other needful buildings. of Guadalupe Hidalgo, by which the Republic of Mexico ceded to the United States government all the lands within the territorial limits of California, the United Tax Law > State & Local Taxes > Administration & States government became vested with the title to all such Proceedings > General Overview lands not held in private ownership, and it retained title to [HN7] Colo. Const. art. XIII, § 6 provides that the power these public lands upon the admission of California to of taxation shall never be surrendered or suspended by statehood. any grant or contract to which the State shall be a party. (2) Id.--Cession to United States--Jurisdiction--Limitation--Taxation--Constitutional Civil Procedure > Jurisdiction > Subject Matter Law. -- --There exists no constitutional inhibition upon Jurisdiction > Jurisdiction Over Actions > Exclusive the power of the state to cede or the right of the United Jurisdiction States to receive limited jurisdiction of lands for park Governments > Federal Government > Property purposes, reserving to the state the right to serve civil or Governments > State & Territorial Governments > criminal process within the limits of such parks, and also Property saving to the state the right to tax persons and [HN8] The Supreme Court of the United States corporations, their franchises and property on lands recognized that exclusive jurisdiction could be acquired included in said parks, and the right to fix and collect otherwise than by purchase with the consent of the State license fees for fishing in said parks. legislature, namely by cession, if for one or more of the purposes enumerated in the federal constitutional (3) Id.--Limited provision. Jurisdiction--Modification--Agreement. -- --The United States may hold limited jurisdiction of land for Civil Procedure > Jurisdiction > Subject Matter other than the purposes enumerated in clause 17 of Jurisdiction > General Overview section 8 of article I of the federal Constitution; and the Tax Law > State & Local Taxes > Administration & extent of such limited jurisdiction may be the subject of Proceedings > General Overview change by mutual agreement between the state and the [HN9] The taxing power of the State is never presumed United States. to have been relinquished unless the language in which (4) Id.--Cession--Modification--Taxation. -- --The the surrender is made is clear and unmistakable. legislative act of 1919 (Stats. 1919, p. 74), re-ceding to the national government jurisdiction over Yosemite Governments > Federal Government > Property national park, Sequoia national park and General Grant Tax Law > State & Local Taxes > Administration & national park for park purposes, reserving to the state, Proceedings > General Overview among other things, the right to tax persons and [HN10] The right of a State to tax the property of others corporations, their franchises and property on the lands located upon lands owned by the United States, although included in said parks, and the right to fix and collect it cannot tax such lands, will not be held to be abandoned license fees for fishing in said parks, and the by the State, except for the most compelling reasons, is congressional acceptance of 1920, subject to such quite manifest from several decisions of the Supreme reservation, operate to reserve to the state the powers Court of the United States. To be accorded immunity stated in said enactments, notwithstanding a prior from State taxation it must be shown not only that the recession of one of said parks to the United States, to be land was acquired by the United States, but also that it held for public use, resort and recreation, and the was acquired and used for one of the purposes indicated acceptance thereof by congress, did not reserve to the in U.S. Const. art. I, § 8, cl. 17. state any taxing power. HEADNOTES (5) Id.--Sales Taxes--Gasoline Taxes--Reserved Powers--Statutory Construction. -- --The taxing power CALIFORNIA OFFICIAL REPORTS HEADNOTES reserved in said act of 1919 must be construed most strongly in favor of the state in order to preserve its (1) Public Lands--Treaties--Title. -- --Under the treaty jurisdiction as to matters with which it is directly and Page 4 10 Cal. 2d 758, *; 76 P.2d 1184, **; 1938 Cal. LEXIS 256, ***1 immediately concerned, and as to which jurisdiction has to the effect of the retail sales tax will be deemed not been ceded or granted to the federal government; and sufficient for that purpose. the imposition by the state of the retail sales and gasoline taxes in said national park areas is within the taxing Standard Oil Company by its several actions sought power expressly reserved by the state and creates no to recover gasoline taxes paid under protest, which were interference with the exercise of the jurisdiction acquired imposed for the distribution and sale of gasoline within by the United States. the boundaries of Yosemite national park, Sequoia national park and General Grant national park, located (6) Id.--Privileges--Sales--Taxation--Statutory within the territorial limits of California. Construction. -- --The mere fact that, by said act of 1919, the taxing power for all general purposes has been The plaintiff is a private corporation authorized to do reserved by the state with the consent of congress is a business in California. The problem revolves around the recognition by the latter that the granting of privileges question whether the state of California ceded exclusive such as the making of sales within the re-ceded areas jurisdiction to the United States government of the areas emanates from the state as well as the national comprising the various national parks in such a way as to government; and there is no merit in the contention that divest itself of jurisdiction to impose and collect the taxes the privilege which lessees and concessioners of the so paid under protest. United States government have of making sales within Demurrers to the various complaints were sustained said areas emanates solely from the national government. and judgment entered for the defendants. The plaintiff SYLLABUS appeals. The facts are stated in the opinion of the court. (1) On February 2, 1848, by the treaty of Guadalupe Hidalgo, the Republic of Mexico ceded to the United COUNSEL: Pillsbury, Madison & Sutro, Felix T. Smith States government all the lands within the territorial and Sigvald Nielson, for Appellant. limits of California. The United States thereby became vested with the title to all such lands not held in private U. S. Webb, Attorney-General, and H. H. Linney and ownership. ( Thompson v. Doaksum [***3] , 68 Cal. James J. Arditto, Deputies Attorney-General, for 593, 596 [10 Pac. 199].) The areas now comprising the Respondent. national parks hereinbefore mentioned were therefore then public lands. The United States retained title to these JUDGES: In Bank. public lands upon the admission of California to statehood. (9 Stats. 452.) OPINION BY: THE COURT [HN1] On June 30, 1864 (13 Stats. 325), that portion OPINION of Yosemite national park designated in the act as the "'Cleft' or 'George' in the Granite Peak of the Sierra [*759] [**1185] The appeals in several actions Nevada mountains situated in the county of Mariposa . . . brought by the plaintiff, Standard Oil Company of and the headwaters of the Merced River, and known as California, involve the question whether sales of gasoline the Yo-Semite valley", was granted to the state of in certain national parks [**1186] are subject to the tax California upon the express condition that the "premises imposed by the Motor Vehicle Fuel License Tax Act shall be held for public use, resort, and recreation". By (Stats. 1923, p. 577, as amended Stats. 1933, p. 1643). the same act "Mariposa Big Tree Grove", comprising These appeals have been consolidated for determination. four sections of land, was granted upon like conditions. A related question is presented in the companion case of Yosemite Park & Curry Co. v. Johnson, post, p. 770 [76 On October 1, 1890 (26 Stats. 650), congress set Pac. (2d) 1191], wherein the Sales Tax Act (Stats. 1933, apart as a national forest and withdrew from sale and p. 2599, as amended), is involved. The determination occupancy certain tracts of the public lands in the Sierra herein will control the disposition of the same questions Nevada, but expressly excepted therefrom the Yosemite presented in the Yosemite Park and Curry Company case, Valley and Mariposa big tree grove theretofore granted to and the discussion herein with [*760] [***2] reference California. A [*761] portion of those reserves Page 5 10 Cal. 2d 758, *761; 76 P.2d 1184, **1186; 1938 Cal. LEXIS 256, ***3 surrounding Yosemite Valley was later, on February 7, [HN4] The legislative act of 1919 in its pertinent 1905, designated [***4] as "Yosemite National Park". parts provides: "Exclusive jurisdiction shall be and the (33 Stats. 702.) same is hereby ceded to the United States over and within [***6] all of the territory which is now or may hereafter [HN2] On March 3, 1905 (Stats. 1905, p. 54), be included in those several tracts of land in the State of California receded and regranted to the United States California set aside and dedicated for park purposes by without reservation the "Cleft" or "Gorge" known as the United States as 'Yosemite national park, Sequoia Yosemite Valley, and the "Mariposa Big Tree Grove", national park' and 'General Grant national park' and resigned the trusts created and granted by the act of respectively; saving, however, to the state of California congress of June 30, 1864, upon condition that the lands the right to serve civil or criminal process within the be held by the United States for public use, resort and limits of the aforesaid parks . . . and saving further, to the recreation. This recession was accepted by congress on said state the right to tax persons and corporations, their June 11, 1906 (34 Stats. 831), and the areas by the same franchises and property on the lands included in said act were included as part of Yosemite National Park. parks, and the right to fix and collect license fees for fishing in said parks. . . ." The area comprising Sequoia national park was withdrawn from occupancy and sale and dedicated as a [HN5] The 1920 Act of Acceptance reads: "Be it public park on September 24, 1890 (26 Stats. 478). An enacted by the Senate and House of Representatives of act of congress (26 Stats. 651), enacted on October 1, the United States of America in Congress assembled, 1890, established General Grant national park. That the provisions of the act of the legislature of the State of California (approved April 15, 1919), ceding to At the time of the recession to the United States of the United States exclusive jurisdiction over the territory the Yosemite Valley and Mariposa big tree grove there embraced and included within the Yosemite National was in effect a statute passed by the legislature of Park, Sequoia National Park, and General Grant National California in [HN3] 1891 (Stats. 1891, p. 262), Park respectively, are hereby accepted and sole and providing: "The State of California hereby cedes to the exclusive jurisdiction is hereby assumed by the United United States of America exclusive jurisdiction over such States over such [***7] territory, saving, however, to the piece or parcel of land as may have been [***5] or may said State of California, the right to serve civil or criminal be hereafter ceded or conveyed to the United States, process within the limits of the aforesaid parks . . . and during the time the United States shall be or remain the saving further to the said State the right to tax persons owner thereof, for all purposes except the administration and corporations, their franchises and property on the of the criminal laws of this state and the service of civil lands included in said parks, and the right to fix and process therein." collect license fees for fishing in said parks. . . ." The plaintiff relies upon the foregoing quoted statute, The contention of the plaintiff is that the state, together with the act of recession of 1905, as supporting having by the 1905 act of recession, granted exclusive its claim that the state of California by the regrant had jurisdiction of Yosemite Valley to the United States, had relinquished exclusive jurisdiction to the United States in nothing more to grant, and that the attempted cession of the area known as Yosemite [**1187] Valley, wherein 1919 with reservations was an empty gesture. Answering occurred most of the transactions upon which the taxes this argument the defendant asserts that the 1905 act of involved were imposed and collected. recession did not vest exclusive jurisdiction in the United States, because, so he claims, such exclusive jurisdiction The defendant, however, contends that the act of the can be acquired only pursuant to [HN6] clause 17, section California legislature approved April 15, 1919 (Stats. 8, article I of the Constitution of the United States, which 1919, p. 74), ceding to the national government provides: "Congress shall have [*763] power to exercise jurisdiction over Yosemite national park, Sequoia exclusive legislation in all cases whatsoever . . . over all national park and General Grant national park, and the act places purchased by the consent of the legislature of the of acceptance by congress on June [*762] 2, 1920 (41 state in which the same shall be, for the erection of forts, Stats. 731), constitute the basis upon which depend the magazines, [***8] arsenals, dockyards, and other rights of the state herein. needful buildings." In this connection reliance is also Page 6 10 Cal. 2d 758, *763; 76 P.2d 1184, **1187; 1938 Cal. LEXIS 256, ***8 placed on [HN7] section 6 of article XIII of the state the United States by the state of Montana for park Constitution, providing that the power of taxation shall purposes. The opinion shows that no concurrent never be surrendered or suspended by any grant or jurisdiction or taxing power was reserved and that the contract to which the state shall be a party. express grant of powers to the United States was inconsistent with the reservation of any concurrent However, we deem it unnecessary to pursue the jurisdiction. The court supported its statement that inquiry into the constitutional question whether exclusive "Cessions of exclusive jurisdiction such as that made by jurisdiction may be ceded to or acquired by the United the Legislature of Montana, have been very common in States of lands within the territorial limits of a state solely the history of this country, and their effect is well for recreational and park purposes. We need note only settled", by the single reference to the Arlington Hotel that the history and reasons for the vesting in the United decision. The other case, Yosemite Park & Curry Co. v. States of the power to hold exclusive jurisdiction for the Collins, 20 Fed. Supp. 1009 (Circuit Court of Appeals, enumerated purposes, and many aspects of the Southern Div., Northern Dist. of California, No. 4165) controversial question relating to acquisition of exclusive [***11] will be later discussed. jurisdiction for other purposes, have been stated in the following cases, among others, and do not require If the legislative act of recession of 1905, the repetition here: Fort Leavenworth R. R. Co. v. Lowe, 114 congressional acceptance thereof, and the related acts U.S. 525, 533 [5 Sup. Ct. 995, 29 L. Ed. 264]; Benson v. prior to that time, were alone to be considered, it might United States, 146 U.S. 325 [13 Sup. Ct. 60, 36 L. Ed. be said that the constitutional question is squarely 991]; Arlington Hotel Co. v. Fant, 278 U.S. 439 [49 Sup. presented for determination. But as applied to all the Ct. 227, 73 L. Ed. 447]; Surplus Trading Co. [***9] v. territory named, we have a subsequent act of the Cook, 281 U.S. 647 [50 Sup. Ct. 455, 74 L. Ed. 1091]; In legislature ceding title to the United States and expressly re Kelly, 71 Fed. 545; People v. Mouse, 203 Cal. 782 reserving, among other matters, the right to exercise in [265 Pac. 944]; Silas Mason, Inc., v. State Tax Com., 188 the territory ceded the power to tax persons and Wash. 98 [61 Pac. (2d) 1269], (affirmed 302 U.S. 186 [58 corporations, their franchises and property, together with Sup. Ct. 233, 82 L. Ed. ]; Ryan v. State, 188 Wash. 115 a congressional acceptance in the same express terms. It [61 Pac. (2d) 1276], (affirmed 302 U.S. 186 [58 Sup. Ct. is not a matter of necessary judicial inquiry as to what 233, 82 L. Ed. ].) Beginning at least as early as the prompted these new acts of cession and acceptance, decision in Fort Leavenworth R. R. Co. v. Lowe, supra, covering public lands reserved to the United States when the [HN8] Supreme Court of the United States recognized California was admitted as a state, and lands formerly that exclusive jurisdiction could be acquired otherwise receded to the United States without the special than by purchase with the consent of the state legislature, reservation. It may be that the respective legislative namely by cession, if for one or more of the purposes bodies deemed that, except for the purposes enumerated enumerated in the federal constitutional [**1188] in clause 17, section 8 of article I of the Constitution, and provision. (See Ryan v. State, supra, 61 Pac. (2d) at in accord with the declaration of section 6, article XIII of 1281.) But whether exclusive jurisdiction by any means the state Constitution, the power had not been may be acquired for a purpose not so enumerated may constitutionally delegated [***12] to the United States to still be an open question. (See Arlington Hotel Co. v. hold land for other purposes exclusive of any dominion Fant, 278 U.S. 439 [49 Sup. Ct. 227, 73 L. Ed. 447]; In of the state, and that they therefore desired to reframe re Kelly, 71 Fed. 545.) The controversial point that the their agreement [*765] to accord with the relative United States has the constitutional power to acquire existing rights of the respective sovereigns. (2) In any exclusive [***10] jurisdiction within state [*764] event, there exists no constitutional inhibition upon the territorial limits of an area devoted solely to park and power of the state to cede or the right of the United States recreational purposes was expressly left open in the to receive limited jurisdiction of lands for the purposes Arlington Hotel case at page 454. So far as we know and with the reservations stated in the grant herein. The only two cases have since attempted to resolve the only proper function of the court, therefore, is to question. In Yellowstone Park Transp. Co. v. Gallatin recognize and give effect to the act of recession of 1919 County, 31 Fed. (2d) 644, (petition for writ of certiorari and the act of acceptance of 1920 which appear to denied, 280 U.S. 555 [50 Sup. Ct. 16, 74 L. Ed. 611]), the constitute a binding and valid definition and mutual court upheld the exclusive jurisdiction of lands ceded to recognition of the rights and powers of the respective Page 7 10 Cal. 2d 758, *765; 76 P.2d 1184, **1188; 1938 Cal. LEXIS 256, ***12 sovereign parties. All other related considerations fade 1923, p. 571), was attempted to be laid on deliveries to away when it is realized that, whatever had taken place the Post Exchange within the Presidio in San Francisco, a before, the taxing power of the state was reserved by the military reservation over which the United States [***15] act of 1919 and that congress, by the acceptance act of was held to have been vested with exclusive jurisdiction 1920, recognized the continuance of that power in the under the constitutional section. state. This express recognition by both sovereigns clearly establishes the existence of the right of the state to tax in (4) We conclude that the legislative act of 1919 and the areas designated in accordance with the power the congressional acceptance of 1920 operate to reserve [***13] as reserved and defined in both acts. to the state the powers stated in the respective enactments. (3) It is not questioned that the United States may hold limited jurisdiction of land for other than the (5) Another ground of resistance to the imposition purposes enumerated in clause 17 of section 8 of article I of the sales and gasoline taxes in the national park areas of the Constitution; and the cases relied upon do not is that such taxes, being in their nature excise taxes rather preclude a holding that the extent of such limited than taxes on persons or property, are not within the jurisdiction for other than the specified purposes may be express reserved power. the subject of change by mutual agreement between the The reserved taxing power is couched in the state and the United States. following language: "and saving further to the said State In Fort Leavenworth R. R. Co. v. Lowe, supra, at the right to tax persons and corporations, their franchises page 539, we find this statement: "It not being a case and property on the lands included in said parks, and the where exclusive legislative authority is vested by the right to fix and collect license fees for fishing in said Constitution of the United States, that cession could be parks". It is asserted that inasmuch as a tax such as the accompanied with such conditions as the State might see retail sales tax or gasoline tax is in its nature an excise tax fit to annex not inconsistent with the free and effective ( People v. Ventura Refining Co., 204 Cal. 286, 294 [268 use of the fort as a military post." In that case the state by Pac. 347, 283 Pac. 60]; Roth Drug, Inc., v. Johnson, 13 the act of cession of land to be used as a military post had Cal. App. (2d) 720, 730 [57 Pac. (2d) 1022]), and being reserved [**1189] the power to tax railroad and other neither a tax on persons, such as a poll tax, nor a tax on corporations. It was held that the reservation of the tangible property, the power to impose it is not [***16] taxing power did not interfere with the use of the area as within the express reservation. The plaintiff misconceives a military post and that there was no constitutional the meaning and purpose of the phraseology employed. prohibition against the exercise of the reserved power. Contrary to its contention, the rule of strict construction (See, also, [***14] Chicago & Pacific Ry. Co. v. does not necessarily apply. The pertinent considerations McGlinn, 114 U.S. 542, 545, 546 [5 Sup. Ct. 1005, 29 L. are stated in Ryan v. State, supra, 61 Pac. (2d) at 1283, as Ed. 270]; United States v. Unzeuta, 281 U.S. 138, 142 follows: "But, since self-preservation is the first [*767] [50 Sup. Ct. 284, 74 L. Ed. 761].) The holding in the case law of nations and states, as well as of individuals, it will of United [*766] States v. Unzeuta, supra, p. 143, that not be presumed, in the absence of clearly expressed ceded jurisdiction which had been accepted could not be intent, that the state has relinquished its sovereignty . . . recaptured by the action of the state alone (which sought [HN9] The taxing power of the state is never presumed to to amend the act of cession), is consistent with our have been relinquished unless the language in which the conclusions herein. So, also, is the statement in In re surrender is made is clear and unmistakable." And the Ladd, 74 Fed. 31, at page 38 (wherein a state amendatory following is also pertinent: "This is not a contest between act was held to be ineffective to abrogate the existing the federal government and the state as to jurisdiction. It contract, and there was no express acceptance), that a is a contest between the state, asserting its concurrent, or ceded exclusive jurisdiction continues until "terminated, partial, jurisdiction, and an individual who asserts that either by the United States ceasing to own and occupy the exclusive jurisdiction rests in the federal government. So reservation, or by the United States retroceding its far from there being any contest as to jurisdiction exclusive jurisdiction to the state". Nor is Standard Oil between the two sovereign powers, the record discloses Co. v. California, 291 U.S. 242 [54 Sup. Ct. 381, 78 L. that they are working in harmony and accord, each Ed. 775], in conflict. There the tax on gasoline (Stats. exercising the field for which it is the [***17] better Page 8 10 Cal. 2d 758, *767; 76 P.2d 1184, **1189; 1938 Cal. LEXIS 256, ***17 equipped and each, at the same time, recognizing the reservation to the state of the general taxing power field of the other. The federal government, therefore, without any exceptions other than that necessarily arising cannot possibly be prejudiced by the result of this from the ownership of the land and property by the action." United States government. There is no inconsistency created by the express inclusion in the reserved power of So, in line with the applicable principle, the reserved the "right to fix and collect license fees for fishing in said power must be construed most strongly in favor of the parks". Because of the nature of the privilege specially state in order to preserve its jurisdiction as to matters with singled out, its express inclusion does not necessarily which it is directly and immediately concerned, and as to indicate that the taxing of all other privileges was which jurisdiction has not been ceded or granted to the intended to be excluded from the reservation. On the federal government. We find support also in Nikis v. contrary it would seem that it was deemed necessary Commonwealth, 144 Va. 618 [131 S. E. 236, 46 A. L. R. expressly to refer to that subject-matter, as otherwise it 219], where it was said: [HN10] "That the right of a state might be claimed that the cession carried the exclusive to tax the property of others located upon lands owned by supervision and regulation of fishing privileges in the the United States, although it cannot tax such lands, will streams included in the ceded areas. not be held to be abandoned by the state, except for the most compelling reasons, is quite manifest from several (6) There is no merit in the contention that the decisions of the Supreme Court of the United States." It privilege of making sales in the ceded areas emanate may be noted that it was there held that to be accorded solely from the national government. [***20] The mere immunity from [**1190] state taxation it must be shown fact that the taxing power for all general purposes has not only that the land was acquired by the United States, been reserved by the state with the consent of congress is but also that it was acquired and used for one of the a recognition by the latter that the granting of such purposes indicated in article I, section 8, clause [***18] privileges emanates as well from the state. 17 of the Constitution. The main contentions urged to establish the A consideration of the taxing statutes shows that the invalidity of the reserved taxing power as here exercised tax is imposed respectively "upon retailers" (sec. 3, Stats. by the state are answered adversely to the claims in the 1933, p. 2599, Stats. 1935, p. 1252) and upon recent case of Rainier Nat. Park Co. v. Martin, 18 Fed. "distributors" of gasoline, and it has so been held. ( Roth Supp. 481 (affirmed 302 U.S. 661 [58 Sup. Ct. 478, 82 L. Drug, Inc., v. Johnson, supra, p. 736; People v. Herbert's Ed. ]). There [*769] the power, exercised under a of Los Angeles, Inc., 3 Cal. App. (2d) 482 [39 Pac. (2d) similar reservation, to impose on and collect a state retail 829]; People v. Ventura Refining Co., supra, at page 294; sales tax from the Rainier National Park Company was Rio Grande Oil Co. v. Los [*768] Angeles, 6 Cal. App. held to be valid and was sustained. (2d) 200, 201 [44 Pac. (2d) 451].) This language in the statutes will not, of course, be construed to disturb the In Yosemite Park & Curry Co. v. Collins, supra, it classification of taxable subjects -- persons, property and was held that the state of California had at one time ceded business ( State Tax on Foreign-Held Bonds, 82 U.S. (15 exclusive jurisdiction of Yosemite Valley to the United Wall.) 300, 319 [21 L. Ed. 179]; 26 R. C. L., p. 34; 1 States, that the subsequent legislation attempting to Cooley on Taxation, p. 172.) Neither does it mean that reserve the taxing power was ineffective, and therefore the excise taxes imposed should be considered as a tax that the state had no reserved power to enforce in "on persons" as a subject of taxation. The language of Yosemite Valley the Alcoholic Beverage Control Act the statutes and the decisions still leaves the sales and (1935 Stats., chap. 330). That act was there declared to gasoline taxes in the category of "excises" or tax on be a complete liquor control measure, [***21] including business. Nevertheless, as stated in volume 1, Cooley on provisions for license fees and excise taxes. Relative to Taxation, pages 68, 69, taxes are contributions from the balance of Yosemite park, the court held that the persons or [***19] property, and "whether a tax be reservation of the taxing power did not include the power considered as imposed on the person or on the property, it to impose a license tax. For the reasons hereinabove is clear that all taxes are imposed either upon the one or stated, we are led to disagree with those conclusions of the other". It seems obvious that the language of the the court in that case. Nor do we perceive that they were reservation of the taxing power contemplated the necessary to its decision. The result in that case, if it be Page 9 10 Cal. 2d 758, *769; 76 P.2d 1184, **1190; 1938 Cal. LEXIS 256, ***21 correct, is adequately supported by the final ground stated power which is beyond the jurisdiction of the state, the by the court, as follows: "While a revenue measure does [***22] measure cannot bestow upon California the not preclude the possibility of a clash between power to collect license taxes from plaintiff for the sovereignties, it does not invite one as a regulatory importation and sale of liquors." measure does. California has ceded the park to the United States, which has agreed to police it. Now by However the exercise of the reserved power by the reason of the Alcoholic Beverage Control Act, California imposition of retail sales and gasoline taxes creates no evidently claims the retention of her police power. Such interference with the exercise of the jurisdiction acquired a claim is violative of the police jurisdiction placed in the by the United States pursuant to the grants herein hands of the national government, and is void. Since the involved. primary purpose of California's tax measure is the The judgment in each case is affirmed. [**1191] regulation of the intoxicating liquor business; since such regulation constitutes an exercise of the police Page 1 THE PIQUA BRANCH OF THE STATE BANK OF OHIO, PLAINTIFF IN ERROR, v. JACOB KNOOP, TREASURER OF MIAMI COUNTY. SUPREME COURT OF THE UNITED STATES 57 U.S. 369; 14 L. Ed. 977; 1850 U.S. LEXIS 1558; 16 HOW 369 May 24, 1854, Decided; December 1850 Term PRIOR HISTORY: [***1] THIS case was brought year 1851, other or greater than six per cent. on its up from the Supreme Court of Ohio, by a writ of error, dividends or profits, as provided by the sixtieth section of issued under the twenty-fifth section of the Judiciary Act. the said act of February 24th, 1845. And it is further certified, that there was drawn in question in said cause In the record there was the following certificate from the validity of the said statute of the State of Ohio, passed the Supreme Court of Ohio, which explains the nature of March 21st, 1851, herein before mentioned, the said the case: defendant claiming that it was a violation of the said alleged agreement and contract between the State of Ohio And thereupon, on motion of the defendant, it is and the said defendant, and on that account repugnant to hereby certified by the court, and ordered to be made a the Constitution of the United States, and void; but the part of the record herein, that in the above entitled cause court here held and decided: 1st. That the sixtieth section the petitioner claimed to collect, and prayed the aid of the of said act of February 24th, 1845, to incorporate the court to enforce the payment of, the tax in the petition State Bank of Ohio, and other banking companies, mentioned, under an act of the General Assembly of the contains [***3] no pledge or contract on the part of the State of Ohio, passed March 21st, 1851, entitled "An act State not to alter or change the mode or amount of to tax banks, and bank and other stocks, the same as other taxation therein specified; but the taxing power of the property is now taxable by the laws of this State," a General Assembly of the State of Ohio over the property certified copy of which is filed as an exhibit in this cause, of companies formed under that act is the same as over marked "A." The said defendant, by way of defence to the property of individuals. And, 2d. That whether the the prayer of said petitioner, &c., set up on act, entitled franchises of such companies may be revoked, changed, "An act to incorporate the State Bank of Ohio, and other or modified, or not, the act of March 21st, 1851, upon banking companies," enacted by the General Assembly of any construction, does not impair any right recurred to the State of Ohio, February 24th, 1845, a certified copy them by the act of 1845, and is a constitutional and valid of which is filed as an exhibit in this cause, marked "B;" law. And it is further certified, that the decision of the under which act the defendants [***2] organized, and question as to the validity of the said statute of 1851, was became and was a branch of the State Bank of Ohio, necessary to the decision of said cause, and the decision exercising the franchises of such bank prior to and ever in the premises was in favor of the validity of said statute. since the year 1847; and that the defendant claimed that, The court do further certify, that this court is the highest by virtue of the operation of said act last mentioned, the court of law and equity of the State of Ohio in which a State of Ohio had entered into a binding contract and decision of this suit could be held. And it is ordered, that obligation, whereby the State of Ohio had agreed and said exhibits A and B be made parts of the complete bound herself not to impose any tax upon the defendant, record in this cause. and not to require the defendant to pay any tax for the Page 2 57 U.S. 369, *; 14 L. Ed. 977, **; 1850 U.S. LEXIS 1558, ***3; 16 HOW 369 The contends of exhibits A and B are stated in the preceding, declaring, surrender opinion of the court. LexisNexis(R) Headnotes CASE SUMMARY: PROCEDURAL POSTURE: Plaintiff in error bank sought review of a decision of the Supreme Court of Ohio Banking Law > Bank Activities > Expenses & Income that entered judgment in favor of defendant in error Banking Law > Bank Expansion > Branch Banking > county treasurer for a tax assessed against plaintiff in General Overview error, pursuant to an act of the General Assembly, passed [HN1] The 16th section of the act of February 24, 1845 March 21, 1851. provides that each banking company under the act, or accepting thereof, and complying with its provisions, OVERVIEW: Plaintiff in error bank was incorporated shall, semiannually, on the days designated for declaring under the act of February 24, 1845, in which any number dividends, set off to the State of Ohio 6 percent on the of individuals were entitled to form banking associations profits, deducting therefrom the expenses and ascertained to carry on the business of banking in the State of Ohio. losses of the company for the six months next preceding, Section 16 of the act provided that each bank would pay which sum or amount so set off shall be in lieu of all six percent, semi-annually, to the state on the dividends taxes to which the company, or the stockholders therein, they declared. Defendant in error county treasurer sought would otherwise be subject. The sum so set off to be paid to enforce the provisions of the tax law enacted in the to the treasurer, on the order of the auditor of State. 1851, which plaintiff in error contended was in violation of its charter. The state supreme court affirmed the Banking Law > Bank Activities > Expenses & Income assessment of the taxes, and plaintiff in error obtained [HN2] The taxes required by the act of February 24, review by writ of error in the United States Supreme 1845, are to be in lieu of other taxes -- that is, to take the Court. The Court reversed the lower court's decision place of other taxes. when the Court found that the charter between the state and plaintiff constituted a contract between the parties. Further, under a provision of the contract, plaintiff was Governments > Legislation > Expirations, Repeals & only required to pay the six percent semi-annually to the Suspensions State in lieu of other taxes. The act of March 21, 1851, [HN3] In Ohio, the repeal of an act shall not revive any under which the higher tax was assessed against plaintiff act which had been previously repealed. in error, impaired the obligation of the contract and was therefore declared void. Banking Law > Bank Expansion > Bank Creations & Reorganizations OUTCOME: The Court reversed the lower court's [HN4] Every valuable privilege given by the charter, and decision that affirmed the assessment of the tax against which conduced to an acceptance of it and an plaintiff in error bank when the Court found that organization under it, is a contract which cannot be plaintiff's charter, which provided that 6 percent would be changed by the legislature, where the power to do so is paid semi-annually on dividends made in lieu of all taxes, not reserved in the charter. The rate of discount, the was a contract that was binding on the State and on duration of the charter, the specific tax agreed to be paid, plaintiff. The tax law passed in 1851 impaired the and other provisions essentially connected with the obligation of the contract and was therefore void. franchise, and necessary to the business of the bank, cannot, without its consent, become a subject for CORE TERMS: taxation, charter, banking, stock, legislative action. stockholder, dividend, taxed, sovereignty, exemption, sovereign power, franchise, exempt, general assembly, sovereign, compact, repeal, binding, dollar, bridge, Governments > Local Governments > Charters repealed, taxing power, declare, presumed, hundred [HN5] A municipal corporation, in which is vested some dollars', power of taxation, designated, succeeding, portion of the administration of the government, may be Page 3 57 U.S. 369, *; 14 L. Ed. 977, **; 1850 U.S. LEXIS 1558, ***3; 16 HOW 369 changed at the will of the legislature. Such is a public General Overview corporation, used for public purposes. But a bank, where [HN10] Any ambiguity in the terms of the contract must the stock is owned by individuals, is a private operate against the adventurers, and in favor of the corporation. public. Business & Corporate Law > Corporations > Governing Contracts Law > Formation > Capacity of Parties > Documents & Procedures > Articles of Incorporation & General Overview Bylaws > General Overview [HN11] A state has power to make a contract which shall Business & Corporate Law > Nonprofit Corporations & bind it in future. Organizations > General Overview [HN6] Because the action of a corporation may be Business & Corporate Law > Corporations > Governing beneficial to the public does not mean that it is a public Documents & Procedures > Articles of Incorporation & corporation. This may be said of all corporations whose Bylaws > Amendments to Articles of Incorporation objects are the administration of charities. But these are Contracts Law > Formation > Capacity of Parties > not public, though incorporated by the legislature, unless General Overview their funds belong to the government. Where the property [HN12] A charter is a contract, to the validity of which of a corporation is private, it gives the same character to the consent of both parties is essential, and therefore it the institution, and to this there is no exception. cannot be altered or added to without consent. Business & Corporate Law > Corporations > Governing Banking Law > Bank Activities > Expenses & Income Documents & Procedures > Articles of Incorporation & Business & Corporate Law > Corporations > Governing Bylaws > General Overview Documents & Procedures > Articles of Incorporation & [HN7] The charter of a private corporation is in the Bylaws > General Overview nature of a contract between the state and the corporation. [HN13] A state, in granting privileges to a bank, with a view of affording a sound currency, or of advancing any Governments > Legislation > Expirations, Repeals & policy connected with the public interest, exercises its Suspensions sovereignty, and for a public purpose, of which it is the Governments > Legislation > Types of Statutes exclusive judge. Under such circumstances, a contract [HN8] One legislature is competent to repeal any act made for a specific tax is binding. This tax continues, which a former legislature was competent to pass, and although all other banks should be exempted from one legislature cannot abridge the powers of a succeeding taxation. Having the power to make the contract, and legislature. The correctness of this principle, so far as rights becoming vested under it, it can no more be respects general legislation, can never be controverted. disregarded nor set aside by a subsequent legislature, than But if an act be done under a law, a succeeding a grant for land. legislature cannot undo it. When, then, a law is in its nature a contract, a repeal of the law cannot divest those Contracts Law > Formation > Capacity of Parties > rights; and the act of annulling them, if legitimate, is General Overview rendered so by a power applicable to the case of every [HN14] A sovereign state may make a binding contract individual in the community. with one of its citizens, and, in the exercise of its sovereignty, repudiate it. Governments > Legislation > Enactment [HN9] No state shall pass any bill of attainder, ex post Constitutional Law > Congressional Duties & Powers > facto law, or law impairing the obligations of contracts. A Contracts Clause > General Overview bill of attainder may affect the life of an individual, or [HN15] The United States Supreme Court has power only may confiscate his property, or may do both. to deal with contracts under U.S. Const. art. I, § 10 whether made by a state or an individual; if such contract Contracts Law > Defenses > Ambiguity & Mistake > be impaired by an act of the state such act is void, as the Page 4 57 U.S. 369, *; 14 L. Ed. 977, **; 1850 U.S. LEXIS 1558, ***3; 16 HOW 369 power is prohibited to the state. This is the extent of the required the officers to make semi-annual dividends, and Court's jurisdiction. the sixtieth required them to set off six per cent. of such dividends for the use of the State, which sum or amount so set off should be in lieu of all taxes to which the Civil Procedure > U.S. Supreme Court Review > State company, or the stockholders therein, would otherwise be Court Decisions subject. [HN16] The rule observed by the United States Supreme Court to follow the construction of the statute of the state This was a contract fixing the amount of taxation, by its supreme court is strongly urged. and not a law prescribing a rule of taxation until changed by the legislature. LAWYERS' EDITION HEADNOTES: In 1851, an act was passed entitled, "An act to tax banks, and bank and other stocks; the same as property is Municipal corporations -- private -- difference now taxable by the laws of this State." The operation of explained -- General Banking Law of Ohio is contract as this law being to increase the tax, the banks were not to taxes -- obligation of. -- bound to pay that increase. Headnote: A municipal corporation, in which is vested some In 1845 the Legislature of Ohio passed a general portion of the administration of the government, may be banking law, the fifty-ninth section of which required the changed at the will of the legislature. But a bank, where officers to make semi-annual dividends, and the sixtieth the stock is owned by individuals, is a private required them to set off six per cent. of such dividends for corporation. Its charter is a legislative contract, and the use of the State, which sum or amount so set off cannot be changed without its assent. should be in lieu of all taxes to which the company, or the The preceding case upon this subject, examined, and stockholders therein, would otherwise be subject. the case of the Providence Bank v. Biling, 4 Peters, 561, This was a contract fixing the amount of taxation, explained. and not a law prescribing a rule of taxation, until changed COUNSEL: The case was argued by Mr. Stanberry and by the Legislature. Mr. Veriton, for the plaintiff in [***5] error, and by Mr. In 1851 an Act was passed entitled, "An Act to tax Spalding and Mr. Pugh, for the defendant in error. banks, and bank and other stocks, the same as property is The points made by the counsel for the plaintiff in error now taxable by the laws of this State. The operation of were the following: this law being to increase the tax, the banks were not bound to pay that increase. 1st. That the Piqua branch of the State Bank of Ohio is a A municipal corporation, in which is vested some private corporation. portion of the administration of the government, may be The principle governing this point is, that if the whole changed at the will of the Legislature. But a bank, where interest of corporation do not belong to the public, it is a the stock is owned by individuals, is a private private corporation. Angell & Ames on Corporations, §§ corporation. Its charter is a legislative contract, and 31 to 36 inclusive; Dartmouth College v. Woodward, 4 cannot be changed without its assent. Wheat. 636; Baily v. Mayor of New York, 3 Hill, 531; Bank United States v. Planters' Bank of Georgia, 9 The preceding case upon this subject, examined, and Wheat. 907; Miners' Bank v. United States, 1 Greene, the case of The Providence Bank v. Billings, 4 Pet. 561, 553; Bonaparte v. Camden & Amboy R.R. Co. 1 Bald. explained. 222. SYLLABUS 2d. The act of the 24th of February, A.D. 1845, In 1845, the Legislature of Ohio passed a general providing for the creation of this private corporation, banking law, the fifty-ninth section [***4] of which became, by its acceptance, a contract between the State Page 5 57 U.S. 369, *; 14 L. Ed. 977, **; 1850 U.S. LEXIS 1558, ***5; 16 HOW 369 and the corporators, which contract is entitled to the Cincinnati, 7 Ohio Rep. 125. protection of that clause of the Constitution of the United States which prohibits the States from passing any law In the absence of adjudicated cases to establish the right impairing the obligation of contracts. of the legislature of a State thus to relinquish, commute, or limit the amount of taxation, it might and ought to be Angell & Ames on Corp. §§ 31, 469, 767; Dartmouth inferred from the uniformity and extent of its exercise by College v. Woodward, 4 Wheat. 636; Gordon v. Appeal the States from their earliest history to the present time. Tax Court, 3 How. 145; West River Bridge v. Dix, 6 How. [***6] 531; Planters' Bank of Mississippi v. [***8] In the case of Briscoe v. Bank of Kentucky, 11 Sharp. 6 How. 326-7; East Hartford v. Hartford Bridge Pet. 318, the court say, "that a uniform course of action Company, 17 Conn. 93; New Jersey v. Wilson, 7 Cranch, involving the right to the exercise of an important power 164; Flether v. Peck, 6 Cranch, 88; Terrett v. Taylor, 9 by the State governments for half a century, and this Cranch, 43; Town of Pawlett v. Clarke, 9 Cranch, 292; almost without question, is no unsatisfactory evidence Wales v. Stetson, 2 Mass. 143; Enfield Toll Bridge v. that the power is rightly exercised. Cin., Wil. & Conn. River Co. 7 Conn. R. 53; McLoren v. Pennington, Zanesville R.R. Co. v. Com'rs. Clinton Co. 21 Ohio Rep. 1 Paige, Ch. R. 107; 2 Kent's Com. 305, 306; Greene v. 95. Biddle, 8 Wheat. 1; University of Maryland v. Williams, In accomplishing the lawful purposes of legislation, the 9 Gill. & Johns. 402; Bayne v. Baldwin, 3 Smedes & choice of means adapted the the end must be left Marsh. (Miss.) R. 661; Aberdeen Academy v. Mayor of exclusively to the discretion of the legislature, provided Aberdeen, 13 Smedes & Marsh. R. 645; Young v. the means used are not prohibited by the Constitution. Harrison, 6 Georgia R. 130; Coles v. Madison county, Cin., Wil. & Zanesville R.R. Co. v. Com'rs. Clinton Co., Breese (Ill.) Rep. 120; Bush v. Shipman, 4 Scam. (Ill). R. 21 Ohio Rep. 95. 190; The People v. Marshall, 1 Gilman (Ill.) R. 672; state v. Hayward, 3 Richardson (S.C.) R. 389; Baily v. 4th. The plaintiff in error claims that by the sixtieth Railroad Co. 4 Harrington (Del) R. 389; LeClercq v. section of the act of 24th of February, 1845, the State, by Gallipolis, 7 Ohio, 217; State v. Com'l Bank of contract, (and not by legislative command) fixed and Cincinnati, 7 Ohio, 125; State v. Wash. Soc. Library, 9 agreed upon the time, manner, and amount of taxation to Ohio, 96; Michigan Bank v. Hastings, 1 Doug. (Mich.) R. be imposed upon and paid by said bank, which contract is 225; Bank of Pennsylvania v. Commonwealth, 19 mutually binding on the parties, and cannot be changed or Pennsylvania Rep. 151; Hardy v. Waltham, 9 Pick. 108. abrogated by either without the consent of the other. 3d. The right of a State to tax the property [***7] of a This last proposition involves an into pretation of so private corporation (such as a bank) or to tax any much of said law as relates to the subject of taxation in specified property of private persons may, by legislative two aspects: contract, be wholly relinquished, commuted, or limited to an agreed amount, and no State law can impair the [***9] 1. Whether the sixtieth section be a contract on validity of such contract. the subject of taxation, as claimed by the plaintiff in error, or a law dictating and commanding the amount of Angell & Ames on Corp. §§ 469-472 inclusive; Gordon taxation, as claimed by the defendant in error. v. Appeal Tax Court, 3 How. 133; Gordon's Ex'rs v. Baltimore, 5 Gill, 231; Bank of Cape Fear v. Edwards, 5 2. If it be a contract, whether it was temporary and Iredell, 516; Bank of Cape Fear v. Deming, 7 Iredell, depending on the will of the legislature, or permanent, 516; Union Bank of Tennessee v. State, 9 Yerger, 490, and to remain in force during the term of the charter. State of New Jersey v. Bury, 2 Harris, 84; Gordon v. State, 1 Zabriskie, 527; Johnson v. Commonwealth, 7 The court lay down the doctrine in Charles River Bridge Dana, 342; Bank of Illinois v. The People, 4 Scam. 304; v. Warren Bridge, 11 Pet. 545, that in the construction of Williams v. Union Bank of Tennessee, 2 Hump. 339; statutes creating corporations, the rules of the common Atwater v. Woodbridge,6 Conn. 223; Osborne v. law must govern in this country; and in the same opinion, Humphrey, 7 Conn. 335; East Hartford v. Hartford at page 548, the court say, that the rules of construing a Bridge Company, 17 Conn. 93; State v. Com'l Bank of statutes which surrenders the taxing power, are the same Page 6 57 U.S. 369, *; 14 L. Ed. 977, **; 1850 U.S. LEXIS 1558, ***9; 16 HOW 369 as those that apply to any other affecting the public follows: interest. "That it shall be the duty of the president and cashier of In the case of the Sutton Hospital, Lord Coke lays down each and every banking institution incorporated by the the rule of the common law in the construction of charters laws of this State, and having the right to issue bills or in the following terms, namely, "That the best exposition notes for circulation, at the time for listing personal of the King's charter is upon the consideration of the property under the laws of this State, to list the capital whole charter to expound the charter by the charter itself, stock of such banking institution, under oath, at its true every material part thereof being explained according to value in money, and return the same, with the amount of the true and genuine sense, which is the best method." surplus and contingent fund belonging to such banking The rule [***10] of interpretation is laid down by the institution, to the assessor of the township or ward in Supreme Court in Charles River Bridge v. Warren which such banking institution is located; and the amount Bridge, 11 Pet. 549. Also, by Judge Story, in his so returned shall be placed on the grand duplicate of the dissenting opinion, at page 600. Also, in case of proper county, (and upon the city duplicate for city taxes, Richmond Railroad Co. v. Louisa Railroad Company, 13 [***12] in cases where such city tax does not go upon How. 81. the grand grand duplicate, but is collected by the city officers,) and taxed for the same purposes and to the Where a right is not given in express words by the same extent that personal property is or may be required charter, it may be deduced by interpretation, if it is to be taxed in the place where such bank is located; and clearly inferrible from some of its provisions. such tax shall be collected and paid over in the same Stourbridge Canal v. Wheely, 2 Barn. & Adol. 792; manner that taxes on other personal property are required Union Bank of Tennessee v. The State, 9 Yerg. 495. by law to be collected and paid over: Provided, however, that the capital stock of any bank shall not returned or In adopting the rule of expounding the charter by the taxed for a less amount than its capital stock paid in." charter itself, the court is referred to all that part of the act of incorporation which is subsequent to the forty-fifth The single question presented in this case is the section. following: In construing statutes making grants for private Has the Legislature of Ohio, in the enactment last recited, enterprise, it is a settled principle, impaired the obligation of a contract, within the meaning of the prohibition contained in the tenth section of the 1st. That all grants for purposes of this sort are to be first article of the Constitution of the United States? construed as contracts between the government and the grantee, and not as mere laws. 11 Pet. 660. Judge Story's I maintain that it has not; and, in support of my position, opinion. respectfully advance, for the consideration of the court, the following propositions: 2d. That they are to receive a reasonable construction. And if from the express words of the act, or just and plain 1st. The act of the General Assembly of the State of inference from the terms used, the intent can be Ohio, entitled "An act to incorporate the State Bank of satisfactorily made out, it is to prevail and be carried into Ohio, and other banking companies," passed February 24, effect. [***11] But if the language be ambiguous, or the 1845, is not a contract in the sense [***13] in which that intent cannot be satisfactorily made out from the terms term is used in the Constitution. used, then the act is to be taken most strongly against the grantee and most beneficially to the public. 11 Pet. 600. It is a system of rules and regulations prescribed by the lawmaking power in the State for the government of all The following points made on behalf of the defendant in the citizens of Ohio who may choose, within certain error, are copied from the brief of Ms. Spalding. limits, to embark in the business of banking. It is as mandatory in its character as any law upon the statute The first section of the "act to tax banks, and bank and book, and some of its mandates are enforced under the other stocks, the same as other property is now taxable by severest penalties known to the law. See § 67. the laws of this State," passed March 21, 1851, reads as Page 7 57 U.S. 369, *; 14 L. Ed. 977, **; 1850 U.S. LEXIS 1558, ***13; 16 HOW 369 It is susceptible of amendment, and it has been amended, 5th. The Supreme Court of Ohio has done nothing more without objection, in its most important features. 46 than give a construction to a statute law of the State, (the Ohio Laws, 92; 48 Ib. 35. At the time of its enactment, act of 1845), that is, to say the least, somewhat February 24, 1845, there was a general law in force in ambiguous. Ohio, providing that all subsequent corporation, whether possessing banking powers or not, were to hold their By this construction, the act of March 21, 1851, does no charters subject to alteration, suspension, and repeal, in violence to the Constitution of the United States. This the discretion of the legislature. Ohio Laws, vol. 40, p. court is in the habit of adopting the interpretation given 70. The bank of Toledo v. The City of Toledo, 1 Ohio by the State courts to the statutes of their own State. State Reports, 622, 696. Surely it will not, in this instance, undertake to give a construction counter to that of the State court, when that 2d. "With the sole exception of duties on imports and counter construction will bring subsequent legislation of exports, the individual States possess an independent and the State into conflict with the Federal Constitution. 10 uncontrollable authority to raise their own revenues for Wheat. 159; 11 Ib. 361; 4 Pet. 137; 6 Ib. 291; 16 Ib. 18; 7 the supply of their own wants; and any attempt on the How. 40, 219, 818; 13 Ib. 271; 14 Ib. 78, 79. part of the [***14] national government to abridge them in the exercise of it would be a violent assumption of Upon the 3d point [***16] the counsel cited these further power unwarranted by any article or clause of its authorities: 16 Pet. 281; 8 How. 584; 10 Ib. 402; 4 Constitution." Alexander Hamilton, No. 32, Federalist, p. Comstock, 423; 2 Denio, 474; 5 Cow. 538; 7 Ib. 585; 1 140. El. & Black, 858. 3d. The taxing power is of such vital importance, and is And read the following extract from Local Laws of Ohio, so essentially necessary to the very existence of a State vol. 43, p. 51: government, that its relinquishment cannot be made the An act to incorporate the Milan and Richland Plank Road subject-matter of a binding contract between the Company, passed January 31, 1845: legislature and individuals or corporations. It is a prerogative of sovereignty that must necessity always be SEC. 9. "That in consideration of the expenses which exerted according to present exigencies, and said company will necessarily incur in constructing said consequently must of necessity continue to be held by road, with the appurtenances thereof, and in keeping the each succeeding legislature, undiminished and same in repair, the said road and its appurtenances, unimpaired. The Mechanics and Traders Bank v. Henry together with all tolls and profits arising therefrom, are Debolt, 1 Ohio State Rep. 591; Brewster v. Hough, 10 hereby vested in said corporation, and the same shall be New Hamp. Rep. 138; The Providence Bank v. Billings, forever exempt from any tax, imposition, or assessment 4 Pet. 541; The Proprietors of the Charles River Bridge v. whatever." The Proprietors of the Warren Bridge, 11 Pet. Rep. 420, and cases therein cited; The West River Bridge Company An act to incorporate the Huron Plank Road Company, v. Dix, 6 How. Rep. 507; The Richmond Railroad passed February 19, 1845. Local Laws, vol. 43d. pp. Company v. The Louisa Railroad Company, 13 Howard, 111, 114. The ninth section is copied exactly from the 71. ninth section of the Miland and Richland charter. 4th. The sixtieth section of the "Act to incorporate the On the 4th point: 8 How. 581; 9 Ib. 185; 19 Ohio Rep. State Bank of Ohio, and other [***15] banking 110; 1 Ohio State Rep. 313; 4 Wheat. 235; 4. Cranch, companies," passed February 24, 1845, provides only a 397; 7 How. 279; 10 Ib. 396. measure of taxation for the time being, and does not relinquish the right to increase the rate at the future On the 5th point: 5 How. 342. exigencies of the State may require. Debolt v. The Ohio Life Insurance and Trust Company, 1 Ohio State Rep. OPINION BY: McLEAN 576; 10 Penn. State Rep. 442; 10 New Hamp. Rep. 138; 13 How. Rep. 71; 9 Georgia Rep. 517; 2 Barn. & Adol. OPINION 793; 3 Pet. Rep. 289; Ib. 168, 514, 11 Ib. 544. [*376] [**980] Mr. Justice McLEAN delivered Page 8 57 U.S. 369, *376; 14 L. Ed. 977, **980; 1850 U.S. LEXIS 1558, ***16; 16 HOW 369 the opinion of the [***17] court. The sum so set off to be paid to the treasurer, on the order of the auditor of State. This is a writ of error to the Supreme Court of the State of Ohio. The Piqua Branch Bank was organized in the year 1847, [***19] under the above at; and still continues to The proceeding was instituted to reverse a decree of carry on the business of banking, and continued to set off that court, entered in behalf of Jacob Knoop, treasurer, and pay the semiannual amount as required; and on the against the Piqua Branch of the State Bank of Ohio, for a first Mondays of May and November, in 1851, there was tax of twelve hundred and sixty-six dollars and set off to the State six per cent. of the profits, deducting sixty-three cents, assessed against the said branch bank expenses and ascertained losses for the six months next for the year 1851. preceding each of those days, and the cashier did, within ten days thereafter, inform the auditor of State of the By the act of 1845, under which this bank was amount so set off on the 15th of November, 1851, the incorporated, any number of individuals, not less than same amounting to $862.50; which sum was paid to the five, were authorized to form banking associations to treasurer of State, on the order of the auditor; which carry on the business of banking in the State of Ohio, at a payment the bank claims was in lieu of all taxes to which place designated; the aggregate amount of capital stock in the company or its stockholders were subject for the year all the companies not to exceed six millions one hundred 1851. and fifty thousand dollars. On the 21st of March, 1851, an act was passed In the fifty-first section it is provided that every entitled "An act to tax banks and bank and other stocks, banking company authorized under the act to carry on the the same as property is now taxable by the laws of the business of banking whether as a branch of the State State." Bank of Ohio, or as an independent banking association, "shall be held and adjudged to be a body corporate, with This act provides that the capital stock of every succession, until the 1st of May, [*377] 1866; and banking company incorporated by the laws of the State, thereafter until its affairs shall be closed." It was made and having the right to issue bills or notes for circulation, subject to the restrictions of the act. shall be listed at its true value in money, with the amount of the surplus and contingent fund belonging to such The fifty-ninth section requires "the [***18] bank; and that the amount [***20] of such capital stock, directors of each banking company, semiannually, on the surplus, and contingent fund, should be taxed for the first Mondays of May and November, to declare a same purposes and to the same extent that personal dividend of so much of the net profits of the company as property was or might be required to be taxed in the place they shall judge expedient; and on each dividend day the [*378] where such bank is located; and that such tax cashier shall make out and verify by oath, a full, clear, should be collected and paid over in [**981] the same and accurate statement of the condition of the company manner that taxes on other personal property are required as it shall be on that day, after declaring the dividend, and by law to be collected and paid over. similar statements shall also be made on the first Mondays of February and August in each years." This In pursuance of this act there was assessed, for the statement is required to be transmitted to the auditor of year 1851, on the capital stock, contingent and surplus State. fund of the Piqua Bank, a tax amounting to the sum of twelve hundred and sixty-six dollars and sixty-three [HN1] The sixtieth section provides that each cents. The bank refused to pay this tax on the ground that banking company under the act, or accepting thereof, and it was in violation of its charter. Suit was brought by the complying with its provisions, shall, semiannually, on the State against the bank for this tax. The defence set up by days designated for declaring dividends, set off to the the bank was, that the tax imposed was in violation of its State six per cent. on the profits, deducting therefrom the charter, which fixed the rate of taxation at six per cent. on expenses and ascertained losses of the company for the its dividends, deducting expenses and losses; but the six months next preceding, which sum or amount so set Supreme Court of the State sustained the act of 1851, off shall be in lieu of all taxes to which the company, or against the provision of the charter by which, it is the stockholders therein, would otherwise be subject. insisted, the contract in the charter was impaired. Page 9 57 U.S. 369, *378; 14 L. Ed. 977, **981; 1850 U.S. LEXIS 1558, ***20; 16 HOW 369 We will first consider whether the specific mode of there? [***23] We think it should be regarded as a law taxation, provided [***21] in the sixtieth section of the prescribing a rule of taxation, until changed, and not a charter, is a contract. contract stipulating against any change: a legislative command and not a legislative compact with these The operative words are, that the bank shall, institutions." And the court further say, [HN2] "the taxes "semiannually on the days designated in the fifty-ninth required by this act are to be in lieu of other taxes -- that section for declaring dividends, set off to the State six per is, to take the place of other taxes. What other taxes? cent. on the profits, deducting therefrom the expenses and The answer is, such as the banks or the stockholders ascertained losses of the company for the six months next 'would otherwise be subject to pay. The taxes to which preceding, which sum or amount so set off shall be in lieu they would be otherwise subject were prescribed by of all taxes to which such company, or the stockholders existing laws, and this, in effect, operated as a repeal of thereof, on account of stock owned therein, would them, so far as these institutions were concerned.'" otherwise be subject." With great respect, it may be suggested there was no This sentence is so explicit, that it would seem to be general tax law existing, as supposed by the court, under susceptible of but one construction. There is not one which the banks chartered by the act of 1845 could have word of doubtful meaning when taken singly, or as it been taxed, and on which the above provision could, "in stands connected with the sentence in which it is used. effect, operate to repeal." Nothing is left to inference. The time, the amount to be set off, the means of ascertaining it, to whom it is to be The general tax law of the 12th of March, 1831, paid, and the object of the payment, are so clearly stated, which raised the tax to five per cent. on dividends, and that no one who reads the provision can fail to understand which operated on all the banks of Ohio, except the it. The payment was to be in lieu of all taxes to which the "Commercial Bank of Cincinnati," was repealed by the company or stockholders would otherwise be subject. small note act of 1836, and that could operate only on This is the full measure of taxation on the bank. It is the banks doing business at the time [***24] of its passage. place of any other tax which, had it not [***22] been for this stipulation, might have been imposed on the The act of the 13th of March, 1838, repealed the act company or stockholder. of 1836, so far "as it restricts or prohibits the issuing and circulation of small bills." The act of 1836 authorized the This construction, I can say, was given to the act by treasurer of State to draw upon the banks for the amount the executive authorities of Ohio, by those who were of twenty per cent. upon their dividends, as their interested in the bank, and generally by the public, from proportion of the State tax; and provided that if any bank the time the bank was organized down to the tax law of should relinquish its charter privilege of issuing bills of 1851. less denomination than three and five dollars, the tax should be reduced to five per cent. upon its dividends. As In the case of Debolt v. The Ohio Insurance and the prohibition of circulating small notes was repealed, Trust Company, 1 Ohio Rep. 563, new series, the the tax necessarily fell. Neither the twenty nor the five Supreme Court, in considering the 60th section now per cent. could be exacted. The five per cent. was a before us, say: "It must be admitted the section contains compromise for the twenty; as the twenty was repealed no language importing a surrender [*379] of the right to by the repeal of the prohibition of small notes, neither the alter the taxation prescribed, unless it is to be inferred one nor the other could be collected. from the words, 'shall be in lieu of all taxes to which such company, or the stockholders thereof, on account of stock But if this were not so, the Bank Act of 1842, which owned therein, would otherwise be subject;' and it is imposed [*380] a tax of one half per cent. on the capital frankly conceded that if these words had occurred in a stock of the bank, repealed, by its repugnancy, any part of general law they would not be open to such a the act of 1836 which, by construction or otherwise, construction. If the place where they are found is could be considered in force. And the act of 1842 was important, we have already seen this law is general in repealed by the act of 1845. There is a general act in many of its provisions, and upon a general subject. Why [***25] Ohio declaring that [HN3] the repeal of an act may not this be classed with these provisions, especially shall not revive any act which had been previously in view of the fact, that in its nature it properly belongs repealed. Swan's Stat. 59. Page 10 57 U.S. 369, *380; 14 L. Ed. 977, **981; 1850 U.S. LEXIS 1558, ***25; 16 HOW 369 If this statement be correct, as it is believed to be, the he says, may be affirmed of insurance, canal, bridge, and legislature could not have intended, by the special turnpike companies. There can be no doubt that these provision in the sixtieth section, to exempt the bank from definitions are sound, and are sustained by the settled tax by the existing law, as no such law existed, but to principles of law." exempt from the operation of tax laws subsequently passed. This is the clear and fair import of the compact, [HN6] It by no means follows that because the action which we think would not be rendered doubtful if a tax of a corporation may be beneficial to the public, therefore law had existed at the time the act of 1845 was passed. it is a public corporation. This may be said of all corporations whose objects are the administration of The 60th section is not found in a general law, as is charities. But these are not public, though incorporated intimated by the Supreme Court of the State. The act of by the legislature, unless their funds belong to the 1845 is general only in the sense, that all banking government. Where the property of a corporation is associations were permitted to organize under it; but the private it gives the same character to the institution, and act is as special to each bank as if no other institution to this there is no exception. Men who are engaged in were incorporated by it. We suppose this cannot be banking understand the distinction above stated, and also controvered by any one. This view [**982] is so clear that privileges granted in private corporations are not a in itself that no illustration can make it clearer. legislative command, but a legislative contract, not liable to be changed. [HN4] Every valuable privilege given by the charter, and which conduced to an acceptance of it and an This fact is shown by the following circumstances: organization under it, is a contract which cannot be "An act to regulate banking in Ohio," passed the 7th of changed by the legislature, where the [***26] power to March, [***28] 1842. The 1st section provided, "that do so is not reserved in the charter. The rate of discount, all companies or associations of persons desiring to the duration of the charter, the specific tax agreed to be engage in and carry on the business of banking within paid, and other provisions essentially connected with the this State, which may hereafter be incorporated, shall be franchise, and necessary to the business of the bank, subject to the rules, regulations, limitations, conditions, cannot, without its consent, become a subject for and provisions contained in this act, and such other acts legislative action. to regulate banking as are now in force, or may hereafter be enacted, in this State." [HN5] A municipal corporation, in which is vested some portion of the administration of the government, The 20th section of that act provided that a tax of one may be changed at the will of the legislature. Such is a half per cent. per annum on its capital should be paid, and public corporation, used for public purposes. But a bank, such other tax upon its capital or circulation as the where the stock is owned by individuals, is a private general assembly may hereafter impose. An amendment corporation. This was not denied or questioned by the to this act was passed the 21st February, 1843; but the act counsel in argument, although it has been controverted in and the amendment remained a dead letter upon the this case elsewhere. But this court and the courts of the statute book. No stock was subscribed under them, and different States, not excepting the Supreme Court of they were both repealed by the act of 1845, under which Ohio, have so universally held that banks, where the nearly three fourths of the banks in Ohio were organized. stock is owned by individuals, are private corporations, There act contained the express stipulation that "six per that no legal fact is susceptible of less doubt. Mr. Justice cent. on the dividends, after deducting expenses and Story, in his learned and able remarks in the Dartmouth losses, should be paid in lieu of all taxes." College case, says: "A bank created by the government for its own uses, where the stock is exclusive owned by This compact was accepted, and on the faith of it the government is, in the strictest sense, a public fifty banks were organized, which are still in operation. corporation." Up to the year 1851, [***29] I believe, the banks, the profession, and the bench, considered this as a contract, [***27] "But a bank whose stock is owned by and binding upon the State and the banks. For more than private persons is a [*381] private corporation, although thirty-five years this mode of taxing the dividends of it is erected by the government, and its objects and banks had been sanctioned in the State of Ohio. With operations partake of a public nature. The same doctrine, few exception the banks were so taxed, where any tax on Page 11 57 U.S. 369, *381; 14 L. Ed. 977, **982; 1850 U.S. LEXIS 1558, ***29; 16 HOW 369 them was imposed. In the case of the State of Ohio v. Can the compact in the 60th section be "regarded as The Commercial Bank of Cincinnati, 10 Ohio Rep. 535, a law prescribing a rule of taxation until changed, and not the Supreme [*382] Court of Ohio say, we take it to be a contract stipulating against any change; a legislative well settled, that [HN7] the charter of a private command, and not a legislative compact with these corporation is in the nature of a contract between the institutions?" We cannot but treat with great respect the State and the corporation. Had there ever been any language of the highest judicial tribunal of a State, and doubts upon this subject, those doubts must have been we would say, that in our opinion it does [*383] not removed by the decision of the Supreme Court of the import to be a legislative command nor a rule of taxation United States, in the case of Woodward v. Dartmouth until changed, but a contract stipulating against any College. And the court remark, "the general assembly change, from the nature of the language used and the say to such persons as may take the stock, you may enjoy circumstances under which it was adopted. According to the privileges of banking, if you will consent to pay to the our views, no other construction can be given to the State of Ohio, for this privilege, four per cent. on your contract, then that the tax of six per cent. on the dividends dividends, as they shall from time to time be made. The is in lieu of all [***32] subsequent taxes which might charter is accepted, the stock is subscribed, and the otherwise be imposed; in other words, taxes to which the corporation pays, or is willing to pay, the consideration company or the stockholders would have been liable, had stipulated, to wit, [***30] the four per cent. c And the the specific tax on the dividends on the terms stated not court say, "here is a contract, specific in its terms, and been enacted. easy to be understood." "A contract between the State and individuals is as obligatory as any other contract. Until a In the opinion of the Supreme Court of the State, it is State is lost to all sense of justice and propriety, she will said, the 60th section, in effect, repealed the existing law scrupulously abide by her contracts more scrupulously under which the bank would have been taxed, and that than she will exact their fulfillment by the opposite this is the obvious application of the language used; and contracting party." they add, "that the General Assembly intended only this, and did not intend it to operate upon the sovereign power This opinion commends itself to the judgment, both of the State, or to tie up the hands of their successors, we on account of its sound constitutional views and its feel fully assured. To suppose the contrary would be to elevated morality. It was pronounced at December term, impeach them of gross violation of public duty, if not 1835. That decision was calculated to give confidence to usurpation of authority." those who were desirous to make investments in banking operations, or otherwise, in the State of Ohio. So far as regards the effect of the 60th section to repeal existing laws, if no such laws existed, it would Ten years after this opinion, and after an ineffectual follow that no such effect was produced, and we may attempt had been made by the act of 1842, and its presume that this was in the knowledge of the legislature amendment in 1843, to organize banks in Ohio, without a of 1845; and in saying that the compact was intended to compact as to taxation, the act of 1845 was passed, run with the charter, we only impute to the legislature a containing a compact much more specific than that which full knowledge of their own powers, and the highest had been sustained by the Supreme Court of the State. regard to the public interest. The idea that a State, by Under such circumstances, can the intentions of the [***33] exempting from taxation certain property, parts Legislature of Ohio, in passing the act of 1845, be with a portion of its sovereignty, is of modern growth; doubted, or the inducements of the stockholders to and so is the argument that if a State may part with this in [***31] vest their money under it. Could either have one instance it may in every other, so as to divest itself of supposed that the 60th section proposed a temporary the sovereign power of taxation. Such an argument would taxation? Such a supposition does great injustice to the be as strong and as conclusive against the exercise of the legislature of 1845. It is against the clear language of the taxing power. For if the legislature may levy a tax upon section, which must ever shield [**983] them from the property, they may absorb the entire property of the imputation of having acted inconsiderately or in bad tax-payer. The same may be said of every power where faith. They passed the charter of 1845, which they knew there is an exercise of judgment. would be accepted, as it removed the objections to the act of 1842. The Legislature of Ohio passes a statute of Page 12 57 U.S. 369, *383; 14 L. Ed. 977, **983; 1850 U.S. LEXIS 1558, ***33; 16 HOW 369 limitations to all civil and criminal actions. Is there no inducements must be held out to capitalists to invest their danger that in the exercise of this power it may not be funds. They must know the rate of interest to be charged abused? Suppose a year, a month, a week, or a day should by the bank, the time the charter shall run, the liabilities be fixed as the time within which all actions shall be of the company, the rate of taxation, and other privileges brought on existing demands, and if not so brought, the necessary to a successful banking operation. remedy should be barred. This is a supposition more probable under circumstances of great embarrassment, These privileges are proffered by the State, accepted when the voice of the debtor is always potent, than that by the stockholders, and in consideration funds are the legislature will inconsiderately exempt property from invested in the bank. Here is a contract by the State and taxation. the bank, a contract founded upon considerations of policy requires by the general interests of the community, Under a statute of limitation, as supposed, the a contract [***36] protected by the laws of England and remedy of the [*384] creditor would be cut [***34] off, America, and by all civilized States where the common or unless the courts should decide that a limitation to bar the the civil law is established. In Fletcher v. Peck, 6 right must be reasonable, but this power could not be Cranch, 135, Chief Justice Marshall says, "The principle exercised under any constitutional provision. It could asserted is, that [HN8] one legislature is competent to rest only on the great and immutable principles of justice, repeal any act [*385] which a former legislature was unless the time was so short as manifestly to have been competent to pass, and that one legislature cannot abridge intended to impair or destroy the contract. To carry on a the powers of a succeeding legislature." government, a more practical view of public duties must be taken. "The correctness of this principle," he says, "so far as respects general legislation, can never be controverted. When the State of Ohio was admitted into the Union But if an act be done under a law, a succeeding by the act of the 30th of April, 1802, it was admitted legislature cannot undo it. When, then, a law is in its under a compact that "the lands within the State sold by nature a contract, a repeal of the law cannot divest those Congress shall remain exempt from any tax laid by or rights; and the act of annulling them, if legitimate, is under the authority of the State, whether for state, county, rendered so by a power applicable to the case of every township, or any other purpose whatever, for the term of individual in the community." five years from and after the day of sale." And yet by the same law the State "was admitted into the Union upon the [**984] And in another part of the opinion he says, same footing with the original States in all respects "Whatever respect might have been felt for the State whatever." sovereignties, it is not to be disguised that the framers of the Constitution viewed, with some apprehension, the Now, if this new doctrine of sovereignty be correct, violent acts which might grow out of the feelings of the Ohio was not admitted into the Union on the footing of moment, and that the people of the United States, in the other sovereign States. Whatever may be considered adopting that instrument, have [***37] manifested a of such a compact now, it was not held to be determination to shield themselves and their property objectionable at the time it was made. from the effects of those sudden and strong passions to which men are exposed. The restrictions on the The assumption [***35] that a State, in exempting legislative power of the States are obviously founded on certain property from taxation, relinquishes a part of its this sentiment; and the Constitution of the United States sovereign power, is unfounded. The taxing power may contains what may be deemed a bill of rights for the select its objects of taxation; and thus is generally people of each State." regulated by the amount necessary to answer the purposes of the State. Now the exemption of property from [HN9] "No State shall pass any bill of attainder, ex taxation is a question of policy and not of power. A post facto law, or law impairing the obligations of sound currency should be a desirable object to every contracts. A bill of attainder may affect the life of an government; and this in our country is secured generally individual, or may confiscate his property, or may do through the instrumentality of a well-regulated system of both." banking. To establish such institutions as shall meet the public wants and secure the public confidence, In this form he says, "the power of the legislature Page 13 57 U.S. 369, *385; 14 L. Ed. 977, **984; 1850 U.S. LEXIS 1558, ***37; 16 HOW 369 over the lives and fortunes of individuals is expressly not taxable as such, if a price has been paid for it, which restrained. What motive, then, for implying, in words the legislature accepted. But that the corporate property which import a general prohibition to impair the of the bank, being separable from the franchise, may be obligation of contracts, an exception in favor of the right taxed, unless there is a special agreement to the contrary." to impair the obligations of those contracts into which the State may enter." And the court say, the language of the eleventh section of the act of 1821 is, "And be it enacted, that The history of England affords melancholy instances upon any of the aforesaid banks accepting and complying where bills of attainder were prosecuted in parliament to with the terms and conditions of this act, the faith of the the destruction of the lives and fortunes of some of its State is hereby pledged not to impose any further tax or most eminent subjects. A knowledge of this caused a burden upon them during the continuance of their prohibition in the Constitution against such [***38] a charters under this act." [***40] This, the court say, is procedure by the States. the language of grave deliberation, pledging the faith of the State for some purpose, some effectual purpose. Was In the case of the State of New Jersey v. Wilson, 7 that purpose the protection of the banks from what that Cranch, 164, it was held, "that a legislative act, declaring legislature and succeeding legislatures could not do, if the that certain lands, which should be purchased for the banks accepted the act, or from what they might do in the Indians, should not thereafter be subject to any tax, exercise of the taxing power. The terms and conditions of constituted a contract which could not be rescinded by a the act were, that the banks should construct the road and subsequent legislative act. Such repealing act being void pay annually a designated charge upon their capital under that clause of the Constitution of the United States stocks, as the price of the prolongation of their franchise which prohibits a State from passing any law impairing of banking. The power of the State to lay any further tax the obligation of contracts." upon the franchise was exhausted. That is the contract between the State and the banks. It follows, then, as a In 1758 the government of New Jersey purchased the matter of course, when the legislature go out of the Indians' [*386] title to lands in that State, in contract, proposing to pledge its faith, if the banks shall consideration of which the government bought a tract of accept the act not to impose any further tax or burden land on which the Indians might reside, an act having upon them, that it must have meant by these words an previously been passed that "the lands to be purchased for exemption [*387] from some other tax than a further tax them shall not hereafter be subject to any tax, any law, upon the franchise of the banks. The latter was already usage, or custom to the contrary thereof in any wise provided against; and the court held that the exemption notwithstanding." The Indians continued in possession of extended to the respective capital stocks of the banks as the lands purchased until 1801, when they applied for and an aggregate, and to the stockholders, [***41] as obtained an act of the legislature, authorizing a sale of persons on account of their stocks. The judgment of the their lands. This act contained no provision in regard to Court of Appeals of Maryland, which sustained the act taxation; under it the Indian lands were sold. imposing an additional tax on the banks, was reversed. In October, 1804, the legislature [***39] repealed It will be observed that the above compact was the act of August, 1758, which exempted these lands applied to the stocks of the bank and the interest of the from taxes; the lands were then assessed, and the taxes stockholders by construction. demanded. The court held the repealing law was unconstitutional, as impairing the obligation of the The Supreme Court of Ohio say in relation to this contract, although the land was in the hands of the case, that "the power to tax and the right to limit the grantee of the Indians. This case shows that although a power were both admitted by counsel, and taken for State government may make a contract to exempt granted in the consideration of the case; and that a very property from taxation, yet the sovereignty cannot annual large consideration had been paid for the extension of the that contract. franchise and the exemption of the stock from taxation." In the case of Gordon v. The Appeal Tax, 3 How. In relation to the admissions of the counsel it may be 133, Mr. Justice Wayne, giving the opinion of the court, said that they were men not likely to admit any thing to held, "that the charter of a bank is a franchise, which is the prejudice of their clients, which could be successfully Page 14 57 U.S. 369, *387; 14 L. Ed. 977, **984; 1850 U.S. LEXIS 1558, ***41; 16 HOW 369 opposed; nor would the court, on a constitutional But suppose, in the language of that great man, "a question, rest their judgment on the admissions of consideration sufficiently valuable to induce a partial counsel. Whether the consideration paid by the banks release of it, and such release had been contained in the was large or small, we suppose was not a matter for the charter; would not that have been held sufficient? And of court, as the motives or consideration which induced a the sufficiency of the consideration, whether it was a sovereign State to make a contract, cannot be inquired bonus paid by the bank, or in supplying a sound currency, into as affecting the validity of the act. [***44] the legislature would be the exclusive judges. This would constitute a contract which a legislature could In the argument, the [***42] case of the Providence not impair. Bank v. Billing, was referred to, 4 Peters, 561. This reference impresses me with the shortness [**985] and The above case is a strong authority against the uncertainty of human life. Of all the judges on this defendants. The Chief Justice further says, "any bench, when that decision was given, I am the only privileges which may exempt the corporation from the survivor. From several circumstances the principles of burdens common to individuals, do not flow necessarily that case were strongly impressed upon my memory; and from the charter, but must be expressed in it, or they do I was surprised when it was cited in support of the not exist." But if so expressed, do they not exist? doctrines maintained in the case before us. The principle held in that case was, that where there was no exemption A case is cited from the Stourbridge Canal v. from taxation in the charter, the bank might be taxed. Wheely, 2 Barn. & Adol. 793, to show that no This was the unanimous opinion of the judges, but no one implications in favor of chartered rights are admissible. of them doubted that the legislature had the power, in the Lord Tenterden says, "that [HN10] any ambiguity in the charter or otherwise, from motives of public policy, to terms of the contract must operate against the exempt the bank from taxation, or by compact to impose adventurers, and in favor of the public; and the plaintiffs a specific tax on it. And this is clear from the language of can claim nothing that is not clearly given then by the the court. act." In the same opinion his lordship said: "Now, it is quite certain that the company have no right expressly to The chief justice in that case says: "that the taxing receive any compensation, except the tonnage paid for power is of vital importance, that it is essential to the goods carried through some of the canals or the locks on existence of government, are truths which it cannot be the canal, or the collateral cuts, and it is therefore necessary to reaffirm. They are acknowledged and incumbent upon them to show that they have a right asserted by all. It would seem that the relinquishment of clearly given by inference from some of the other such a power is never to be presumed. No one can clauses." [***43] controvert the correctness of these axioms." [*388] The relinquishment of such a power is never to be Neither [***45] this, the Rhode Island Bank case, presumed; but this implies it may be relinquished, or nor the Charles River Bridge case, affords any aid to the taxable objects may be exempted, if specially provided doctrines maintained, with the single exception, that a for in the charter. And this is still more clearly expressed, right set up under a grant must clearly appear, and cannot as follows: "We will not say that a State may not be presumed; and this has not been controverted. relinquish it; that a consideration sufficiently valuable to [*389] That [HN11] a State has power to make a induce a partial release of it may not exist; but as the contract which shall bind it in future, is so universally whole community is interested in retaining it held by the courts of the United States and of the States, undiminished, that community has a right to insist, that that a general citation of authorities is unnecessary on the its abandonment ought not to be presumed, in a case in subject. Dartmouth College v. Woodward, 4 Wheat. 518; which the deliberate purpose of a State to abandon it does Terrett v. Taylor, 9 Cranch, 43; Town of Pawlett, 9 not appear." Cranch, 292. Such a case was not then before the court. There Mr. Justice Blackstone says, 2 Bl. Com. 37, "that the was no provision in the Providence Bank charter which same franchise that has before been granted to one, exempted it from taxation, and in that case the court cannot be bestowed on another, because it would could presume no such intention. prejudice the former grant. In the King v. Pasmore, 3 Page 15 57 U.S. 369, *389; 14 L. Ed. 977, **985; 1850 U.S. LEXIS 1558, ***45; 16 HOW 369 Term, 246, Lord Kenyon says, that an existing indefinable notion, that every exemption from taxation or corporation cannot have another charter obtruded upon it, a specific tax, which withdraws certain objects from the or accept the whole or any part of the new charter. The general tax law, affects the sovereignty of the State, is reason of this, it is said, is obvious. [HN12] A charter is indefensible. a contract, to the validity of which the consent of both parties is essential, and therefore it cannot be altered or There has been rarely, if ever, it is believed, a tax added to without consent." law passed by any State in the Union, which did not contain some [***48] exemptions from general taxation. There is no constitutional [***46] objection to the The act of Ohio of the 25th of March, 1851, in the exercise of the power to make a binding contract by a fifty-eighth section, declared that "the provisions of that State. It necessarily exists in its sovereignty, and it has act shall not extend to any joint-stock company which been so held by all the courts in this country. A denial of now is, or may hereafter be organized, whose charter or this is a denial of State sovereignty. It takes from the act of incorporation shall have guaranteed to such State a power essential to the discharge of its functions as company an exemption from taxation, or has prescribed sovereign. If it do not possess this attribute, it could not and other as the exclusive mode of taxing the same." communicate it to others. There is no power possessed Here is a recognition of the principle now repudiated. In by it more essential than this. Through the the same act, there are eighteen exemptions from instrumentality of contracts, the machinery of the taxation. government is carried on. Money is borrowed, and obligations given for payment. Contracts are made with The federal government enters into an arrangement individuals, who give bonds to the State. So in the with a foreign State for reciprocal duties on imported granting of charters. If there be any force in the argument, merchandise, from the one country to the other. Does it applies to contracts made with individuals, the same as this affect the sovereign power of either State? The with corporations. But it is said the State cannot barter sovereign power in each was exercised in making the away any part of its sovereignty. No one ever contended compact, and this was done for the mutual advantage of that it could. both countries. Whether this be done by treaty, or by law, is immaterial. The compact is made, and it is [HN13] A State, in granting privileges to a bank, binding on both countries. with a view of affording a sound currency, or of advancing any policy connected with the public interest, The argument is, and must be, that [HN14] a exercises its sovereignty, and for a public purpose, of sovereign State may make a binding contract with one of which it is the exclusive judge. Under such its citizens, and, in the exercise of its sovereignty, circumstances, [***47] a contract made for a specific repudiate it. tax, as in the case before us, is binding. This tax The Constitution of the Union, when first adopted, continues, although all other banks should be exempted [***49] made States subject to the federal judicial from taxation. Having the power to make the contract, power. Could a State, while this power continued, being and rights becoming vested under it, it can no more be sued for a debt contracted in its sovereign capacity, have disregarded nor set aside by a subsequent legislature, than repudiated it in the same capacity? In this respect the a grant for land. This act, so far from parting with any Constitution was very properly changed, as no State portion of the sovereignty, is an exercise of it. Can any should be subject to the judicial power generally. one deny this power to the legislature? Has it not a right to select the objects of taxation and determine the Much stress was laid on the argument, and in the amount? To deny either of these, is to take away State decisions of the Supreme Court, on the fact that the banks sovereignty. paid no bonus for their charters, and that no contract can be binding which is not mutual. [*390] [**986] It must be admitted that the State has the sovereign power to do this, and it would have the This is a matter which can have no influence in sovereign power to impair or annul a contract so made, deciding the legal question. The State did not require a had not the Constitution of the United States inhibited the bonus, but other requisitions are found in the charter, exercise of such a power. The vague and undefined and which the legislature deemed sufficient, and this is not Page 16 57 U.S. 369, *390; 14 L. Ed. 977, **986; 1850 U.S. LEXIS 1558, ***49; 16 HOW 369 questionable by any other authority. The obligation is as case before us not to carry into effect a law of the State, strong on the State, from [*391] the privileges granted but to test the validity of such a law by the Constitution and accepted, as if a bonus had been paid. of the Union. We are exercising an appellate jurisdiction. The decision of the Supreme Court of the State is before Another assumption is made, that the banks are taxed us for revision, and if their construction of the contract in as property is taxed in the hands of individuals. No question impairs its obligation, we are required to reverse deduction, it appears, is made from banks on account of their judgment. To follow the [***52] [*392] debts due to depositors or others, whilst debts due by an construction of a State court in such a case, would be to individual are deducted from this credits. If this be so, it surrender one of the most important provisions in the places banks [***50] on a very different footing from federal Constitution. individuals. There is no jurisdiction which we are called to The power of taxation has been compared to that of exercise of higher importance, nor one of deeper interest eminent domain, and it is said, as regards the question to the people of the States. It is, in the emphatic language before us, they are substantially the same. These powers of Chief Justice Marshall, a bill of rights to the people of exist in the same sovereignty, but their exercise involves the States, incorporated into the fundamental law of the different principles. Property may be appropriated for Union. And whilst we have all the respect for the public purposes, but it must be paid for. Taxes are learning and ability which the opinions of the judges of assessed on property for the support of the government the Supreme Court of the State command, we are called under a legislative act. upon the exercise our own judgments in the case. We were not prepared for the position taken by the In the discussion of the principles of this case, we Supreme Court of Ohio, that "no control over the right of have not felt ourselves at liberty to indulge in general taxation by the States was intended to be conferred upon remarks on the theory of our government. That is a the General Government by the section referred to, or any subject which belongs to a convention for the formation other, except in relation to duties upon imports and of a constitution; and, in a limited view, to the exports." This has never been pretended by any one. The law-making power. Theories depend so much on the section referred to gives the federal government no power qualities [**987] of the human mind, and these are so over taxation by a State. Such an idea does not belong to diversified by education and habit as to constitute an the case, and the argument used, we submit, is not unsafe rule for judicial action. Our prosperity, legitimate. [HN15] We have power only to deal with individually and nationally, depends upon a close contracts under the tenth section of the first article of the adherence to the settled [***53] rules of law, and Constitution, whether made by a State or an individual; if especially to the great fundamental law of the Union. such contract be impaired by an act of the State such act is void, as [***51] the power is prohibited to the State. Having considered this case in its legal aspects, as This is the extent of our jurisdiction. As well might it be presented in the arguments of counsel, and in the views contended under the above section that no power was of the Supreme Court of the State, and especially as given to the federal government to regulate the regards the rights of the bank under the charter, we are numberless internal concerns of a State which are the brought to the conclusion, that in the acceptance of the subjects of contracts. With those concerns we have charter, on its terms, and the payment of the capital stock, nothing to do; but when contracts growing out of them under an agreement to pay six per cent. semi-annually on are impaired by an act of the State, under the federal the dividends made, deducting expenses and ascertained Constitution we inquire whether the act complained of is losses, in lieu of all taxes, a contract was made binding in violation of it. on the State and on the bank; and that the tax law of 1851, under which a higher tax has been assessed on the [HN16] The rule observed by this court to follow the bank than was stipulated in its charter, impairs the construction of the statute of the State by its Supreme obligation of the contract, which is prohibited by the Court is strongly urged. This is done when we are Constitution of the United States, and, consequently, that required to administer the laws of the State. The the act of 1851, as regards the tax thus imposed, is void. established construction of a statute of the State is The judgment of the Supreme Court of Ohio, in giving received as a part of the statute. But we are called in the Page 17 57 U.S. 369, *392; 14 L. Ed. 977, **987; 1850 U.S. LEXIS 1558, ***53; 16 HOW 369 effect to that law, is, therefore, reversed. portion of her banking institutions, organized under a general banking law, passed in 1845. She was then a Mr. Justice CATRON, Mr. Justice DANIEL, and Mr. wealthy and prosperous community, and had numerous Justice CAMPBELL, dissented. banks which employed a large capital, and were taxed by the general laws five per cent. on their dividends, being [**996contd] [EDITOR'S NOTE: The page equal to thirty cents on each hundred dollars' worth of numbers of this document may appear to be out of stock, supposing it to be at par value. But this was sequence; [***54] however, this pagination accurately merely a State tax, payable into the State treasury. The reflects the pagination of the original published old banks were liable to taxes for county purposes, document.] besides; and when located in cities or towns, for corporation taxes also. These two items usually Order. amounted to much more than the State tax. This cause came on to be heard on the transcript of Such was the condition of Ohio when the general the record from the Supreme Court of [**997] Ohio, and banking law was passed in 1845. By this act, any number was argued by counsel. On consideration whereof, it is of persons not less than five might associated together, by now here ordered and adjudged by this court that the articles, to carry on banking. judgment of the said Supreme Court of Ohio in this cause be, and the same is hereby reversed with costs, and that The State was laid off into districts, and the law this cause be and the same is hereby remanded to the said prescribes the amount of [***56] stock that may be Supreme Court of Ohio for further proceedings to be had employed in each. Every county was entitled to one therein in conformity of the opinion of this court. bank, and some to more. Commissioners were appointed to carry the law into effect. It was the duty of this Board CONCUR BY: TANEY of Control to judge of the articles of association, and other matters necessary to put the banks into operation. CONCUR Any company might elect to become a branch of the State Mr. Chief Justice TANEY gave a separate opinion, Bank, or to be a separate bank, disconnected with any as follows: other. Fifty thousand dollars was the minimum, and five hundred thousand the maximum, that could be employed I concur in the judgment in this case. I think that by in any one proposed institution. the sixtieth section of the act of 1845, the State bound itself by contract to levy no higher tax than the one By the fifty-first section, each of the banking therein mentioned, upon the banks or stocks in the banks companies authorized to carry on business was declared which organized under that law during the continuance of to be a body corporate with succession to the first day of their charters. In my judgment [*393] the words used May, 1866, with general banking powers; with the are too plain to admit of any other construction. privilege to issue notes of one dollar and upwards, to one hundred dollars; and each bank was required to have "on But I do not assent altogether to the principles or hand in gold, and silver coin, or their equivalent, one half reasoning contained in the opinion just delivered. The at least of which shall be in gold and silver coin in its grounds [***55] upon which I hold this contract to be vault, an amount equal to thirty per cent. of its obligatory on the State, will appear in my opinion in the outstanding notes of circulation;" and whenever the case of the Ohio Life Insurance and Trust Company, also specie on hand, or its equivalent, shall fall below twenty decided at the present term. per cent. of the outstanding [*394] [***57] notes, then no more notes shall be circulated." The equivalent to DISSENT BY: CATRON; DANIEL; CAMPBELL specie, meant deposits that might be drawn against in the hands of eastern banks, or bankers of good credit. In this DISSENT provision constituted the great value of the franchise. Mr. Justice CATRON. The 59th section declares that semiannual dividends shall be made by each bank of its profits, after deducting This is a contest between the State of Ohio and a expenses; and the 60th section provides, that six per cent. Page 18 57 U.S. 369, *394; 14 L. Ed. 977, **997; 1850 U.S. LEXIS 1558, ***57; 16 HOW 369 per annum of these profits shall be set off to the State, case of Debolt v. The Ohio Life Insurance and Trust "which sum or amount so set off shall be in lieu of all Company, 1 Ohio State Reports, 564, with a fairness, taxes to which such company, or the stockholders thereof ability, and learning, calculated to command the respect on account of stock owned therein, would otherwise be of all those who have his opinion to review; and which subject." This was equal to thirty-six cents per annum on opinion has, as I think, construed the 60th section truly. each hundred dollars of stock subscribed, supposing it to But, as my brother Campbell has rested his opinion on yield six per cent. interest. this section without going beyond it, and as I concur in his views, I will not further examine that question, but By an act of 1851, it was declared that bank stock adopt his opinion in regard to it. should be assessed at its true value, and that it should be taxed for State, county, and city purposes, to the same The next question, decided by the State court is of extent that personal property was required to be taxed at most grave importance; I give it in the language of the the place where the bank was located. As this rate was State court: "Had the general assembly power, under the much more than that prescribed by the 60th section of the constitution then in force, permanently to surrender, by act of 1845, the bank before us refused to pay the excess, contract, within the meaning and under the protection of and suffered herself [***58] to be sued by the tax the Constitution [***60] of the United States, the right of collector, relying on the 60th section, above recited, as an taxation over any portion of the property of individuals, irrepealable contract, which stood protected by the otherwise subject to it?" On which proposition the court Constitution of the United States. proceeds to remark: It is proper to say that the trifling sum in dispute in "Our observations and conclusions upon this this cause is the mere ground of raising the question question, must be taken with reference to the between the State of Ohio and some fifty of her banks, unquestionable facts, that the act of 1851 was a bona fide claiming exemption under the act of 1845. attempt to raise revenue by an equal and uniform tax upon property, and contained no covert attack upon the The taxable property of these banks is about eighteen franchises of these institutions. That the surrender did millions of dollars, according to the auditor's report of not relate to property granted by the State, so as to make last year, and which was used on the argument of this it a part of the grant for which a consideration was paid; cause, by both sides. Of course, the State officers, and the State having granted nothing but the franchise, and other tax payers, assailed the corporations claiming the the tax being upon nothing but the money of individuals exemption, and various cases were brought before the invested in the stock; and that no bonus or gross sum was Supreme Court of Ohio, drawing in question the validity paid in hand for the surrender, so as to leave it open to of the act of 1851 in so far as it increased the taxes of the controversy, that reasonable taxes, to accrue in future, banks beyond the amount imposed [**988] by the 60th were paid in advance of their becoming due. What effect section of the act of 1845. The State court sustained the a different state of facts might have, we do not stop to act of 1851, from which decision a writ of error was inquire. Indeed, if the attempt has here been made, it is a prosecuted, and the cause brought to this court. naked release of sovereign power without any consideration or attendant circumstance to give it strength The opinions of the State court have been laid before or color; and, so far as we are [***61] advised, is the us, for our consideration; and on our assent or dissent to first instance where the rights and interests of the public them, the case depends. have been entirely overlooked." The first [***59] question made and decided in the "Under these circumstances, we feel no hesitation in Supreme Court of Ohio was, whether the 60th section of saying the general assembly was incompetent to such a the act of 1845, purported to be in its terms, a contract not task. This conclusion is drawn from a consideration of further to tax the banks organized under it during the the limited authority of that body, and the nature of the entire term of their existence? The court held that it power claimed to be abridged. imported no such contract; and with this opinion I concur. "That political sovereignty, in its true sense, exists [*395] The question was examined by the judge only with the people, and that government is "founded on who delivered the unanimous opinion of the court, in the their sole authority," and subject to be altered, reformed, Page 19 57 U.S. 369, *395; 14 L. Ed. 977, **988; 1850 U.S. LEXIS 1558, ***61; 16 HOW 369 or abolished only by them, is a political axiom upon nature of the power, connected with the manner and which all the American [*396] governments have been purpose of its exercise. What, then, is the taxing power? based, and is expressly asserted in the bill of rights. Such And to what extent, and for what purposes has it been of the sovereign powers with which they were invested, conferred upon the legislature? That it is a power incident as they deem necessary for protecting their rights and to sovereignty -- "a power of vital importance to the very liberties, and securing their independence, they have existence of every government" -- has been as often delegated to governments created by themselves, to be declared as it has been spoken [*397] of. Its importance exercised in such manner and for such purposes as were is not too strongly represented by Alexander Hamilton, in contemplated in the delegation. That these powers can the 30th number of the Federalist, [***64] when he neither be enlarged or diminished by these repositories of says: "Money is with propriety considered as the vital delegated authority, would seem to result, inevitably, principle of the body politic; as that which sustains its life from the fundamental maxim referred to, and to be too and motion, and enables it to perform its most important [***62] plain to need argument or illustration. functions. A complete power, therefore, [**989] to procure a regular and adequate supply of revenue, as far "If they could be enlarged, government might as the resources of the community will permit, may be become absolute; if they could be diminished or regarded as an indispensable ingredient in every abridged, it might be stripped of the attributes constitution. From a deficiency in this particular, one of indispensable to enable it to accomplish the great two evils must ensue; either the people must be subjected purposes for which it was instituted. And, in either event, to continual plunder, as a substitute for a more eligible the constitution would be made, either more or less, than mode of supplying the public wants, or the government it was when it came from the hands of its authors; being must sink into a fatal atrophy, and in a short course of changed and subverted without their action or consent. In time perish." the one event its power for evil might be indefinitely enlarged; while in the other its capacity for good might be "This power is not to be distinguished, in any entirely destroyed; and thus become either an engine of particular material to the present inquiry, from the power oppression, or an instrument of weakness and of eminent domain. Both rest upon the same foundation pusillanimity. -- both involve the taking of private property -- and both, to a limited extent, interfere with the natural right "The government created by the constitution of this guaranteed by the constitution, of acquiring and enjoying State, (Ohio,) although not of enumerated, is yet one of it. But, as this court has already said, in the case referred limited powers. It is true, the grant to the general to, "neither can be classed amongst the independent assembly of legislative authority" is general; but its powers of government, or included in its objects and exercise within that limit is necessarily restrained by the [***65] ends." No government was ever created for the previous grant of certain powers to the federal purpose of taking, taxing, or otherwise interfering with government, and by the express limitations to be found in the private property of its citizens. "But charged with the other parts of the instrument. Outside of that boundary, it accomplishment of great objects necessary to the safety needed no express limitations, for nothing was granted. and prosperity of the people, these rights attach as [***63] Hence this court held, in Cincinnati, incidents to those objects, and become indispensable Wilmington, &c. R.R. v. Clinton Co. 1 Ohio State Rep. means to the attainment of those ends." They can only be 77, that any act passed by the general assembly not called into being to attend the independent powers, and falling fairly within the scope of "legislative authority," can never be exercised without an existing necessity. was as clearly void as though expressly prohibited. So careful was the convention to enforce this principle, and "To sustain this power in the general assembly, to prevent the enlargement of the granted powers by would be to violate all the great principles to which I construction or otherwise, that they expressly declared in have alluded. It would affirm its right to deal in, and art. 8, § 28 -- "To guard against the transgression of the barter away the sovereign right of the State, and thereby, high powers we have delegated, we declare that all in effect, to change the constitution. When the general powers, not hereby delegated, remain with the people." assembly of 1845 convened, it found the State in the When, therefore, the exercise of any power by that body unquestionable possession of the sovereign right of is questioned, its validity must be determined from the taxation, for the accomplishment of its lawful objects, Page 20 57 U.S. 369, *397; 14 L. Ed. 977, **989; 1850 U.S. LEXIS 1558, ***65; 16 HOW 369 extending to 'all the persons and property belonging to court says, -- Power to exempt property, was reserved to the body politic.'" the people; they alone could exempt, by an organic law. That is to say, by an amended constitution. The clause When its successor convened, in 1846, under the mainly relied on declares, "that all powers not delegated, same constitution, and to legislate for the same people, if remain with the [***68] people." Now it must be this defence is available, it found the State shorn of this admitted that this clause has a meaning; and it must also power over fifteen or [***66] twenty millions of be conceded (as I think,) that the Supreme Court of Ohio, property, still within its jurisdiction and protected by its has the uncontrollable right to declare what that meaning laws. This and each succeeding legislature had the same is; and that this court has just as little right to question power to surrender the right, as to any and all other that construction as the Supreme Court of Ohio has to property; until at length the government, deprived of question our construction of the Constitution of United every thing upon which it could operate, to raise the States. means to attain [*398] its necessary ends, by the exercise of its granted powers, would have worked its In my judgment the construction of the court of Ohio own inevitable destruction, beyond all power of remedy, is proper; but if I believed otherwise I should at once either by the legislature or the people. It is no answer to acquiesce. Let us look at the matter fairly and truly as it this to say that confidence must be reposed in the is, and see what a different course on part of this court legislative body, that it will not thus abuse the power. would lead to; nay, what Ohio is bound to do in self-defence and for self-preservation, under the "But, in the language of the court, in McCulloch v. circumstances. Maryland, 4 Wheat. 316, 'is this a case of confidence?'" [*399] In 1845 a general banking law is sought at "For every surrender of the right to tax particular the hands of the legislature, where five dollars in paper property not only tends to paralyze the government, but can be circulated for every dollar in specie in the bank, or involves a direct invasion of the rights of property, of the on deposit, in eastern banks or with brokers. One dollar balance of the community; since the deficiency thus notes are authorized; every county in the State is entitled created must be made up by larger contributions from to a bank, and the large ones to several; the tempting lure them, to meet the public demand." is held out of six per cent. interest on five hundred dollars for every hundred dollars paid in as stock: thus obtaining The foregoing are some of the reasonings of the State a profit [***69] of twenty-four dollars on each hundred court on the consideration here involved. With these dollars actually paid in. That such a bill would have views I concur, and will add some of [***67] my own. advocates enough to pass it through the legislature, all The first is, "That acts of parliament derogatory from the experience attests; and that the slight tax of thirty-six power of subsequent legislatures, are not binding. cents on each hundred dollars' worth of stock, subscribed Because, (as Blackstone says,) the legislature being in and paid, was deemed a privilege, when the existing truth the sovereign power, is always equal, always banks and other property were taxed much higher, is absolute; and it acknowledges no superior on earth, plainly manifest. As was obvious, when the law passed, which the prior legislature must have been if its banks sprang up at once -- some fifty in number having a ordinances could bind a subsequent parliament. And taxable basis last year of about eighteen millions. The upon the same principle Cicero, in his letters to Atticus, elder and safer banks were, of course, driven out, and treats with proper contempt these restraining clauses new organizations sought under the general law, by the which endeavor to tie up the hands of succeeding stockholders. From having constructed large public legislatures. When you repeal the law itself, says he, you works, and made great expenditures, Ohio has become at the same time repeal the prohibitory clause which indebted so as to require a very burdensome [**990] tax guards against repeal." on every species of property; this was imposed by the act of 1851, and on demanding from these institutions their If this is so under the British government, how is it in equal share, the State is told that they were protected by a Ohio? Her Supreme Court holds that the State contract made with the legislature of 1845, to be exempt constitution of 1802 expressly prohibited one legislature from further taxation, and were not bound by the late law, from restraining its successors by the indirect means of and, of course, they were sued in their own courts. The contracts exempting certain property, from taxation. The Page 21 57 U.S. 369, *399; 14 L. Ed. 977, **990; 1850 U.S. LEXIS 1558, ***69; 16 HOW 369 Supreme Court holds that by the express [***70] terms roads and bridges, on compensation being made. of the State constitution no such contract could be made by the legislature of 1845, to tie up the hands of the Where the distinction lies, involving a principle, legislature of 1851. And then the banks come here and between that case and this, I cannot perceive, as every ask our protection against this decision, which declares tax-payer is compensated by the security and comfort the true meaning of the State constitution. It expressly government affords. The political necessities for money guarantees to the people of Ohio the right to assemble, are constant and more stringent in favor of the right of consult, "and instruct their representatives for their taxation; its exercise is required daily to sustain the common good;" and then "to apply to the legislature for a government. But in the essential attributes of sovereignty redress of grievances." It further declares, that all powers the right of eminent domain and the right of taxation are not conferred by that constitution on the legislature are not distinguishable. reserved to the people. Now, of what consequence or If the West River Bridge case be sound constitutional practical value will these attempted securities be if one law (as I think it is) then it must be true that the Supreme legislature can restrain all subsequent ones by contracting Court of Ohio is right in holding that the legislature of away the sovereign power to which instructions could 1845 could not deprive the legislature of 1851 of its apply? sovereign powers or of any part of them. The question, whether the people have reserved this It is insisted, that the case of the State of Ohio v. The right so as to hold it in their own hands, and thereby be Commercial Bank of Cincinnati, 7 Ohio Rep. 125, has enabled to regulate it by instructions to a subsequent held otherwise. This is clearly a mistake. The State in legislature, (or by a new constitution,) is a question that that case raised no question as to the right of one has been directly raised only once, in any State of the legislature to cede the sovereign [***73] power to a Union, so far as I know. In the case of Brewster v. corporation, and tie up the hands of all subsequent Hough, 10 New Hampshire Reports, 139, it [*400] was legislatures: no such constitutional question entered into [***71] raised, and Chief Justice Parker, in delivering the decision; nor is any allusion made to it in the opinion the opinion of the court in a case in all respects like the of the court. It merely construed the acts of assembly, one before us, says, "That it is as essential that the public and held that a contract did exist on the ground that by faith should be preserved inviolate as it is that individual the charter the bank was taxed four per cent.; and grants and contracts should be maintained and enforced. therefore the charter must [*401] be enforced, as this But there is a material difference between the right of a rate of taxation adhered to the charter, and excluded a legislature to grant lands, or corporate powers, or money, higher imposition and a right to grant away the essential attributes of sovereignty or rights of eminent domain. These do not It would be most unfortunate for any court, and seem to furnish the subject-matter of a contract." especially for this one, to hold that a decision affecting a great constitutional consideration, involving the harmony This court sustained the principle announced by the of the Union, (as this case obviously does,) should be Supreme Court of New Hampshire, in the West River concluded by a decision in a case where the constitutional Bridge case. A charter for one hundred years, question was not raised by counsel; and so far from being incorporating a bridge company, had been granted; the considered by the court, was never thought of: such a bridge was built and enjoyed by the company. Then doctrine is altogether inadmissible. And in this another-law was passed authorizing public roads to be connection I will say, that there are two cases decided by laid out, and free bridges to be erected; the this court, (and relied on by the plaintiff in error,) in commissioners appropriated the West River Bridge and regard to which similar remarks apply. The first one is made it free; the Supreme Court of Vermont sustained the that of New Jersey v. Wilson, 7 Cranch, 164. An proceeding on a review of that decision. And this court exchange of lands took place in 1758 between the British held that the first charter was a contract securing the [***74] colony of New Jersey and a small tribe of franchises and property in the bridge to the company; but Indians residing there. The Indians had the land granted [***72] that the first legislature could not cede away the to them by an act of the colonial legislature, which sovereign right to eminent domain, and that the exempted it from taxes. They afterwards sold it, and franchises and property could be taken for the uses of free removed. In 1804, the State legislature taxed these lands Page 22 57 U.S. 369, *401; 14 L. Ed. 977, **990; 1850 U.S. LEXIS 1558, ***74; 16 HOW 369 in the hands of the purchasers; they were proceeded violation of the bill of rights." against for the taxes, and a judgment rendered, declaring the act of 1804 valid. In 1812, the judgment was brought "5th. That taxation upon property within the State, before this court, and the case submitted on the part of the wherever the owners may reside, is not against the bill of plaintiff in error without argument; no one appearing for rights." New Jersey. This court held the British contract with the On these legal propositions the opinion here given Indians binding; and, secondly, that it run with the land sets out by declaring that, "The question, however, which which was exempt from taxation in the hands of the this court is called on to decide, and to which our purchasers. decision will be confined, is -- Are the shareholders in the No question was raised in the Supreme Court of New old and new banks, liable to be taxed under the act of Jersey, nor decided there, or in this court, as to the 1841, on account of the stock which they own in the constitutional question of one legislature having authority banks." to deprive a succeeding one of sovereign power. The The following paragraph is the one relied on as question was not considered, nor does it seen to have adjudging the question, that the taxing power may be been thought of in the State court or here. embodied in a charter and contracted away as private The next case is Gordon's case, 3 Howard, 144. What property, to wit: "Such a contract is a limitation on the questions were there presented on the part of the State of taxing power of the legislature making it, and upon Maryland, does not appear in the report [***75] of the succeeding legislatures, to impose any further tax on the case, but I have turned to them in the record, to see how franchise." they were made in the State courts. They are as follows: "But why, when bought, as it becomes property, may "1st. That at the time of passing the general it not be taxed as land is taxed which has been bought assessment law of 1841, there was no contract [**991] from the State, was repeatedly asked in the course of the existing between the State and the banks, or any of them, argument. The reason is, [***77] that every one buys or the stockholders therein or any of them, by which any land, subject in his own apprehension to the great law of of the banks or stockholders can claim an exemption necessity, that we must contribute from it and all of our from the taxation imposed upon them by the said act of property something to maintain the State.But a franchise 1841." for banking, when bought, the price is paid for the use of the privilege whilst it lasts, and any tax upon it would "2d. That the contract between the State and the old substantially be an addition to the price." banks, if there be any contract, extends only to an exemption from further 'taxes or burdens,' of the As the case came up from the Supreme Court of corporate privileges of banking; [*402] and does not Maryland, this court had power merely to reexamine the exempt the property, either real or personal, of said questions raised in the court below, and decided there. banks, or the individual stockholders therein." All that is asserted in the opinion beyond this is outside of the case of which this court had jurisdiction, and is "3d. That even if the contract should be construed to only so far to be respected as it is sustained by sound exempt the real and personal property of the old banks, reasoning; but its dicta are not binding as authority; and and the property of the stockholders therein, yet such so the Supreme Court of Maryland held in the case of the exemption does not extend to the new banks, or those Mayor, &c. of Baltimore v. The Baltimore and Ohio chartered since 1830, and, moreover that the power of Railroad Company, 6 Gill, 288. revocation, in certain cases in these charters, reserves to the State the power of passing the general assessment The State of Maryland merely asked to have her law." statutes [*403] construed, and if, by their true terms, she had promised to exempt the stockholders of her banks "4th. That the imposition [***76] of a tax of 20 from taxation, then she claimed no tax of them. She took cents upon every one hundred dollars' worth of property, no shelter under constitutional objections, but guardedly upon both the old and new banks, under the said avoided doing so. assessment law, is neither unequal nor oppressive, nor in Page 23 57 U.S. 369, *403; 14 L. Ed. 977, **991; 1850 U.S. LEXIS 1558, ***77; 16 HOW 369 If an expression [***78] of opinion is authority that to conform to the construction they have settled; and the binds, regardless of the case presented, then we are as only objection to conformity [*404] that I suppose could well bound the other way, by another quite equal exist with any one is, that the construction is not settled. authority. In the case of East Hartford v. Hartford Bridge How is the fact? Co. 10 Howard, 535, Mr. Justice Woodbury, delivering the opinion of the court, says: The case of Goszler v. The The refusal of some fifty banks to pay their assessed Corporation of Georgetown, 6 Wheat. 596, 598, "appears portion of the revenue for the year 1851, raised the to settle the principle that a legislative body cannot part question for the first time in the State of Ohio; since then with its powers by any proceeding so as not to be able to the doctrine has been maintained in various cases, continue the exercise of them. It can, and should, supported unanimously by all the judges of the Supreme exercise them again and again, as often as the public Court of that State, in opinions deeply considered, and interests require." . . . . manifesting a high degree of ability in the [**992] judges, as the extract from one of them, above set forth, "Its members are made, by the people, agents or abundantly shows. If the construction of the State trustees for them, on this subject, and can possess no constitution is not settled, it must be owing to the recent authority to sell or grant their power over the trust to date of the decisions. An opinion proceeding on this others." hypothesis will, as I think, involve our judgment now given in great peril hereafter; for if the court of Ohio do The Hartford case was brought here from the not recede, but firmly adhere to their construction until Supreme Court of Connecticut, by writ of error, on the the decisions, now existing, gain maturity and strength by ground that East Hartford held a ferry right secured by a time, and the support of other adjudications conforming legislative act that was a private contract. But this court to them, then it must of necessity occur that this court held, among other things that, by a true construction of will be [***81] eventually compelled to hold that the the State laws, no such contract existed; so that this case construction is settled in Ohio; when it must be followed cannot be relied on as binding authority more than to avoid conflict between the judicial powers of that State Gordon's case. If fair reasoning [***79] and clearness of and the Union, an evil that prudence forbids. statement are to give any advantage, then the Hartford case has that advantage over Gordon's case. 1. The result of the foregoing opinion is, that the sixtieth section of the general banking law of 1845 is, in It is next insisted that the State legislatures have in its terms, no contract professing to bind the Legislature of many instances, and constantly, discriminated among the Ohio not to change the mode and amount of taxation on objects of taxation; and have taxed and exempted the banks organized under this law; and for this according to their discretion. This is most true. But the conclusion I rely on the reasons stated by my brother matter under discussion is aside from the exercise of this Campbell, in his opinion, with which I concur. undeniable power in the legislature. The question is whether one legislature can, by contract, vest the 2. That, according to the constitutions of all the sovereign power of a right to tax, in a corporation as a States of this Union, and even of the British Parliament, franchise, and withhold the same power that legislature the sovereign political power is not the subject of contract had to tax, from all future ones? Can it pass an so as to be vested in an irrepealable charter of irrepealable law of exemption? incorporation, and taken away from, and placed beyond the reach of, future legislatures; that the taxing power is a General principles, however, have little application political power of the highest class, and each successive to the real question before us, which is this: Has the legislature having vested in it, unimpaired, all the constitution of Ohio withheld from the legislature the political powers previous legislatures had, is authorized authority to grant, by contract with individuals, the to impose taxes on all property in the State that its sovereign power; and are we bound to hold her constitution does not exempt. constitution to mean as here Supreme Court has construed it to mean? If the decisions in Ohio have settled It is undeniably true that [***82] one legislature the question in the affirmative that the sovereign political may by a charter of incorporation exempt from taxation power is not the subject of an irrepealable contract, then the property of the corporation in part, or in whole, and few will be [***80] so bold as to deny that it is our duty with or without consideration; but this exemption will Page 24 57 U.S. 369, *404; 14 L. Ed. 977, **992; 1850 U.S. LEXIS 1558, ***82; 16 HOW 369 only last until the necessities of the State require its and other banking companies of that State," adopted modification or repeal. February, 1845. 3. But if I am mistaken in both these conclusions, The section provides, that every banking company then, I am of opinion that, by the express provisions of organized by the act, or complying with its provisions, the constitution of Ohio, of 1802, the legislature of that shall semiannually, at designated days, set off to the State had withheld [*405] from its powers the authority State, six per cent. of the net profits for the six months to tie up the hands of subsequent legislatures in the next preceding, "which sum or amount so set off shall be exercise of the powers of taxation, and this opinion rests in lieu of all taxes to which such company, or the on judicial authority that this court is bound to follow; the stockholders thereof, on account of stock owned therein, Supreme Court of Ohio having held by various solemn would otherwise be subject;" and the cashier was and unanimous decisions, that the political power of required to report the amount to the auditor and to pay it taxation was one of those reserved rights intended to be to the treasurer; but in computing the profits of the delegated by the people to each successive legislature, company for the purposes [*406] aforesaid, the interest and to be exercised alike by every legislature according received on the certificates of the funded debt held by the to the instructions of the people. This being the true company, or deposited with and transferred to the meaning of the nineteenth and twenty-eighth sections of treasurer of the State, or to the board of control by such the bill of rights, forming part of the constitution of 1802; company, shall not be taken into the account." I have one section securing the right of instructing extracted the last clause merely because it forms a part of representatives, and the other protecting [***83] the section. reserved rights held by the people. It is not usual for governments to levy taxes upon the Whether this construction given to the State certificates of their funded debt, and Ohio had, in an early constitution is the proper one, is not a subject of inquiry statute, forbidden taxation of hers. This clause was a in this court; it belongs exclusively to the State courts, cumulative precaution, wholly unnecessary. Swan Stat. and can no more be questioned by us than State courts [***85] 747, § 5. and judges can question our construction of the Constitution of the United States. For these reasons I am The case lies in the solution of the question whether of opinion that the judgment of the Supreme Court of the clause directing the banks to set apart semiannually, Ohio should be affirmed. upon the profits for the six months preceding, six per cent. in lieu of all other taxes to which the company or Mr. Justice DANIEL. the stockholders would otherwise be subject on account of the stock, institutes an unalterable rule of taxation for In the views so clearly taken by my brother the whole time of the corporate existence of these banks? Campbell of the character of the legislation of Ohio, The General Assembly of Ohio thinks otherwise, and has impeached by the decision of the court, I entirely imposed a tax upon the stock of the banks, corresponding coincide. I will add to the objections he has so well with the taxes levied upon other personal property held in urged to the jurisdiction of this court, another, which to the State. The payment of this tax has been resisted by my mind at least is satisfactory; it is this, that one of the the banks. The Supreme Court of Ohio, by its judgment, parties to this controversy being a corporation created by affirms the validity of the act of the general assembly, a State, this court can take no cognizance, by the and has condemned the bank to the payment. This constitution, of the acts, or rights, or pretensions of that judgment is the matter of consideration. corporation. The section of the act above cited furnishes a rule of Mr. Justice CAMPBELL. taxation, and while it remains in [**993] force a compliance with it relieves the banks from all other taxes I dissent from the opinion of the court. to which they would otherwise be subject. Such is the letter of the section. The question disclosed by the record, is contained in the sixtieth section of an act of the General Assembly of The question is, has the State of Ohio inhibited Ohio, "to incorporate the State Bank of Ohio [***84] herself from adopting any other rule of taxation either for Page 25 57 U.S. 369, *406; 14 L. Ed. 977, **993; 1850 U.S. LEXIS 1558, ***86; 16 HOW 369 [***86] amount or mode of collection, while these banks the State to the support of its government. The duty of all continue in existence? It is not asserted that such a to make such a contribution in the form of an equal and prohibition has been imposed by the express language of apportioned taxation, is a consequence of the social the section. The term for which this rule of taxation is to organization. The right to enforce it is a sovereign right, continue is not plainly declared. The amounts paid stronger than any proprietary claim to property. The according to it discharge the taxes for the antecedent six amount to be taken, the mode of collection, and the months. Protection is given in advance of exaction. duration of any particular assessment or form of collection, are questions of administration submitted to The clause in the section, that this "sum or amount, the discretion of the legislative authority; and variations so set off, shall be in lieu of all taxes to which such must frequently occur, according to the mutable company or the stockholders thereof would otherwise to conditions, circumstances, or policy of the State. These subject," requires an addition to ascertain the duration of conditions are regulated for the time, in the sixtieth the rule. It may be completed in adding, "by the existing section of this act. That section comes from the law laws for the taxation of banks," or "till otherwise maker, who ordains that the officers of certain banking provided by law," or at "the date of such apportionment corporations, at stated periods, shall set apart from their or dividend." Or, following the argument of the banks, in property a designated sum as their share of the public adding, "during the existence of the banks." Whether we burden, in lieu of other sums or modes of payment to shall select from the one series of expressions, leading to which they would be subject; but there is no promise that one result, or the expression leading to another altogether the same authority may not, as it clearly had a right to different, depends upon the rules of interpretation [***89] do, apportion a different rate of contribution. I applicable to the subject. will not say that a contract may not be contained in a law, but the practice is not to be encouraged, and courts [*407] The first inquiries are of the relations of the discourage the interpretation which discovers them. A parties to the supposed contract to its subject-matter, common informer sues for a penalty, or a revenue officer [***87] and the form in which it has been concluded. makes a seizure under a promise that on conviction the The sixtieth section of the act of 1845, was adopted by recovery shall be shared, and yet the State [*408] the General Assembly of Ohio in the exercise of discharges the forfeiture, or prevents the recovery by a legislative powers, as a part its public law. The powers repeal of the law, violating thereby no vested right nor of that assembly in general, and that of taxation impairing the obligation of any contract. 5 Cranch, 281; especially, are trust powers, held by them as magistrates, 10 Wheat. 246; 6 Pet. 404. in deposit, to be returned, after a short period, to their constituents without abuse or diminution. A captor may be deprived of his share of prize-money, pensioners of their promised bounty, at any The nature of the legislative authority is inconsistent time before their payment. 2 Russ. & M. 35. with an inflexible stationary system of administration. Its office is one of vigilance over the varying wants and Salaries may be reduced, offices having a definite changing elements of the association, to the end of tenure, though filled, amy be abolished, faculties may be ameliorating its condition. Every general assembly is withdrawn, the inducements to vest capital impaired and organized with the charge of the legislative powers of the defeated by the varying legislation of a State, without State; each is placed under the same guidance, impairing constitutional obligation. 8 How. 163; 10 Ib. experience, and observation; and all are forbidden to 395; 3 Ib. 534; 8 Pet. 88; 2 Sanf. S.C.R. 355. The whole impress finally and irrevocably their ideas or policy upon society is under the dominion of law, and acts, which the political body. Each, with the aid of an experience, seem independent of its authority, rest upon its toleration. liberal and enlightened, is bound to maintain the State in The multifarious [***90] interests of a civilized State the command of all the resources and faculties necessary must be continually subject to the legislative control. to a full and unshackled self-government. No implication General regulations, affecting the public order, or can be favored which convicts a legislature of a departure extending to the administrative arrangements of the State, [***88] from this law of its being. must overrule individual hopes and calculations, though they may have originated in its legislation. It is only The subject-matter of this section is the contributive when rights have vested under laws that the citizen can share of an important element of the productive capital of Page 26 57 U.S. 369, *408; 14 L. Ed. 977, **993; 1850 U.S. LEXIS 1558, ***90; 16 HOW 369 claim a protection to them as property. Rights do not cases affirm, "that the sovereignty of the State extends to vest until all the conditions of the law have been fulfilled every thing which exists by its authority, or is introduced with exactitude during its continuance, or a direct by its permission, and all on subjects of taxation." 2 Pet. engagement has been made, limiting legislative power 449; 9 Wheat. 738; 4 Ib. 316. over and producing an obligation. In this case it may be conceded that at the end of every six months the payment The limitations imposed by the court in these cases then taken is a discharge for all antecedent liabilities for excited a deep and pervading discontent, and must have taxes. That there could be no retrospective legislation. directed the court to a profound consideration of the But beyond this the concessions of the section do not question in its various relations. The case of the extend. Providence Bank v. Billings, 4 Pet. 514, enabled the court to give a practical illustration of sincerity with which the A plain distinction exists between the statutes which principle I have quoted was declared. A bank, existing create hopes, expectations, faculties, conditions, and by the authority of a State legislature, claimed an those which form contracts. There banks might fairly immunity from taxation [***93] against the authority of hope that without a change in the necessities of the State, its creator. their quota of taxes would not be increased; and that while payment was punctually made the [***91] form of The court then said "however absolute the right of an collection would not be altered. But the general assembly individual (to property) may be, it is still in the nature of represents a sovereign, and as such designated this rule of that right, that it must bear a portion of the public taxation upon existing considerations of policy, without burdens, and that portion is determined by the annexing restraints on its will, or abdicating [**994] its legislature." The court declared that the relinquishment of prerogative, and consequently was free to modify, alter, the power of taxation is never to be assumed. "The or repeal the entire disposition. community has a right to insist that its abandonment ought not to be presumed in a case in which the I have thus far considered the sixtieth section of the deliberate purpose of the State to abandon it does not act as a distinct act, embodying a State regulation with plainly appear." the view of ascertaining its precise limitations. There principles were reaffirmed, their sphere I shall, however, examine the general scheme and enlarged, and their authority placed upon broad and solid object of the act, of which it forms a part, to ascertain foundations of constitutional law and general policy, in whether a different signification can be given to it. the opinion of this court, in the case of the Charles River Before doing so, it is a matter of consequence to ascertain Bridge, 11 Pet. 420. No opinion of the court more fully on what principles the inquiry must be conducted. satisfied the legal judgment of the country, and consequently none has exercised more influence upon its [*409] Three cases occurred in this court, before legislation. The Supreme Court of Pennsylvania, either of the members who now compose it belonged to speaking of these cases, says, "they are binding on the it, in which taxation acts of the States or its municipal State courts not merely as precedents, and therefore authorities, involving questions of great feeling and proving what the law is, but as the deliberate judgment of interest, were pronounced invalid. In the last of these the that tribunal [*410] with whom the final decision of court said, "that in a society like ours, with one supreme [***94] all such questions rests. The State courts have government for national purposes, and numerous State almost universally followed them. But no tribunal of the governments for other purposes, [***92] in many Union has acceded to the rule they lay down with a more respects independent and in the uncontrolled exercise of earnest appreciation of its justice than did this court." 7 many important powers, occasional interferences ought Har. 144; 10 Barr, 142. not to surprise us. The power of taxation is one of the most essential to a State, and one of the most extensive in The Supreme Court of Georgia says, "the decision, its operation. The attempt to maintain a rule which shall based as it is upon a subject particularly within the limit its exercise is undoubtedly among the most delicate cognizance and jurisdiction of the Supreme Court of the and difficult duties which can devolve on those whose United States, is entitled to the highest deference." And province it is to expound the supreme law of the land, in the eminent Chief Justice of that court adds, "that the its application to individuals." The court in each of these proposition it establishes commands my entire assent and Page 27 57 U.S. 369, *410; 14 L. Ed. 977, **994; 1850 U.S. LEXIS 1558, ***94; 16 HOW 369 approbation." 9 Georgia Rep. 517; 10 N.H. 138; 17 Conn. what had once got into the crown should [**995] have 454; 21 Verm. 590; 21 Ohio, (McCook's Rep.) 564; 9 been forever separated from private possession. For then Ala. 235; 9 Rob. 324; 4 Coms. 419; 6 Gill, 288. by forfeitures and attaintures he must have become lord of the whole soil in a long course of time. The The chief justice, delivering the opinion of this court constitution, therefore, seems to have left him free in this in that case, quotes with approbation the principle, that matter; but upon this tacit trust, (as he has all his other the abandonment of the power of taxation ought not to be power,) that he shall do nothing which may tend to the presumed in a case in which the deliberate purpose to do destruction of his subjects. However, [***97] though he so did not appear, and says, "The continued existence of a be thus trusted, it is only as head of the commonwealth; government would be of no great value, if, by and the people of England have in no age been wanting to implications and presumption, it was disarmed of the put in their claim to that to which they conceived powers necessary to accomplish the ends of it creation, themselves to have a remaining interest; which claims are and the functions it [***95] was designed to perform the acts of resumption that from time to time have been transferred to the hands of privileged corporations. The made in parliament, when such gifts and grants were rule of construction announced by the court was not made as become burdensome and hurtful to the people. confined to the taxing power; nor is it so limited in the Nor can any government or State divest itself of the opinion delivered. On the contrary it was distinctly means of its own preservation; and if our kings should placed on the ground that the interests of the community have had an unlimited power of giving away their whole were concerned in preserving, undiminished the power in revenue, and if no authority could have revoked such question; and whenever any power of the State is said to gifts, every profuse prince, of which we have had many be surrendered or diminished, whether it be the taxing in this kingdom, would have ruined his successor, and the power or any other affecting the public interest, the same people must have been destroyed with new and repeated principle applies, and the rule of construction must be the taxes; for by our duty we are likewise to support the next same." prince. So that if no authority could look into this, a nation must be utterly undone without any way of The court only declared those principles for which redressing itself, which is against the nature and essence the commons of England had struggled for centuries, and of any free establishment. which were only established by magnanimous and heroic efforts. The rules that public grants convey nothing by Our constitution, therefore, seems to have been, that implication, are construed strictly in favor of the the king always might make grants, and that these grants, sovereign, do not pass any thing not described nor if passed according to the forms prescribed by the law, referred to, and when the thing granted is described were [***98] valid and pleadable, against not only him, nothing else passes; that general words shall never be so but his successors. However, it is likewise manifest that construed as to deprive him of a greater amount of the legislative power has had an uncontested right to look revenue than he intended to grant, were not the inventions into those grants, and to make them void whenever they of the craft of crown lawyers, but were established in were thought exorbitant." contests [***96] with crown favorites and impressed upon the administration, executive and judicial as checks Nor were they careless or indifferent to for the people. The invention of crown lawyers was precautionary measures for the preservation of the employed about such phrases, as ex speciali gratia, certa revenues of the State from spoliation or waste. Official scientia mero motu, and non obstante, to undermine the responsibility was established, and the Lords High strength of such rules, and to enervate the force of Treasurer and Chancellor, through whose offices the wholesome statutes. A writer of the seventeenth century grants were to pass, were severally sworn "that they says, "from the time of William [*411] Rufus, our kings would neither know nor suffer the king's hurt, nor his have thought they might alienate and dispose of the disinheriting, nor that the rights of his crown be crown lands at will and pleasure; and in all ages, not only distressed by any means as far forth as ye may let; and if charters of liberty, but likewise letters-patent for lands ye may not let it, ye shall make knowledge thereof clearly and manors, have actually passed in every reign. Nor and explicitly to the king with your true advice and would it have been convenient that the prince's hands counsel." should have been absolutely bound up by any law, or that Page 28 57 U.S. 369, *411; 14 L. Ed. 977, **995; 1850 U.S. LEXIS 1558, ***98; 16 HOW 369 [*412] The responsibility of these high officers, as cases, control the decision of this, if applied to this act. the history of England abundantly shows, was something Indeed, the argument of the plaintiff rests upon rules more than nominal; nor did the frequent enforcement of created for, and adapted to, a class of statutes entirely that rule of responsibility, nor the adoption by the judges dissimilar. We were invited to consider the antecedent of the stringent rules I have cited, protect the revenues of legislation [***101] of Ohio, in reference to its [*413] the State from spoliation. "The wickedness of men," banks, the discouraging effects of that legislation, and continues this writer, [***99] "was either too cunning or then to deal with this act, as a medicinal and curative too powerful for the wisdom of laws in being. And from measure; as an act recognizing past error, and correcting time to time great men, ministers, minions, favorites, for the future the consequences. It is proper to employ have broken down the fences contrived and settled in our this argument to its just limit. The legislation of Ohio constitution. They have made a prey of the since 1825 certainly manifests a distinct purpose of the commonwealth, plumed the prince, and converted to their State to maintain its powers over these corporations, in own use what was intended for the service and the matter of taxation, unimpaired. With a very few preservation of the State. That to obviate this mischief, exceptions this appears in all the statutes. It is seen in the the legislative authority has interposed with inquiries, act of 1825, in the charters granted in 1834, in the acts of accusations, and impeachments, till at last such 1841-2-3, the two last being acts embracing the whole dangerous heads were reached." Davenant's Dis. passim. subject-matter of banking. It is said this austerity was the source of great mischief, depreciated the paper currency Nor let it be said that this history contains no lessons of the State, and occasioned distress to the people, and nor instructions suitable to our condition. The that the change apparent in the act of 1845 was the discussions before this court in the Indiana Railroad and consequence. the Baltimore Railroad cases exposed to us the sly and stealthy arts to which State legislatures are exposed, and The existence of a consistent and uniform purpose the greedy appetites of adventurers, for monopolies and for a long period is admitted. The abandonment of such a immunities from the State right of government. We purpose, and one so in harmony with sound principles of cannot close our eyes to their insidious efforts to ignore legislation, cannot be presumed. If the application of the fundamental laws and institutions of the States, and to these principles in Ohio was productive of mischief, we subject the highest popular interests to their central should have [***102] looked for an explicit [**996] boards of control and directors' management. and unequivocal disclaimer. We have seen that the act contains no renunciation of this important power. And it This is not the time for the relaxation [***100] of may be fairly questioned whether th people of Ohio those time-honored maxims, under the rule of which free would have sanctioned such a measure. I know of no institutions have acquired their reality, and liberty and principle which enables me to treat the sixtieth section of property their most stable guaranties. The Supreme this act as a remedial statute. Even the dissenting Court of Pennsylvania says, with great force, "that if acts opinions in the Charles River and Louisa Railroad cases, of incorporation are to be so construed as to make them which have formed the repertory from which the imply grants of privileges, immunities, and exemptions, arguments of the plaintiffs have been derived, do not in which are not expressly given, every company of terms declare such a rule, and the opinions delivered by adventurers may carry what they wish, without letting the the authority of the court repel such a conclusion. Nor legislature know their designs. Charters would be framed can I consider the decision in 7 Ohio R. 125 of in doubtful or ambiguous language, on purpose to consequence in this discussion. That case was decided deceive those who grant them; and laws, which seem upon a form of doctrine which after the judgments of this perfectly harmless on their face, and which plain men court, before cited, had no title to any place in the legal would suppose to mean no more than what they say, judgment of the country. The case was decided in might be converted into engines of infinite mischief. advance of the most important and authoritative of those There is no safety to the public interest except in the rule decisions. It is not surprising to hear that the judges who which declares that the privileges not expressly granted gave the judgment, afterwards renounced its principle, or are withheld." 7 Harris, 144. that another State court has disapproved it, (7 Harris, 144,) or that it has not been followed in kindred cases, 11 The principles of interpretation, contained in these [***103] Ohio, 12, 393; 19 Ib. 110; 21 Ib. (McCook,) Page 29 57 U.S. 369, *413; 14 L. Ed. 977, **996; 1850 U.S. LEXIS 1558, ***103; 16 HOW 369 563, 604, 626; and at the first time when it came up for grow by subsequent events; there are sections which revision it was overruled. convey present rights, or from which rights may possibly arise in the form of a contract; there are others which It remains for me to consider the act of 1845, its enter into the general system of administration, affect the purpose and details, in connection with the sixtieth public order, and tend to promote the common security. section of the act, to ascertain whether it is proper to Some of these provisions may be dispensed with by those assume that the State has relinquished its rights of for whose exclusive benefit they were made. Some may taxation over the banking capital of the State. be altered, modified, or repealed, to meet other conditions of the public interest, and some perhaps may not be The act of 1845 was designed to enable any number, alterable except with the consent of the corporators not [*414] fewer than five persons, to form associations themselves. To determine the class to which one to carry on the business of banking. enactment or another belongs, we are referred to those general principles I have already considered. In this act, The legislature determined the whole amount of the [*415] of seventy-five sections, which organizes a vast capital which should be employed under the act -- that it machinery for private banking, which directs the delicate should be distributed over the State, according to a and complex arrangements for the supply of a paper specified measure of apportionment; that the bills to currency to the State, and determines the investment of circulate as currency should have certain marks of millions of capital, we find this sixtieth section. The act uniformity, and be in a certain proportion to capital and is enabling and permissive. It makes it lawful for persons specie on hand, and that a collateral security should be [***106] to combine and to conduct business in a given for their redemption. The act contains measures for particular manner. It forms no partnership for the State, organization, relating to subscriptions for stock, the compels no one to embrace or to continue the application appointment of officers and boards of management; of industry and capital according to its scheme. It grants sections, of a general interest, referring to the frauds of licenses under certain conditions and reservations, but is officers, the insolvency of the corporations, [***104] nowhere coercive. Among the general regulations is the their misdirection and forfeiture; sections containing one which directs the banks at the end of every six explicit and clear statements of corporate right and months to ascertain their net profits for the six months privilege, the capacities they can exercise, the functions next preceding and to set apart six per cent. for. the State they are to perform, and the term of their existence. in the place of the other taxes or contributions to which The act initiates a system of banking of which any they would be liable. But the legislature imposes no limit five of its citizens may avail, and which provides for the to its power, nor term to the exercise of its will, nor binds confederacy of these associations under the general title itself to adhere to this or any other rule of taxation. of the State Bank of Ohio, and its branches, and their The subject affects the public order and general subjection to a board of control, appointed by them. administration. It is not properly a matter for bargain or More than fifty banks have been formed under this barter; but the enactment is in the exercise of a sovereign act, and thirty-nine belong to the confederacy. Some of power, comprehending within its scope every individual the banks over whose charters the State has reserved a interest in the State. It is a power which every plenary control, are by the act permitted to join it. It is department of government knows that the community is said "that the whole of this act is to be taken; the purpose interested in retaining unimparied, and that every of the act and the time of the act. It is a unit." It will not corporator understood its abandonment ought not to be be contended that the fifty-first section of this act, by presumed in a case in which the [***107] deliberate which this multitude of banking companies are adjudged purpose to abandon it does not appear." to be corporations, with succession for twenty years, I have sought in vain in the sixtieth section of the act, places every other relation established by the act, beyond in the act itself, and in the legislation and jurisprudence the legislative domain for the same period of time. For of Ohio, for the expression of such a deliberate purpose. there are in the act measures designed for organization and arrangement [***105] for the convenience and My opinion is that the Supreme Court of Ohio has benefit of the corporators only; there are concessions faithfully applied the lessons inculcated by this court, and creating hopes and expectations out of which rights may Page 30 57 U.S. 369, *415; 14 L. Ed. 977, **996; 1850 U.S. LEXIS 1558, ***107; 16 HOW 369 that its judgment should be affirmed. Page 1 STATE HIGHWAY DEPARTMENT OF TEXAS ET AL, V. W. E. GORHAM. No. 7963 SUPREME COURT OF TEXAS 139 Tex. 361; 162 S.W.2d 934; 1942 Tex. LEXIS 243 May 27, 1942 SUBSEQUENT HISTORY: [***1] Rehearing compensation benefits to respondent state highway overruled June 24, 1942 department employee, pursuant to Tex. Rev. Civ. Stat. art 6674s. The district court had reversed a decision by an PRIOR HISTORY: Error to the Court of Civil administrative board, which had denied benefits to the Appeals for the Tenth District, in an appeal from employee. McLennan County. OVERVIEW: The employee was injured by equipment W. E. Gorham, having obtained permission by similar to a circular saw, which seriously cut and injured reason of a legislative act, brought this suit against the his leg, resulting in a permanent incapacity to work. The State Highway Department of Texas to recover Department asserted that he was not entitled to benefits workmen's compensation for injuries received by him because Tex. Rev. Civ. Stat. art 6674s (1937), which while in the employ of the department, when an provided for compensation for Department employees, instrument similar to a circular saw, which he was using was not in effect on the date of his injury in December and which he alleged was defective seriously cut and 1937. On appeal, the court agreed with the Department, injured his leg near the ankle joint, resulting in a holding that the language of the statute was clear and permanent incapacity to work. Plaintiff had previously unambiguous. The workmen's compensation insurance filed his claim with the Industrial Accident Board and became effective on the date stated in the notice sent by same was denied. A judgment awarding plaintiff a lump the Department to the Industrial Accident Board , as sum recovery for $3,591.70 was affirmed by the Court of required by the statute, which was January 1, 1938. The Civil Appeals, 158 S.W. (2d) 330, and the State Highway State and the Department were not liable for injuries Department has brought error to the Supreme Court. sustained by employees prior to that time. The court held that a bill passed by the legislature, which provided that Judgments of both courts are reversed and judgment all rights and privileges of the statute were to be applied is here rendered in favor of the Highway Department. to this individual employee as if the statute had been effective on the date of his injury was unconstitutional CASE SUMMARY: and without effect. It violated the constitutional inhibition against the enactment of local or special laws set forth in PROCEDURAL POSTURE: Petitioners, the Texas Tex. Const. art. III, § 56. State Highway Department and the State, sought review of the order of the Court of Civil Appeals, Texas, which OUTCOME: The court reversed the judgment of the affirmed a district court's judgment granting workmen's lower courts and entered judgment in favor of the Page 2 139 Tex. 361, *; 162 S.W.2d 934, **; 1942 Tex. LEXIS 243, ***1 Department. Governments > Legislation > Interpretation [HN5] While interpretations and construction by the CORE TERMS: notice, payroll, special law, Texas Legislature of its Acts at the same or succeeding compensation insurance, general law, prescribe, violative, sessions are persuasive on a reviewing court in the notified, work performed, number of employees, interpretation of statutes, they are not controlling. estimated amount, physical examinations, annual, workmen's compensation, particular case, permission, deprived, effect prior, reasonable time, appropriation, Governments > Legislation > Effect & Operation > approximate, promulgate, convenient, physically, Operability designate, furnish, certify, notify Governments > State & Territorial Governments > Employees & Officials LexisNexis(R) Headnotes Workers' Compensation & SSDI > Administrative Proceedings > Awards > General Overview [HN6] The date upon which workmen's compensation insurance became effective and available to the employees of the Texas State Highway Department is the Governments > Legislation > Effect & Operation > date stated in the notice, required by the statute, which Operability was sent by the Department to the Industrial Accident Governments > State & Territorial Governments > Board, -- to wit, January 1, 1938, at 12:01 A.M.; and the Employees & Officials State and the Department are not liable, under the general Workers' Compensation & SSDI > Administrative law, for injuries sustained prior to that time. Proceedings > Awards > General Overview [HN1] See Tex. Rev. Civ. Stat. art 6674s, § 3 (1937). Constitutional Law > Bill of Rights > General Overview Governments > Legislation > Enactment Governments > Legislation > Interpretation [HN7] Tex. Const. art. III, § 36 forbids the amendment of [HN2] Where a statute is plain and unambiguous, it will a law without its being "re-enacted and published at be enforced according to its wording. It is the duty of an length." appellate court to examine the entire act, and to construe it as a whole. The statute should be given a fair review, in order to accomplish the legislative intent and pursuable Constitutional Law > Bill of Rights > General Overview construction, considering the language and the subject Constitutional Law > Equal Protection > Scope of pose. Protection [HN8] Section 3 of the Texas Bill of Rights provides that all men shall have equal rights. Governments > Legislation > Interpretation [HN3] A statute will not be construed so as to ascribe to the legislature an intention of doing an unjust thing by its Constitutional Law > Equal Protection > Scope of enactment, or of causing confusion thereby, if the statute Protection is reasonably susceptible of a construction showing the Governments > Legislation > Enactment legislature's intention to have been otherwise. [HN9] Tex. Const. art. III, § 56 provides that no local or special law shall be enacted where a general law can be made applicable. Governments > Legislation > Effect & Operation > Operability COUNSEL: Gerald C. Mann, Attorney General, Wm. J. Governments > Legislation > Enactment Fanning, Ardell Williams, Wm. J. R. King and Geo. W. Governments > Legislation > Interpretation Barcus, Assistants Attorney General, for petitioners. [HN4] Where an act is complete in and of itself, it is fairly within the scope of the legislative power to It was error for the court to hold that plaintiff proved prescribe that it shall become operative on the happening [***2] a good cause for not filing his claim with the of some specific contingency or future event. Industrial Accident Board within six months; and that there were no such conflicts in the findings of the jury as Page 3 139 Tex. 361, *; 162 S.W.2d 934, **; 1942 Tex. LEXIS 243, ***2 to require a reversal of the judgment of the trial court. [*364] "Sec. 3. [HN1] After the effective date of this Scott v. Texas Emp. Ins. Assn., 118 S.W. (2d) 354; law any employee * * *, who sustains an injury in the Casualty Reciprocal Exch. v. Richardson, 86 S.W. (2d) course of his employment shall be paid compensation as 838; Traders & Gen. Ins. Co. v. Wood, 103 S.W. (2d) hereinafter provided. 1058. "The Department is hereby authorized to be self Witt, Terrell, Lincoln, Jones & Riley, of Waco, for insuring and is charged with the administration [***4] respondent. of this law. The Department shall notify the Board of the effective date of such insurance, stating in such notice the OPINION BY: SHARP nature of the work performed by the employees of the Department, the approximate number of employees, and OPINION the estimated amount of the payroll. [**935] [*363] MR. JUSTICE SHARP delivered "The Department shall give notice to all employees the opinion of the Court. that, effective at the time stated in such notice, the Department has provided for payment of insurance." W. E. Gorham, having obtained legislative consent, (Italics ours.) brought this suit under Article 6674s, Vernon's Annotated Civil Statutes, against the State Highway Department of The Act further provides that the Department is Texas, referred to as the Department, and The State of authorized to promulgate and publish rules and Texas, to recover workmen's compensation for injuries regulations, and to prescribe and furnish such forms as sustained while in the employ of the Department. A may be necessary. It is required to designate a recovery was denied by the Industrial Accident Board, convenient number of physicians and surgeons [**936] referred to as the Board, and Gorham appealed. Upon to make physical examinations of all persons in the trial in the district court, the jury found that he was totally employ of the Department, and to determine those who and permanently disabled as the result of an accidental are physically fit to be classified as employees. injury received on December 7, 1937, in the course of his employment for the Department. The trial [***3] court There is a further provision that no person shall be thereupon awarded Gorham a lump sum recovery of certified as an "employee" unless and until he has $3,591.70. The judgment was affirmed by the Court of submitted himself to a physical examination and is found Civil Appeals. 158 S.W. (2d) 330. This Court granted a to be physically fit for the duties to which he is assigned; writ of error. but it is further provided that failure to be examined shall not bar a recovery. The principal question is whether the insurance coverage contemplated by the law providing for The Act authorizes the Department to set [***5] compensation insurance for employees of the Highway aside from its available appropriations an amount, not to Department was in effect on December 7, 1937, the date exceed 3 1/2% of the annual labor payroll of the on which Gorham was injured. For a determination of Department, for the payment of all costs, administrative this matter the Act itself, Article 6674s, Vernon's expense, charges, benefits, and awards authorized by this Annotated Civil Statutes, must be construed. law. The Department is charged with the duty of keeping a record of all injuries sustained by its employees and of This Act was passed on June 11, 1937, and was making a report thereof to the Board. signed by the Governor on the same day. It carried the emergency clause, and provided that it should take effect On December 21, 1937, the Department notified the immediately after its passage. The Act, therefore, Board that, "Workmen's Compensation insurance for unquestionably became a law on June 11, 1937. The certain employees of the Highway Department, as question then remains as to when the insurance provided in said Statute, will become effective at 12:01 provisions in the Act became effective. A.M., January 1, 1938. The nature of the work performed by employees of the Highway Department is The Act provides in part as follows: Highway Construction and Maintenance, and all work incidental thereto. The appropriate number of [*365] Page 4 139 Tex. 361, *365; 162 S.W.2d 934, **936; 1942 Tex. LEXIS 243, ***5 such employees is seven thousand (7,000). The estimated work performed by the employees, the [*366] amount of annual payroll is Nine Million Dollars approximate number of employees, and the estimated ($9,000,000.00)." amount of the payroll. The Legislature must have contemplated that it would take a reasonable time to put The Industrial Accident Board certified that the this program in operation. Therefore the following Department became a subscriber as outlined under the provisions of the Act appear to be controlling as to the Workmen's Compensation Law on January 1, 1938, at meaning of the "effective date" upon which the insurance 12:01 A.M. should go [***8] in operation: On May 26, 1939, the Legislature passed House Bill "The Department shall notify the Board of the No. 1047, being Chapter 1, page 950, Special Laws of the effective date of such insurance. * * * The Department 46th Legislature, [***6] granting Gorham permission to shall give notice to all employees that, effective at the sue for compensation on account of the alleged injuries time stated in the notice, the Department has provided for and on account of the failure of the Department to payment of insurance." (Italics ours.) provide compensation insurance within a reasonable time; and it was provided that any judgment so recovered [HN3] A statute will not be construed so as to should be paid out of the funds of the Department set ascribe to the Legislature an intention of doing an unjust aside for injuries to its employees. The bill reserved to thing by its enactment, or of causing confusion thereby, if the Department all defenses available to it under Article the statute is reasonably susceptible of a construction 6674s, "except its failure to have compensation insurance showing the Legislature's intention to have been and to comply with the law relevant thereto and to certify otherwise. Anderson v. Penix, 138 Texas 596, 161 S.W. said Gorham as an employee, and except the Statute of (2d) 455; Trimmier v. Carlton, 116 Texas 572, 296 S.W. Limitations. It being the purpose of this act to make 1070; Winder v. King (Com. App.), 1 S.W. (2d) 587; 39 available to the said W. E. Gorham, all rights and Tex. Jur. 174. privileges of Article 6674s as if the Highway Commission had put said Act into effect prior to December 7, 1937." We believe, when we read the Act as a whole, that it (Italics ours.) was the intention of the Legislature [**937] to leave it to the Department to set up the rules, regulations, and It is a settled rule that [HN2] where a statute is plain machinery necessary to put in operation the method of and unambiguous, it will be enforced according to its paying compensation to employees for injuries sustained wording. It is the duty of the Court to examine the entire while in the employ of the Department; and that such Act, and to construe it as a whole. The statute should be insurance could not take effect until the Department had given a fair and reamatter, in order to accomplish the inaugurated the system and notified the Industrial legislative intent and pursonable construction, Accident Board of the effective date [***9] of such considering the language and the subject pose. [***7] insurance. In any event, there are no pleadings in this 39 Tex. Jur., p. 166 et seq., secs. 90 and 91. case that the Department was negligent in any manner in getting the plan in operation, or that it was guilty of any After June 11, 1937, the Department was authorized unreasonable delay. The distinction between the date and required to promulgate rules and regulations, and to upon which a legislative Act becomes a law and the date prescribe and furnish forms, for the effective upon which that law becomes operative has been drawn administration of the law. It was authorized to set aside in numerous other decisions by this Court. See Corpus v from its appropriation an amount, not to exceed 3 1/2% Chorn, 136 Texas 209, 150 S.W. (2d) 70; Popham v. of its annual labor payroll, to cover all costs of the Patterson, 121 Texas 615, 51 S.W. (2d) 680; Anderson v. program. It necessarily had to investigate the number of Penix, supra. employees to be included, the risks covered, and the probable cost to the Department. The Department was [HN4] Where an Act is complete in and of itself, it is required to designate a convenient number of doctors, fairly within the scope of the legislative power to and was authorized to conduct physical examinations of prescribe that it shall become operative on the happening employees. Since the program was to be administered in of some specific contingency or future event. Johnson v. connection with the Industrial Accident Board, the statute Martin, 75 Texas 33, 12 S.W. 321; 16 C.J.S., p. 414, sec. prescribed that the Board be notified of the nature of the 141; 9 Tex. Jur., 498. [*367] Page 5 139 Tex. 361, *367; 162 S.W.2d 934, **937; 1942 Tex. LEXIS 243, ***9 It is asserted by respondent that the intention of the into effect prior to December 7, 1937." Legislature was conclusively demonstrated to the contrary by the passage of House Bill No. 1047, supra, The foregoing part of this Act is invalid for many which granted Gorham permission to sue the State, and reasons. To enumerate the following will suffice here: If deprived the State and the Department of the defense that this part of the Act be construed as an amendment to the Act was not effective on December 7, 1937. [HN5] Article 6674s, it is ineffectual; because general laws can While interpretations and construction by the Legislature not be amended in this manner. Caples v. Cole, supra. It [***10] of its Acts at the same or succeeding sessions is also violative of Article III, Section 36, of the Texas are persuasive on the Court in the interpretation of Constitution, which [HN7] forbids the amendment of a statutes, they are not controlling. Caples v. Cole, 129 law without its being "re-enacted and published at Texas 370, 102 S.W. (2d) 173, rehearing denied 129 length." If the Act be construed as a special law, Texas 370, 104 S.W. (2d) 3. depriving the State of a defense in a particular case, it is unconstitutional, as being violative of Section 3 of the We therefore hold that [HN6] the date upon which Texas Bill of Rights, which [HN8] provides that all men the insurance became effective and available to the shall have equal rights. It is also violative of Article III, employees of the Department was the date stated in the Section 56, of our State Constitution, [*368] which notice, required by the statute, which was sent by the [HN9] provides that no local or special law shall be Department to the Board, -- towit, January 1, 1938, at enacted where a general law can be made applicable. 12:01 A.M.; and the State and the Department are not "The purpose of this constitutional inhibition against the liable, under the general law, for injuries sustained prior enactment of local or special laws is a wholesome one. It to that time. is intended to prevent the granting of special [***12] privileges and to secure uniformity of law throughout the But it is contended by respondent that, in his State as far as possible." Miller v. El Paso County, 136 particular case, the State and the Department were Texas 370, 150 S.W. (2d) 1000. It certainly was not the deprived of that defense by the subsequent enactment of intention of the framers of our Constitution that the State House Bill No. 1047, supra, giving him the privilege of should have certain defenses against some individuals, bringing suit against the State and the Department, and but not against others similarly situated. wherein it was provided that all defense should be available to the State and the Department, "except its The judgments of the trial court and of the Court of failure to have compensation insurance and to comply Civil Appeals are reversed, and judgment is here with the law relevant thereto and to certify said Gorham rendered in favor of petitioners. as an employee, and except the Statute of Limitations. It being the purpose of this Act to make [***11] available Opinion delivered May 27, 1942. to the said W. E. Gorham, all rights and privileges of Art. Rehearing overruled June 24, 1942. 6674s as if the Highway Commission had put said Act Page 1 Sunbeam Environmental Services, Inc. and Alphonso Solomon and Company, Inc., Appellants v. Texas Workers' Compensation Insurance Facility, succeeded by the Facility Insurance Corporation, Appellee NO. 03-01-00326-CV COURT OF APPEALS OF TEXAS, THIRD DISTRICT, AUSTIN 71 S.W.3d 846; 2002 Tex. App. LEXIS 1380 February 22, 2002, Filed NOTICE: [**1] PURSUANT TO THE TEXAS attorneys not designated as the attorney in charge RULES OF APPELLATE PROCEDURE, purported to act for the insurer. The court of appeals UNPUBLISHED OPINIONS SHALL NOT BE CITED disagreed. The statute of limitations was four years, as AS AUTHORITY BY COUNSEL OR BY A COURT. the suit for debt was based on a breach of contract. Evidence was sufficient to warrant the insurer's recovery, SUBSEQUENT HISTORY: Released for Publication as complete documentation was provided of a breach, April 18, 2002. despite the insurer's failure to introduce a copy of the policy. There was no evidence that the insured's contract PRIOR HISTORY: FROM THE DISTRICT COURT differed in any material respect from those in evidence to OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT. illustrate the terms therein. Further, the second insured NO. 97-0115, HONORABLE SCOTT JENKINS, shared liability for the premiums. The insureds' failure to JUDGE PRESIDING. pay the amounts billed was sufficient to support attorney's fees, despite their claim they did not receive DISPOSITION: Affirmed. the bills. Finally, any attorney employed by the firm representing the insurer was entitled to correspond with CASE SUMMARY: the insured. OUTCOME: The judgment was affirmed. PROCEDURAL POSTURE: The District Court of Travis County, 250th Judicial District, Texas, granted CORE TERMS: premium, coverage, workers' summary judgment to appellee insurer, finding appellant compensation, attorney's fees, owed, payroll, insured, insureds liable for unpaid premiums, interest, and wholly owned, invoice, limitations periods, servicing, attorney's fees. The insureds appealed. complain, audit, statute of limitations, limitations bars, evidence supports, trial record, documents filed, opposing OVERVIEW: The insureds challenged judgment against party, reply brief, designated, scintilla, claimant, expired, them, contending that: (1) the insurer was barred from signing, notice, uphold, insurance policy, evidence recovering on the first of their policies by the statute of admitted, coverage provided limitations, (2) the evidence was insufficient to sustain the decision, (3) the insurer failed to give proper pre-suit LexisNexis(R) Headnotes notice sufficient to award attorney's fees, and (4) Page 2 71 S.W.3d 846, *; 2002 Tex. App. LEXIS 1380, **1 Smith and Puryear. OPINION BY: Bea Ann Smith Contracts Law > Breach > General Overview Contracts Law > Defenses > Statutes of Limitations OPINION Governments > Legislation > Statutes of Limitations > Time Limitations [*848] Appellants Sunbeam Environmental [HN1] A suit for debt based on a breach of contract has a Services, Inc. (Sunbeam) and Alphonso Solomon and four-year statute of limitations. Tex. Civ. Prac. & Rem. Company, Inc. (ASC) challenge a judgment favoring the Code Ann. § 16.004 (West Supp. 2002). Texas Workers' Compensation Insurance Facility (the Facility). 1 The district court found appellants jointly and severally liable to the Facility for unpaid premiums, Civil Procedure > Appeals > Standards of Review > interest on those premiums, and attorney's fees. Because Substantial Evidence > General Overview we find this cause is not barred by the statute of [HN2] When reviewing no-evidence challenges, an limitations and the evidence is sufficient to support the appellate court considers all the evidence in the light award, we affirm the district court's judgment. most favorable to the judgment, making every reasonable inference in its favor. It will uphold the jury's finding if 1 According to testimony at trial and appellate more than a scintilla of evidence supports it. The briefs, the Facility Insurance Corporation evidence supporting a finding is more than a scintilla if succeeded the Texas Workers' Compensation reasonable minds could arrive at the finding given the Insurance Facility. The succession had occurred facts proved in the particular case. by time of trial and had no known effect on this case; we will refer to appellee simply as the Civil Procedure > Appeals > Standards of Review > Facility. Clearly Erroneous Review [**2] BACKGROUND [HN3] When reviewing factual-sufficiency challenges, an appellate court considers all the evidence and upholds the Sunbeam and ASC are both Texas corporations jury's verdict unless it finds that (1) the evidence is too wholly owned by Alphonso Solomon (Solomon). weak to support the finding, or (2) the finding is so Sunbeam received workers' compensation insurance against the overwhelming weight of the evidence as to be coverage through the Facility. The Facility was "a manifestly unjust. private, non-profit, unincorporated association of insurers authorized to write workers' compensation insurance in Civil Procedure > Parties > Required Representation Texas for employers who are unable to obtain coverage Civil Procedure > Remedies > Costs & Attorney Fees > through private insurance companies." See All Star Sheet General Overview Metal & Roofing, Inc. v. Texas Dep't of Ins., 935 S.W.2d [HN4] Tex. Civ. Prac. & Rem. Code Ann. § 38.002 186, 189 (Tex. App.--Austin 1996, no writ). (West 1997) requires that in order for a claimant to This dispute concerns premiums on policies in effect recover attorney's fees: (1) the claimant must be in 1992 and 1993. Workers' compensation insurance represented by an attorney; (2) the claimant must present premiums are based on payroll expenditures. Insureds are the claim to the opposing party or to a duly authorized required to pay premiums based on their estimated agent of the opposing party; and (3) payment for the just payroll, but the final premium cannot be calculated until amount owed must not have been tendered before the all salaries and wages for the coverage period have been expiration of the 30th day after the claim is presented. disbursed. Part five of the standard workers' compensation insurance policy calls for a payroll audit to Civil Procedure > Appeals > Briefs calculate the final premium within three years of the end [HN5] A reply brief is limited in scope to responding to of the coverage period. Coverage for Sunbeam under the matters in an appellee's brief. Tex. R. App. P. 38.3. first policy in this case began January 29, 1992. Upon learning that Sunbeam was a "combinable" risk with JUDGES: Before Chief Justice Aboussie, Justices B. A. [**3] ASC because Solomon wholly owned both Page 3 71 S.W.3d 846, *848; 2002 Tex. App. LEXIS 1380, **3 companies, the Facility required ASC to apply for The limitations period did not begin running on coverage or the Facility would cancel Sunbeam's policy. January 29, 1993, however. [**5] Part five of the ASC applied and, on February 21, 1992, was added as an workers' compensation policy states that, because the insured through an endorsement on the first policy issued final premium is based on the actual payroll disbursed, to Sunbeam. The two [*849] companies renewed the final premium cannot be determined until after the coverage under the second policy for the year beginning end of the policy term; the policy specifies that the audit January 29, 1993. The Facility canceled the second policy will occur within three years of the end of the policy on June 8, 1993, for nonpayment of premiums and failure term. Here, the auditors sent an invoice on May 28, 1993 to make required reports. for the additional $ 7520.13 they determined appellants owed in premiums on the first policy. This suit for The district court found that appellants owed the collection of this amount, filed less than four years after Facility for unpaid premiums on these policies, less an the date of this invoice, was timely. offset due for a refund of a maintenance tax. Audits showed that appellants owed $ 7,520.13 in additional Sufficiency of the evidence premium on the first policy and $ 5,808.33 in premium on the second policy, less the credit of $ 871.47, yielding Appellants raise five issues that essentially challenge a total due of $ 12,456.99; the court also assessed the sufficiency of the evidence to support the judgment. prejudgment interest of $ 6,223.27, court costs, and [HN2] When reviewing no-evidence challenges, we will postjudgment interest. The court awarded attorney's fees consider all the evidence in the light most favorable to the of $ 3114 plus additional amounts for appeals. judgment, making every reasonable inference in its favor. See Associated Indem. Corp. v. CAT Contracting, Inc., DISCUSSION 964 S.W.2d 276, 285-86 (Tex. 1998); Transportation Ins. Co. v. Moriel, 879 S.W.2d 10, 25 (Tex. 1994). We will Appellants raise eight issues on appeal. They assert uphold the jury's finding if more than a scintilla of that limitations bars the Facility from recovering on the evidence supports it. Burroughs Wellcome Co. v. Crye, first policy. By five issues, they complain [**4] about 907 S.W.2d 497, 499 (Tex. 1995); [**6] Seideneck v. various aspects of the evidence admitted in support of the Cal Bayreuther Assocs., 451 S.W.2d 752, 755 (Tex. judgment, including the sufficiency of the evidence. They 1970); In re King's Estate, 150 Tex. 662, 244 S.W.2d further complain that the Facility did not give pre-suit 660, 661 (Tex. 1951). The evidence supporting a finding notice sufficient to empower the court to award attorney's is more than a scintilla if reasonable minds could arrive at fees and that attorneys not designated as the attorney in the finding given the facts proved in the particular case. charge purported to act for the Facility. See Crye, 907 S.W.2d at 499; Moriel, 879 S.W.2d at 25. [HN3] When reviewing [*850] factual-sufficiency Limitations challenges, we consider all the evidence and uphold the jury's verdict unless we find that (1) the evidence is too Appellants contend that the statute of limitations bars the Facility's claims for premiums owed on the policy weak to support the finding, or (2) the finding is so against the overwhelming weight of the evidence as to be that expired at 12:01 a.m. on January 29, 1993. Because manifestly unjust. Ortiz v. Jones, 917 S.W.2d 770, 772 this is [HN1] a suit for debt based on a breach of contract, (Tex. 1996); Cain v. Bain, 709 S.W.2d 175, 176 (Tex. a four-year statute of limitations applies. See Tex. Civ. 1986). Prac. & Rem. Code Ann. § 16.004 (West Supp. 2002). Appellants contend that the suit was filed too late because Appellants complain that the Facility did not provide it was filed hours after the four-year period expired at "complete documents as evidence to show the court that a 12:01 a.m. on January 29, 1997. contract was violated." They point to the sole witness's testimony that she did not know whether appellants had We find no authority to support appellants' assertion received any of the insurance documents. Appellants' that limitations periods are computed on any unit of time argument regarding receipt of the contract is made for the shorter than a day. The Facility's cause of action was thus first time on appeal. The witness was an [**7] employee timely filed even if the limitations period began running of the Facility, not the servicing company or any of the on January 29, 1993. appellants, and so did not have direct knowledge of what Page 4 71 S.W.3d 846, *850; 2002 Tex. App. LEXIS 1380, **7 the servicing company sent or what the appellants janitorial workers, causing overcharges because the rate received. She testified that the standard procedure would for supervisory employees was lower. The affidavits be for the servicing company to send to the insured a attached to appellants' brief were not offered or admitted standard policy with boilerplate language dictated by the at trial and do not bear file stamps indicating that they State. The policy's boilerplate language explains the were filed with the district court. Some of the exhibits process of estimating premiums and calculating them [*851] attached to the affidavits are the same as within three years after the coverage period based on documents admitted at trial, but they do not require us to actual payroll. Though the Facility did not introduce a find that the Facility miscalculated the premiums due. copy of a policy contained in appellants' files, there was Appellants neither preserved this argument nor presented no evidence that the appellants' contract differed in any a record requiring reversal. material respect from the contracts in evidence used to illustrate the terms of appellants' contract. Further, Attorney's fees appellants' attorney effectively conceded receipt and Appellants contend that the Facility cannot recover coverage at trial, stating that "no one is arguing that attorney's fees because it did not give proper notice they're not covered by insurance." The evidence admitted before filing suit. They also contend that bills sent do not was sufficient to show the terms of the contracts. satisfy the statute permitting attorney's fees. See Tex. Civ. Appellants next contend that ASC was only an Prac. & Rem. Code Ann. § 38.002 (West 1997). 2 additional named insured and not liable for premiums on Appellants contend the bills do not satisfy the statute Sunbeam's policies. They contend that ASC never had an because [**10] they were not issued by the Facility's account or policy with the Facility, that [**8] a policy attorney. Appellants misread section 38.002; though the was never issued to ASC, and that ASC never received a party requesting attorney's fees must both make demand policy or endorsement. Appellants do not cite to any for payment (to ensure that the debtor is aware of the debt evidence from the trial record supporting these claims. being sued upon) and be represented by counsel (so that Appellants' argument that ASC had no liability for there is an attorney who is due the fees requested), there premiums is premised on the fact that ASC did not is no requirement that the demand must be made by voluntarily apply for the insurance policy. The Facility counsel. See id. The only evidence in the record is that did not mandate that ASC request coverage; Solomon the Facility sent invoices to the appellants for premiums could have chosen to forego workers' compensation due on each of the policies; there is no evidence in the insurance for both companies, but chose to apply for trial record that the appellants did not receive the bills. coverage for ASC to preserve coverage for Sunbeam. The The only evidence is that appellants failed to pay the only evidence is that ASC applied for and received amounts the Facility billed them and that the Facility was coverage on equal footing with Sunbeam--ASC was represented by counsel. The record supports the "combined" with Sunbeam for purposes of workers' conclusion that the Facility satisfied section 38.002. Id. compensation insurance--rather than passively receiving 2 This statute [HN4] requires that "(1) the coverage under Sunbeam's policy. The January 1993 claimant must be represented by an attorney; (2) application for insurance lists both Sunbeam and ASC as the claimant must present the claim to the names of the applicant, as does the binder issued for that opposing party or to a duly authorized agent of policy. Both companies were wholly owned by Solomon the opposing party; and (3) payment for the just and received their mail at the same address. The only amount owed must not have been tendered before evidence is that both were insureds, and thus that they the expiration of the 30th day after the claim is were both liable for premiums owed on the coverage presented." Tex. Civ. Prac. & Rem. Code Ann. § provided to both companies. The evidence supports the 38.002 (West 1997). finding that ASC shared [**9] liability for premiums for the coverage provided. [**11] In their reply brief, appellants for the first time challenge their liability for $ 350 in attorney's fees Appellants contend for the first time on appeal that awarded to the Facility for filing a motion to compel the Facility miscalculated the premiums due on both them to respond to interrogatories. [HN5] A reply brief is policies. They contend that they were erroneously limited in scope to responding to matters in an appellee's charged the same rate for supervisory employees as for brief. Tex. R. App. P. 38.3. The Facility did not mention Page 5 71 S.W.3d 846, *851; 2002 Tex. App. LEXIS 1380, **11 the $ 350 award. Appellants waived this complaint by cite no authority for the proposition that documents filed failing to raise it in their initial brief. by other attorneys from his firm were invalidly filed. Most important, appellants [**12] have not shown how Authorization of attorneys they were harmed by the filing of documents by co-counsel in the firm of the attorney in charge. See Tex. Appellants contend that all pleadings and documents R. App. P. 44.1; see also Spellmon v. Collins, 970 filed by attorneys other than David Dillon were S.W.2d 578, 580 (Tex. App.--Houston [14th Dist.] 1998, unauthorized. Appellants correctly assert that, by signing no pet.). We resolve this issue in favor of the judgment. the Facility's original petition, Dillon became the Facility's attorney in charge. See Tex. R. Civ. P. 8. The CONCLUSION record plainly shows that attorneys other than Dillon signed and filed documents without being designated as Having resolved all issues in favor of the judgment, attorneys in charge. All attorneys signing and filing we affirm the district court's judgment. documents on the Facility's behalf were from the same firm as Dillon. Though appellants were entitled to Bea Ann Smith, Justice continue to correspond with the attorney in charge, they Page 1 Walter E. SWITZER, Jr., Appellant, v. CITY OF PHOENIX, Jack Williams, Mayor of the City of Phoenix, David P. Jones, Wesley Johnson, Faith I. North, V. A. Cordova, Dr. Joseph Madison Greer, and Clarence H. Shivvers, Members of the Phoenix City Council, John E. Burke, Phoenix City Clerk, Appellees No. 6770 Supreme Court of Arizona 86 Ariz. 121; 341 P.2d 427; 1959 Ariz. LEXIS 145 July 1, 1959 DISPOSITION: [***1] Modified and affirmed. court found instead that a decrease in the proportion payable to the city, so long as the bondholders received CASE SUMMARY: their quid pro quo, was permissible. OUTCOME: The court modified the summary judgment PROCEDURAL POSTURE: A lower court (Arizona) in favor of appellees and affirmed as modified. granted motion for summary judgment filed by appellees, a city, the city council members, and the city clerk, in CORE TERMS: convention, taxation, street, appellant real estate taxpayer's action seeking a modification, ordinance, highway, improvement bonds, declaratory judgment and injunctive relief to prevent the right to impose, power of taxation, issuance, decrease, issuance of certain street improvement bonds. existing law, excise tax, continuation, surrendered, proportion, contracted, suspended, memorial, sentence, OVERVIEW: The city adopted an ordinance authorizing pledge, impair, right to tax, contracting, bonds issued, the issuance of street and highway improvement bonds taxes collected, power to impose, crystal clear, which were to be paid from the city's share of the funds indebtedness, collection received from the state's motor vehicle fuel and gasoline tax receipts. The taxpayer argued, inter alia, that the LexisNexis(R) Headnotes bonds would increase the city's total debt above the limit set by Ariz. Const. art. IX, § 8. The trial court found for appellees, and the court modified and affirmed. The court held that an obligation payable from a special fund Governments > Local Governments > Finance created by the imposition of excise taxes and for the Governments > Public Improvements > Financing payment of which the general credit of the taxing [HN1] Phoenix, Ariz., Ordinance No. S-1186 states that a authority was not pledged was not a debt within the bond and the issue of which it is a part are payable solely, meaning of constitutional debt limitations. The court as to both principal and interest, from the proceeds of rejected the taxpayer's argument that the city could not revenues to be derived by said city from taxes collected bind the state not to decrease the motor vehicle tax. The by the state of Arizona and returned to the city for street court held that the ordinance's broad language that the and highway purposes. state fuel tax could not be decreased was ultra vires. The Page 2 86 Ariz. 121, *; 341 P.2d 427, **; 1959 Ariz. LEXIS 145, ***1 Governments > Public Improvements > Financing Governments > Legislation > Enactment [HN2] Bonds issued to finance public improvements, if Governments > State & Territorial Governments > made payable solely from the revenues to be derived Finance from the operation of the improvement, do not constitute Tax Law > State & Local Taxes > General Overview an indebtedness within the meaning of the limitation [HN7] 'The right to impose taxes is a legislative power, clauses of the constitution. inherent in organized government. In the absence of constitutional limitations, a legislature may enact such tax laws as it sees fit, subject only to the restrictions Governments > Public Improvements > Financing contained in the constitution of the United States. [HN3] The weight of authority generally is to the effect Everything over which the authority of the state reaches that an obligation payable from a special fund created by may be the subject of taxation, whether it be person, the imposition of fees, penalties, or excise taxes and for property, or occupation. There are certain safeguards, the payment of which the general credit of the taxing however, that should be provided: First; The legislature authority is not pledged is not a debt within the meaning should be prohibited from contracting away the right to of constitutional debt limitations. tax anything or person whatsoever, or from making any irrepealable grant of exemption. Governments > Local Governments > Finance Governments > Public Improvements > Financing COUNSEL: Gust, Rosenfeld, Divelbess & Robinette, Tax Law > State & Local Taxes > Administration & Phoenix, for appellant. Proceedings > Collection William C. Eliot, City Atty., Merle L. Hanson, Anis [HN4] Phoenix, Ariz., Ordinance No. S-1186 provides Mitchell and Leven B. Ferrin, Asst. City Attys., Phoenix, that no decrease in the proportion thereof of the motor for appellees. vehicle fuel tax payable to the city of Phoenix may be made while any of such bonds so remain outstanding and JUDGES: Struckmeyer, Justice. Phelps, C. J., and Udall there is hereby vested in the holders of such bonds and and Johnson, JJ., concurring.Note: BERNSTEIN, J., the interest coupons thereto attached a contract right in having heard this case in the Superior Court, disqualified, the continuation of such tax and its allocation as above and took no part in the determination of this appeal. set forth. And further, the contract rights herein vested in the holders of such bonds shall extend to the imposition, OPINION BY: STRUCKMEYER collection and proper application of the street revenues, that is the taxes collected by the state of Arizona and OPINION returned to the city for street and highway purposes, until such bonds shall have been paid in full as to principal and [*123] [**428] This is an action wherein interest and shall not be subject to repeal, impairment or appellant, an elector and real property taxpayer of the modification either by the city or by the legislature or City of Phoenix, seeks a declaratory judgment and people of the state of Arizona. injunctive relief to prevent the issuance of certain street improvement bonds. The court below entered a summary Constitutional Law > Congressional Duties & Powers > judgment in favor of appellees, declaring that the Contracts Clause > General Overview ordinance of the City of Phoenix under which the bonds Governments > Public Improvements > Financing were issued did not violate the state constitution and was [HN5] A modification of the constitution and the statutes not otherwise unlawful. which does not lessen the likelihood of payment or delay On May 7, 1957, the city held a bond election at payment of the bonds will not impair the obligation of the which the duly qualified electors authorized the issuance contract arising in consideration of the existing law. of certain street and highway improvement bonds; thereafter, on September 27, 1957, the city adopted its Governments > State & Territorial Governments > Ordinance No. S-1186, by which there was authorized the Finance issuance [***2] of street and highway improvement [HN6] See Ariz. Const. art. IX, § 1. bonds in the amount of $ 2,500,000, the principal and interest thereon to be paid from the city's share of the Page 3 86 Ariz. 121, *123; 341 P.2d 427, **428; 1959 Ariz. LEXIS 145, ***2 funds received from the Motor Vehicle Fuel and Gasoline taxes to the repayment of highway improvement bonds. Tax receipts collected by the State and distributed to the We notice that section 7 of the Ordinance is a pledge of city pursuant to the applicable statutes. revenues in the alternative. The city pledges all "or so much thereof as may be necessary." Consequently, the Appellant first urges that the issuance of the bonds question presented is academic and does not pertain to an would increase the total indebtedness of the city above actual controversy. It is not subject to resolution by this the four per cent limit set by the constitution of Arizona, court. Podol v. Jacobs, 65 Ariz. 50, 173 P.2d 758. Art. IX, § 8, A.R.S. Both the proposition submitted to the voters on May 7, 1957 and the Ordinance recite: The city's Ordinance S-1186, among other things, promises the bond purchaser: "* * * [HN1] This bond and the issue of which it is a part are payable solely, as to "* * * [HN4] that no decrease in the both principal and interest, from the proportion thereof [the Motor Vehicle proceeds of revenues to be derived by said Fuel Tax] payable to the City of Phoenix City from taxes collected by the State of may be made while any of such bonds so Arizona and returned to the city for street remain outstanding and there is hereby and highway purposes. * * *" vested in the holders of such bonds and the interest coupons thereto attached a contract right in the continuation of such It is the settled law of this state that [HN2] bonds tax and its allocation as above set forth." issued to finance public improvements, if made payable solely from the revenues to be derived from the operation And further, of the improvement, do not constitute an indebtedness "* * * The contract rights herein vested within the meaning of the limitation clauses of the in the holders of such bonds shall extend constitution. [*124] Guthrie v. City of Mesa, 47 Ariz. to the imposition, collection and proper 336, 56 P.2d [***3] 655; Crandall v. Town of Safford, application of the street revenues 47 Ariz. 402, 56 P.2d 660; Humphrey v. City of Phoenix, [meaning the taxes collected by the State 55 Ariz. 374, 102 P.2d 82; Board of Regents of of Arizona and returned to the City for University of Arizona v. Sullivan, 45 Ariz. 245, 42 P.2d street and highway purposes] until such 619. bonds shall have been paid [***5] in full as to principal and interest and shall not be Appellant argues, however, that the same rule should subject to repeal, impairment or not apply when the obligations are to be paid out of the modification either by the city or by the fund created by the collection of a special excise tax. The [*125] Legislature or people of the State authorities dealing with this problem are not entirely in of Arizona." accord, but [HN3] the weight generally is to the effect that an obligation payable from a special fund created by Appellant contends that the quoted language is an attempt the imposition of fees, penalties, or excise taxes and for by the city to bind the legislature and the state of Arizona the payment of which the general credit of the taxing not to decrease the state Motor Vehicle Fuel Tax nor to authority is not pledged is not a debt within the meaning decrease the portion of the proceeds payable to the City of constitutional debt limitations. See Stone v. City of of Phoenix until the bonds issued by the City of Phoenix Hobbs, 54 N.M. 237, 220 P.2d 704, and Annotation 100 are all paid and that as such it is invalid. In part we A.L.R. 878; Gruen v. Tax Commission, 35 Wash.2d 1, agree. To the extent that the language of the resolution 211 P.2d 651. We will follow the weight of authority at purports to require the continuance of all laws without least to the extent where, as here, the fund from which the modification of the amount of the Motor Vehicle Fuel obligations are to be paid is created [**429] by Tax or the proportion payable to the city, it is clearly a voluntary contributions of the state to the city. usurpation of the legislative function of the people of the State. Appellant next urges that a municipality may not, under the existing law, pledge all the revenues to be There can be no doubt that the legislature, in received [***4] from the Motor Vehicle and Gasoline Page 4 86 Ariz. 121, *125; 341 P.2d 427, **429; 1959 Ariz. LEXIS 145, ***5 permitting the Motor Vehicle Fuel Tax to be used for the years. retirement of the bonds has, by clear implication, promised that it would do nothing to impair the We have considered Art. IX, § 1, and arrived at the obligation arising in consideration of the existing law. same conclusion as the majority in the Gruen case, but But [HN5] a modification of the constitution and the for different reasons. statutes which does not lessen the likelihood of payment The Minutes of the Constitutional Convention of this [***6] or delay payment of the bonds will not impair the state establish that the article was introduced in the obligation of the contract. Scougale v. Page, 194 Ark. Convention as Substitute Proposition No. 106. This 280, 106 S.W.2d 1023; Flint v. Duval County, 126 Fla. proposition came before the Convention for discussion on 18, 170 So. 587; State ex rel. Freeling v. Howard, 67 Okl. Saturday morning, November 19, 1910. At that time, the 296, 171 P. 41. The bondholders cannot be injured by Honorable George W. P. Hunt, who later became the modification of the statute, such as a decrease in the seven-time Governor of Arizona, said: proportion payable to the city, so long as they receive their quid pro quo, and the legislature and the people of "In regard to that [***8] first section. the state may make any changes in the law, organic and The Committee on Taxation had a otherwise, save those which will impair the obligation of memorial gotten up by the Tax the contract. We therefore hold that the broad language Association composed of men all over the alluded to, in so far as it purports to restrict any changes United States who have made this a study in the existing law, is ultra vires and ineffective to for years, and I have on my desk here transfer to the bondholders the right to a continuation letters from nearly every professor on without modification. economics in all the universities of the There is an implication from the appellant's country, from Harvard, in Massachusetts argument that a construction of the statutes committing to Stanford, in California, and they are for the legislature and the State of Arizona to the anyone who wants to look at these letters. continuation of a law imposing a tax, since of necessity They one and all believe this is the only the law must be continued in order to retire the way to put this in the constitution, and if contemplated bonds, violates that portion of Art. IX, § 1 the members of the convention will allow of the constitution which provides: me to read them a letter from Washington, which is a sample of the letters I have [HN6] "The power of taxation shall received, it will throw some light on the never be surrendered, [***7] suspended, subject. It is from J. E. Frost, President of or contracted away." the State Board of Tax Commissioners of the State of Washington, at Olympia, Washington." [**430] Appellant directs the attention of this court to Gruen v. Tax Commission, supra. There, with four Here follows the letter, the pertinent portions of which we judges dissenting, the Washington Supreme Court, in set forth: construing an identical provision, stated [35 Wash.2d 1, "'Dear Sir: I am just in receipt of a letter 211 P.2d 680]: from the Hon. Allen R. Foote, of Columbus, Ohio, President of the "It is crystal clear that the legislature did International Tax Association, asking me not in any way relinquish or yield its right to express to you my views on the subject to impose a tax * * *." of constitutional provisions relative to taxation. [*126] The four dissenting judges were of the opinion that where the state pledged the proceeds of an excise tax *** on cigarettes to the payment of bonds, the power of [HN7] "'The right to impose taxes is a taxation was suspended, surrendered, and contracted legislative power, inherent in organized away until the retirement of the bonds -- possibly thirty [***9] government. In the absence of Page 5 86 Ariz. 121, *126; 341 P.2d 427, **430; 1959 Ariz. LEXIS 145, ***9 constitutional limitations, a legislature sentence of Art. IX, § 1 was designed to leave legislators may enact such tax laws as it sees fit, unencumbered in so far as their power to impose taxes. subject only to the restrictions contained We note also from the report of the Third Conference of in the constitution of the United States. the same Association, p. 88, that one M. H. Carver of the Everything over which the authority of the Louisiana State Tax Commission is quoted as stating: state reaches may be the subject of taxation, whether it be person, property, or "There is little necessity for putting occupation. anything at all in the constitution about taxation, and some distinguished *** authorities hold that everything on the subject in a constitution is dangerous. To "'There are certain safeguards, meet the decision of the Supreme Court of however, that should be provided: First; the United States, though, in the The legislature should be prohibited Dartmouth College case [***11] [*127] from contracting away the right to [Trustees of Dartmouth College v. tax anything or person whatsoever, or Woodward], 4 Wheat. 518, [4 L.Ed. 629], from making any irrepealable grant of it is well to provide: exemption.'" (Emphasis supplied.) "'That the power of taxation shall 1 never be suspended, surrendered or 1 In the discussion that followed, Mr. M. G. contracted away. * * *'" Cunniff stated from the floor: "I am satisfied with the proposition as it stands. but I am not satisfied Thus, it becomes apparent that the first sentence of that the courts of Arizona will get the right Substitute Proposition No. 106, now Art. IX, § 1, was interpretation." adopted for the purpose of restricting the legislature's From the content of the letter, it can be gleaned that right to alienate the power to tax anything and all since the legislature should be prohibited from persons. The prohibition is against the irrepealable grant contracting away the right to tax, the Convention intent of immunity from taxation. It was not intended to was to accomplish the converse; [***10] that is, that the prohibit the levying of a tax. The scope of the language legislature would have the right to tax anything and all was communicated to, and understood by, the members persons whatsoever. Viewed in this light, it would of the Constitutional Convention. appear that by the use of the words "power of taxation," Therefore, we are of the opinion that the first the [**431] Convention meant "the power to impose sentence of Art. IX, § 1 is a prohibition against the taxes." surrender or relinquishment [*128] of the right to The complete text of the Memorial referred to in the impose a tax. In the instant case, "it is crystal clear" that statement by the Honorable George W. P. Hunt can be the legislature is not contracting away the right to impose found in the report of State and Local Taxation, 5th a tax. The legislature has imposed a tax and has simply National Conference of the National Tax Association applied the proceeds of the tax to a particular purpose. held in Richmond, Virginia, September, 1911, pp. 451 Except as modified by this opinion, the judgment of through 457. A reading of the Memorial leads us to the the court below is affirmed. conclusion that the language contained in the first Page 1 TEXAS v. NEW MEXICO No. 65, Orig. SUPREME COURT OF THE UNITED STATES 462 U.S. 554; 103 S. Ct. 2558; 77 L. Ed. 2d 1; 1983 U.S. LEXIS 67; 51 U.S.L.W. 4805 March 30, 1983, Argued June 17, 1983, Decided PRIOR HISTORY: ON EXCEPTIONS TO REPORT permitted to vote on the Commission and participate in OF SPECIAL MASTER. all Commission deliberations. In the alternative, the master recommended the continuance of the suit as DISPOSITION: Exceptions to Special Master's report presently postured. The court sustained the exceptions to sustained in part and overruled in part. the master's recommendation that another person be permitted to vote on the Commission. Once Congress CASE SUMMARY: approved the Compact, it had the force of law and the court was not entitled to order relief inconsistent with its terms. To provide a third, tie-breaking vote on the PROCEDURAL POSTURE: The State of Texas sued Commission would fundamentally alter the Commission the State of New Mexico, claiming New Mexico in contravention of the Compact's terms. breached its obligations under the Pecos River Compact by depleting the flow of the Pecos River. The U.S. OUTCOME: The court sustained the exceptions filed by Government intervened. The court granted leave to file the Government and New Mexico to the master's the complaint and appointed a special master, who recommendation that another party be given a vote on the recommended that the court appoint a third party to the Commission. The court overruled all other exceptions Pecos River Commission to resolve the dispute and other and returned the case to the master with directions that he relief. The Government and New Mexico filed determine the unresolved issue of whether New Mexico exceptions. breached its obligations under the Compact and related questions. OVERVIEW: The Compact provided that New Mexico should not deplete by man's activities the flow of the CORE TERMS: compact, river, inflow, inflow-outflow, Pecos River at the New Mexico-Texas state line below an special masters, engineering, shortfall, state-line, outflow, amount that would give to Texas a certain quantity of basin, dam, interstate, curve, state line, correlation, water. The Compact also established the Commission, original jurisdiction, recommendation, depletion, which was to be composed of a representative from each advisory committee, stream, flood, reservoir, negotiation, State and the Government; the Government's measured, quantity of water, apportionment, equitable, representative was not permitted to vote. Texas alleged acre-feet, ratified, appoint that New Mexico breached its obligations under the Compact so as to deplete the flow of the River. The LexisNexis(R) Headnotes master recommended that to resolve the dispute, either the Government's representative or a third party be Page 2 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 Constitutional Law > Congressional Duties & Powers > and report on data as to the stream flows, storage, Contracts Clause > General Overview diversions, salvage, and use of the waters of the Pecos Governments > State & Territorial Governments > River and its tributaries, Arts. V(d)(3), (4) of the Pecos Relations With Governments River Contract. [HN1] See U.S. Const. art. I, § 10, cl. 3. Constitutional Law > Congressional Duties & Powers > Governments > State & Territorial Governments > Contracts Clause > General Overview Relations With Governments Governments > Federal Government > U.S. Congress Governments > State & Territorial Governments > Governments > State & Territorial Governments > Water Rights Relations With Governments Real Property Law > Water Rights > General Overview [HN4] Under the Compact Clause, two States may not [HN2] Art. III of the Pecos River Compact provides that conclude an agreement without the consent of the United the State of New Mexico shall not deplete by man's States Congress. However, once given, congressional activities the flow of the Pecos River at the New consent transforms an interstate compact within the Mexico-Texas state line below an amount which will give Compact Clause into a law of the United States. One to the State of Texas a quantity of water equivalent to that consequence of this metamorphosis is that, unless the available to Texas under the 1947 condition. The term compact to which Congress has consented is somehow "1947 condition" is expressly defined as that situation in unconstitutional, no court may order relief inconsistent the Pecos River Basin as described and defined in the with its express terms. Report of the Engineering Advisory Committee, Art. II(g) of the Pecos River Compact. In turn, the Report Governments > State & Territorial Governments > includes basic data, processes, and analyses utilized in Relations With Governments preparing that report, Art. II(f) of the Pecos River Governments > State & Territorial Governments > Compact, and "deplete by man's activities" is defined to Water Rights include any beneficial consumptive uses of water within Real Property Law > Water Rights > General Overview the Pecos River Basin, but excludes diminutions of flow [HN5] The Pecos River Compact clearly delimits the role due to "encroachment of salt cedars" or deterioration of of the United State Commissioner on the Pecos River the channel of the stream, Art. II(e) of the Pecos River Commission. Although the United States Commissioner Compact. must be present at a Commission meeting in order to provide a quorum and serves as its presiding officer, and Governments > State & Territorial Governments > although the engineering advisers to the United States Relations With Governments Commissioner have consistently participated fully in the Governments > State & Territorial Governments > work of the various engineering committees and Water Rights subcommittees, Art. V(a) of the Compact specifies that Real Property Law > Water Rights > General Overview the Commissioner representing the United States shall [HN3] The Pecos River Compact establishes the Pecos not have the right to vote in any of the deliberations of River Commission as a permanent body, in more or less the Commission. No other third party is given the right to the same form that it had during the negotiations on the vote on matters before the Commission. To provide a Compact. It is to have three Commissioners, one from the third, tie-breaking vote on regular Commission business State of Texas, one from the State of New Mexico, and would be to alter fundamentally the structure of the one representing the United States, but the United States Commission. representative can not vote, Art. V(a) of the Pecos River Compact. Accordingly, the Commission can take official Governments > Federal Government > Employees & action only with the concurrence of both state Officials Commissioners. The Commission is given broad powers Governments > State & Territorial Governments > to make all findings of fact necessary to administer the Water Rights Compact, Arts. V(d)(5)-(10) of the Pecos River Compact, Real Property Law > Water Rights > General Overview as well as to engage in studies of water supplies of the [HN6] Congress may vest a federal official with the Pecos River and to collect, analyze, correlate, preserve Page 3 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 responsibility to administer the division of interstate [HN10] Where Congress has so exercised its streams. constitutional power over waters, courts have no power to substitute their own notions of an "equitable apportionment" for the apportionment chosen by Governments > State & Territorial Governments > Congress. Nevertheless, the mere existence of a compact Claims By & Against does not foreclose the possibility that the United States Governments > State & Territorial Governments > Supreme Court will be required to resolve a dispute Relations With Governments between the compacting states. Real Property Law > Water Rights > General Overview [HN7] Under the Pecos River Compact, the solution for impasse is judicial resolution of such disputes as are Civil Procedure > Jurisdiction > Subject Matter amenable to judicial resolution, and further negotiation Jurisdiction > General Overview for those disputes that are not. Governments > State & Territorial Governments > Water Rights Real Property Law > Water Rights > General Overview Governments > State & Territorial Governments > [HN11] The United States Supreme Court's equitable Relations With Governments power to apportion interstate streams and the power of Governments > State & Territorial Governments > the states and Congress acting in concert to accomplish Water Rights the same result are to a large extent complementary. Real Property Law > Water Rights > General Overview [HN8] The United States Supreme Court expressly refuses to make indefinite appointments of Constitutional Law > Congressional Duties & Powers > quasi-administrative officials to control the division of Contracts Clause > General Overview interstate waters on a day-to-day basis, even with the Constitutional Law > The Judiciary > Jurisdiction > consent of the states involved. General Overview Governments > Legislation > Interpretation [HN12] In the absence of an explicit provision or other Civil Procedure > Justiciability > Case or Controversy clear indications that a bargain to that effect was made, Requirements > General Overview the United States Supreme Court shall not construe a Constitutional Law > The Judiciary > Congressional compact between states to preclude a state from seeking Limits judicial relief when the compact does not provide an Governments > State & Territorial Governments > equivalent method of vindicating the state's rights. Relations With Governments [HN9] There is no doubt that the United States Supreme Court's jurisdiction to resolve controversies between two Civil Procedure > Jurisdiction > Subject Matter states, U.S. Const., Art. III, § 2, cl. 1; 28 U.S.C.S. § Jurisdiction > Jurisdiction Over Actions > General 1251(a)(1), extends to a properly framed suit to apportion Overview the waters of an interstate stream between states through Constitutional Law > The Judiciary > Jurisdiction > which it flows, or to a suit to enforce a prior General Overview apportionment. It also extends to a suit by one state to Governments > State & Territorial Governments > enforce its compact with another state or to declare rights Claims By & Against under a compact. If there is a compact, it is a law of the [HN13] 28 U.S.C.S. § 1251(a) is construed as providing United States, and the Court's first and last order of the United States Supreme Court with substantial business is interpreting the compact. discretion to make case-by-case judgments as to the practical necessity of an original forum in the Court for particular disputes within its constitutional original Constitutional Law > Congressional Duties & Powers > jurisdiction. The Court exercises that discretion with an Census > Apportionment & Redistricting eye to promoting the most effective functioning of the Governments > State & Territorial Governments > Court within the overall federal system. If authorized Water Rights representatives of the states to a compact have reached an Real Property Law > Water Rights > General Overview agreement within the scope of their congressionally Page 4 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 ratified powers, recourse to the Court when one state has that the Inflow-Outflow Manual did not accurately second thoughts is hardly necessary for the state's describe the actual state of the river, the flow of water at protection. the state line almost every year being significantly below the amount predicted. The Commission was unable to agree on the appropriate method for determining annual Civil Procedure > Jurisdiction > Subject Matter shortfalls of water flow. Texas then invoked the original Jurisdiction > General Overview jurisdiction of the United States Supreme Court, alleging Governments > State & Territorial Governments > in its complaint that New Mexico had breached its Relations With Governments obligations under the Compact by allowing man's Governments > State & Territorial Governments > activities to deplete the water available from the flow of Water Rights the river at the state line below that which was available [HN14] Absent extraordinary cause, the United States under the 1947 conditions, and seeking a decree ordering Supreme Court shall not review the Pecos River New Mexico to deliver water in accordance with the Commission's actions without a more precise mandate Compact. The United States intervened to protect its own from Congress than either the Pecos River Compact or 28 claims to the Pecos River waters under the Compact. The U.S.C.S. § 1251 provides. Supreme Court granted leave to file the complaint (44 L Ed 2d 84), and appointed a Special Master (46 L Ed 2d Governments > State & Territorial Governments > 274). The Special Master, in his first report to the court, Relations With Governments concluded that a new Inflow-Outflow Manual was Governments > State & Territorial Governments > required in order to provide an accurate description of the Water Rights conditions existing in 1947. The Supreme Court Real Property Law > Water Rights > General Overview approved the report in full (64 L Ed 2d 485). The Special [HN15] See Article VI of the Pecos River Compact. Master then recommended in a later report that in order to resolve the water allocation issues, the Supreme Court DECISION: should appoint a third party to participate in all Commission deliberations and cast the tie-breaking vote Supreme Court held not authorized under Pecos whenever the two Commissioners could not agree. The River Compact to designate third party to cast Special Master also rejected a motion by New Mexico to tie-breaking votes on Pecos River Commission's water dismiss the case, and one by Texas to adopt a simpler allocation disputes. method than provided by the Inflow-Outflow Manual for determining the extent of shortfalls in state-line water SUMMARY: deliveries. Texas and New Mexico entered into an agreement, On exceptions to the report of the Special Master, the known as the Pecos River Compact, which governed the United States Supreme Court sustained in part and allocation of the waters of the Pecos River Basin between overruled in part, and returned the case to the Special the two states. The Compact, which was approved by Master for a final decision on whether New Mexico was Congress, provided in part that New Mexico was not to in compliance with obligations imposed by the Pecos deplete by man's activities the flow of the river at the River Compact. In an opinion by Brennan, J., expressing state line below that which would give Texas a quantity the unanimous view of the court, it was held that (1) the of water equivalent to that which was available to Texas Supreme Court could not order a third party to be under certain consumption conditions existing in 1947. designated and empowered to participate in all Under the Compact, an "Inflow-Outflow Manual" was Commission deliberations and cast the tie-breaking vote used to determine how much water Texas should expect when necessary, since it would be inconsistent with the to receive over any particular period under the 1947 express terms of the Compact, (2) it was within the conditions. The Compact also established the Pecos River original jurisdiction of the Supreme Court under Article Commission to resolve water allocation disputes by the III, 2, cl 1 of the United States Constitution and 28 USCS unanimous vote of the two voting members representing 1251(a) to resolve by equitable apportionment the dispute their respective states, with a third non-voting member between the two states regarding the allocation of the representing the United States. It later became apparent Pecos River Basin waters under the Compact, since the Page 5 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 express terms of the Compact did not make the Congress, since the lack of such jurisdiction would leave Commission the sole arbiter of those disputes, and the the court powerless to grant one of the states relief on its lack of jurisdiction would leave the court powerless to claim under the Compact, and the express terms of the grant Texas relief on its claim, and (3) the Supreme Court Compact do not establish the Pecos River Commission as could not adopt the simplified method for determining the sole arbiter of these disputes between the two states. water flow shortfalls, since the Commission had not adopted it or any other feasible method as an alternative POSSESSIONS §58 ; to replace the inflow-outflow method, and the simplified method was not similar enough to the inflow-outflow compact between states -- water rights -- method of method. measurement -- ; LAWYERS' EDITION HEADNOTES: Headnote:[3A][3B] The United States Supreme Court may not order the POSSESSIONS §58 ; adoption of a "double mass analysis" method for compact between states -- water rights -- resolution determining when a shortfall has occurred in the amount of disputes -- ; of water from the Pecos River Basis that a state is entitled to under the Pecos River Compact that was entered into Headnote:[1A][1B] between two states and approved by Congress, where the Pecos River Commission, which was established under The United States Supreme Court cannot order that a the Compact to resolve disputes regarding the allocation third party be designated and empowered to participate in of the waters, has not adopted that method, although it is all deliberations of the Pecos River Commission and cast entitled to do so, and the "double mass analysis" method the tie-breaking vote when the two Commission members is not similar enough to the "inflow-outflow method" are not in agreement concerning the allocation of the established by the Compact, the Commission not having waters of the Pecos River Basin between the two states adopted a more feasible method as allowed by the they respectively represent pursuant to the Pecos River Compact to replace the inflow-outflow method. Compact that was entered into between the two states and approved by Congress, since the order would be inconsistent with the express terms of the Compact, the POSSESSIONS §58; effect of the provision of a third, tie-breaking vote on compact clause -- state compacts -- consent of regular Commission business being to alter Congress -- effect -- ; fundamentally the structure of the Commission. Headnote:[4] POSSESSIONS §58 Under the compact clause found in Article 1, 10, cl 3 STATES §58 ; of the United States Constitution, two states may not without the consent of Congress conclude an agreement, original jurisdiction -- compact between states -- such as the Pecos River Compact, which was agreed to in water rights -- resolution of dispute -- ; order to allocate the waters of Pecos River Basin between two states, but once given, congressional consent Headnote:[2A][2B][2C] transforms the interstate compact within this clause into a law of the United States. It is within the original jurisdiction of the United States Supreme Court under Article III, 2, cl 1 of the United States Constitution and 28 USCS 1251(a) to COURTS §111 resolve by equitable apportionment the dispute of two states regarding the allocation of the waters of the Pecos POSSESSIONS §59 ; River Basin pursuant to the Pecos River Compact that compact between states -- congressional consent -- was entered into by the two states and approved by judicial relief -- ; Page 6 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 Headnote:[5] two states and approved by Congress, since continuing supervision by the court of water decrees would test the Unless a compact between two states to which limits of proper judicial function. Congress has consented is somehow unconstitutional, no court may order relief inconsistent with its express terms. STATES §54.5; WATERS §18.5 ; jurisdiction suits between states -- water rights -- compacts -- ; division of interstate streams -- administration -- power of Congress -- ; Headnote:[9A][9B] Headnote:[6] The United States Supreme Court's jurisdiction to resolve controversies between two states pursuant to Congress may vest a federal official with Article III, 2, cl 1 of the United States Constitution and responsibility to administer the division of interstate 28 USCS 1251(a) extends to a properly framed suit to streams. apportion the waters of an interstate stream between states through which it flows, or to a suit to enforce a prior apportionment, even though litigation of such COURTS §120 disputes is a poor alternative to negotiations between the POSSESSIONS §58 ; interested states, and also extends to a suit by one state to enforce its compact with another state or to declare rights compact between states -- water rights -- failure to under a compact. resolve disputes -- ; Headnote:[7] COURTS §120 ; The failure of two states to agree on one issue, equitable apportionment between states -- however important, does not render void the Pecos River congressional power -- ; Compact, which was established to allocate between the Headnote:[10] states the waters of the Pecos River Basin, and by which the Pecos River Commission was created to resolve Courts have no power to substitute their own notions disputes pursuant to the unanimous vote of the two voting of an equitable apportionment of waters between states members representing their respective states, and neither for the apportionment chosen by Congress, where does it provide a justification for altering its structure by Congress has exercised its constitutional power over judicial decree. waters. POSSESSIONS §58 STATES §58 REFERENCE §2 ; WATERS §18.5 ; compact between states -- water rights -- interstate streams -- equitable apportionment -- ; appointment of master -- ; Headnote:[11] Headnote:[8] The equitable power of the United States Supreme The United States Supreme Court will not appoint a Court to apportion interstate streams and the power of the master to control the diversion, storage and use of the states and Congress acting in concert to accomplish the Pecos River Basin waters within the State of New same result are to a large extent complementary. Mexico, the allocation of those waters being governed by the Pecos River Compact that was entered into between Page 7 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 POSSESSIONS §58 ; and New Mexico (and approved by Congress) to govern allocation of the waters of the Pecos River, which rises in compact between states -- water rights -- dispute -- New Mexico and flows into Texas. Article III(a) of the judicial resolution -- ; Compact requires that New Mexico "not deplete by man's activities the flow of the Pecos River at the New Headnote:[12] Mexico-Texas state line below an amount which will give to Texas a quantity of water equivalent to that available In the absence of an explicit provision or other clear to Texas under the 1947 condition." The Compact indications that one state has agreed to trade away its establishes the Pecos River Commission (Commission) -- right to seek an equitable apportionment of a river in consisting of one Commissioner from each State and a return for a promise that the other state could avoid at nonvoting representative of the United States -- and will, the United States Supreme Court will not construe a empowers it to make all findings of fact necessary to compact between the states to preclude a state from administer the Compact. The two voting Commissioners seeking judicial relief when the compact does not provide were unable to agree when a dispute arose between the an equivalent method of vindicating the state's rights. States concerning the methods for determining annual shortfalls of state-line water flow with regard to Texas' POSSESSIONS §58 right to receive as much water as it would have received under the consumption conditions prevailing in New STATES §58 ; Mexico in 1947. Texas filed this action against New Mexico (the United States intervened to protect its claims compact between states -- water rights -- on the waters of the river), alleging that New Mexico had administrative action -- judicial review -- ; breached its obligations under Art. III(a) of the Compact and seeking a decree commanding New Mexico to Headnote:[13] deliver water in accordance with the Compact. This Court Without a more precise mandate from Congress than appointed a Special Master, who ultimately filed the is provided by the Pecos River Compact or 28 USCS report involved here, and the parties filed various 1251, the United States Supreme Court, absent exceptions thereto. extraordinary cause, will not in its discretion under Held: 1251(a) review the actions of the Pecos River Commission, which was created by the Compact to 1. Exceptions of the Government and New Mexico to resolve disputes concerning the allocation of the waters the Master's recommendation that either the United States of the Pecos River Basin between the compacting states, Commissioner or some other third party be given a vote such review not being necessary for a state's protection, on the Commission and be empowered to participate in where both Commission members representing their all Commission deliberations are sustained. Once respective states must first vote to approve the action. congressional consent is given to an interstate compact as required by the Compact Clause, the compact is STATES §54 ; transformed into a law of the United States, and unless the compact is unconstitutional, no court may order relief original jurisdiction -- disputes between states -- ; inconsistent with its express terms. Here, the Compact provides that the Government Commissioner shall not Headnote:[14A][14B] have the right to vote, and no other third party is given the right to vote on matters before the Commission. This The model case for invocation of the United States Court cannot rewrite the Compact so as to provide for a Supreme Court's original jurisdiction is a dispute between third, tie-breaking vote. Moreover, the Court's equitable states of such seriousness that it would amount to "casus powers have never been exercised so as to appoint belli" if the states were fully sovereign. quasi-administrative officials to control the division of interstate waters on a day-to-day basis. Pp. 564-566. SYLLABUS 2. New Mexico's exception to the Master's The Pecos River Compact was entered into by Texas Page 8 462 U.S. 554, *; 103 S. Ct. 2558, **; 77 L. Ed. 2d 1, ***; 1983 U.S. LEXIS 67 alternative recommendation to continue the suit as Charlotte Uram, Special Assistant Attorney General of presently postured is overruled, and the recommendation New Mexico, argued the cause for defendant. With her is accepted. There is no merit to New Mexico's on the briefs were Paul G. Bardacke, Attorney General, contention that this Court may do nothing more than Jeff Bingaman, former Attorney General, and Peter review the Commission's official actions, and that the Thomas White, Special Assistant Attorney General. case should be dismissed if it is found either that there is no Commission action to review or that actions taken by Solicitor General Lee, Deputy Solicitor General the Commission were not arbitrary or capricious. This Claiborne, and John H. Garvey filed a brief for the United Court's original jurisdiction to resolve controversies States. between two States extends to a suit by one State to enforce its compact with another State or to declare rights JUDGES: BRENNAN, J., delivered the opinion for a under a compact. Here, fundamental structural unanimous Court. considerations of the Compact militate against New Mexico's theory, since if all questions under the Compact OPINION BY: BRENNAN had to be decided by the Commission in the first instance, New Mexico could indefinitely prevent authoritative OPINION Commission action solely by exercising its veto on the [*556] [***7] [**2561] JUSTICE BRENNAN Commission. Nor do the Compact's express terms delivered the opinion of the Court. constitute the Commission as the sole arbiter of disputes over New Mexico's Art. III obligations. Moreover, if [***LEdHR1A] [1A] [***LEdHR2A] [2A] authorized representatives of the compacting States have [***LEdHR3A] [3A]For the second time we consider reached an agreement on action to be taken by the exceptions to a report of the Special Master in this case. Commission, this Court will not review the Commission's The States of Texas and New Mexico and the United action at the behest of one of the States absent States have filed exceptions to a report submitted by the extraordinary cause or a precise mandate from Congress. Special Master on September 10, 1982 (1982 Report). Pp. 566-571. We sustain an exception in which both New Mexico and the United States concur, overrule all other exceptions, 3. Texas' exception to the Master's recommendation and return the case to the Special Master for a final against approval of Texas' motion to adopt a so-called decision on the basic issue in dispute -- whether New "Double Mass Analysis" method for determining when a Mexico is in compliance with obligations imposed by the shortfall in state-line flows has occurred is overruled. Pecos River Compact. The Compact provides that until the Commission adopts a more feasible method, an "inflow-outflow method" I shall be used to measure state-line shortfalls. The "Double Mass Analysis" is not close enough to what the The Pecos River rises in north-central New Mexico Compact terms an "inflow-outflow method, as described and flows in a southerly direction into Texas until it joins in the Report of the Engineering Advisory Committee" to the Rio Grande near Langtry, Tex. 1 It is the principal make it acceptable for use in determining New Mexico's river in eastern New Mexico, draining roughly one-fifth compliance with its Art. III obligations. While the of the State, and it is a major tributary of the Rio Grande. Compact leaves the Commission free to adopt the "Double Mass Analysis," this Court may not apply it 1 From north to south, the Pecos River flows against New Mexico in the absence of Commission past Pecos and Santa Rosa, N. M., and then into action. Pp. 571-574. the Alamogordo Reservoir above Alamogordo (or Sumner) Dam. It then passes Fort Sumner and COUNSEL: R. Lambeth Townsend, Assistant Attorney traverses a relatively desolate region in the central General of Texas, argued the cause for plaintiff. With part of the State. From Acme to Artesia, in the him on the briefs were Mark White, Attorney General, area around Roswell, the river is fed by a large, John W. Fainter, Jr., First Assistant Attorney General, slowly flowing aquifer. Below Artesia, the river Richard E. Gray III, Executive Assistant Attorney passes through a set of deltas and lakes formed by General, and Frank R. Booth. the now-deteriorated McMillan and Avalon Page 9 462 U.S. 554, *556; 103 S. Ct. 2558, **2561; 77 L. Ed. 2d 1, ***LEdHR3A; 1983 U.S. LEXIS 67 Dams, then flows past Carlsbad and into the Red Compact Commission was formed, consisting of three Bluff Reservoir, which straddles the state line and Commissioners, representing the two States and the is used to regulate the river in Texas. United States. In January 1948, the Compact Commission's engineering advisory committee submitted [*557] Due in large part to many natural a lengthy report (1947 Study), the central portion of difficulties, 2 the Pecos barely supports a level of which was a set of river routing studies describing six development reached in the first third of this century. If "conditions" of the Pecos, one of which consisted of the development in New Mexico were not restricted, actual conditions as of the beginning of 1947. 4 Each of especially the [**2562] groundwater pumping near the studies was embodied in a 41-column table Roswell, no water at all might reach Texas in many years. accounting for all known inflows and outflows of water As things stand, the amount of water Texas receives in on the river during each of the years between 1905 and [***8] any year varies with a number of factors besides 1946. 5 The engineering advisory committee also drafted beneficial consumption in New Mexico. These factors a Manual of Inflow-Outflow Methods [*559] of include, primarily, precipitation in the Pecos Basin over Measuring Changes in Stream-Flow Depletion (1948) the preceding several years, evaporation in the McMillan (Inflow-Outflow Manual), which contained charts and and Alamogordo Reservoirs, and nonbeneficial tables, derived from data in the 1947 Study, to be used in consumption of water by salt cedars and other riverbed determining how much water Texas should expect to vegetation. receive over any particular period for any particular levels of precipitation, under the consumption conditions 2 In its natural state, the Pecos may dry up prevailing in New Mexico in 1947. completely for weeks at a time over fairly long reaches in central New Mexico. Much of its 3 In 1925, the States negotiated a compact for annual flow comes in flash floods, carrying with regulating the river. It was approved by both state them great quantities of topsoil that both legislatures, but the Governor of New Mexico progressively destroy reservoirs, by silting, and vetoed its bill. In the early 1930's, the Texas render the river's waters quite saline. The congressional delegation succeeded in holding up nonflood "base" flow of the Pecos below federal funding for construction of the Alamogordo Dam is supplied to a large part by Alamogordo Dam until New Mexico agreed to groundwater aquifers that empty into the river in ensure that Texas received the same portion of the reach between Acme and Artesia, N. M. The flood flows originating above Avalon Dam that it operation of these aquifers is little understood. had received during the period from 1905 to 1935. They are depleted by pumping from wells in the This agreement was signed in 1935 by the Roswell area, and there is some suggestion that at Secretary of the Interior, the United States times heavy groundwater pumping in the area Senators from both States, and representatives of around Roswell may actually reverse the direction the irrigation districts concerned, and it was of flow of the underground aquifer, so that water formally ratified by the Texas Legislature but flows away from the river. See Texas' Brief on the never by the New Mexico Legislature. New 1947 Condition (filed Aug. 21, 1978), p. 34. In Mexico did, however, sharply restrict addition, a steady stream of underground brine groundwater pumping in the Roswell area in enters the river at Malaga Bend, some 10 miles 1937, thus restoring to some extent the base flow above the Texas border, severely impairing the of the river. quality of water that reaches Texas when the river 4 The six "conditions" studied by the is low. Salt cedars, which consume large amounts engineering committee represented various of water, proliferate along its channel and in the combinations of historical facts from different silt deposits at the heads of its reservoirs. periods and hypothetical assumptions about the existence, condition, and operation of the dams A and irrigation projects that had been built since 1905. See S. Doc. No. 109, 81st Cong., 1st Sess., After 20 years of false starts, 3 in 1945 Texas and 9-11 (1949) (S. Doc. 109). The only one material New Mexico commenced negotiations on a compact to to the Compact as adopted is the "1947 allocate the [*558] waters of the Pecos Basin. A Page 10 462 U.S. 554, *559; 103 S. Ct. 2558, **2562; 77 L. Ed. 2d 1, ***8; 1983 U.S. LEXIS 67 condition," which assumed actual conditions as of defined as "that situation in the Pecos River Basin as 1947, with some additional use by the Carlsbad described and defined in the Report of the Engineering and Fort Sumner projects. Advisory Committee." Art. II(g). In turn, the Report was 5 For instance, on each table column 14 showed defined to include "basic data, processes, and analyses depletion by pumps between Acme and Artesia, utilized in preparing that report," Art. II(f), and "deplete column 15 showed inflows from aquifers in the by man's activities" was defined to include any same reach, and column 16 showed depletion by "beneficial consumptive uses of water within the Pecos salt cedars. Some of the entries in the tables River Basin," but to exclude diminutions of flow due to could be inferred more or less easily from "encroachment of [*560] salt cedars" or "deterioration observed data -- e. g., the flow of the river past of the channel of the stream," Art. II(e). specific gauges, or diversions to irrigation projects. Others, such as the entries for salt-cedar [HN3] The Compact also established the Pecos River depletions or evaporation from each reservoir, Commission as a permanent body, in more or less the could only be estimated, albeit with some degree same form that it had during the negotiations on the of reliability. However, many entries -- e. g., the Compact. It was to have three Commissioners, one from three columns showing "flood inflows" and the each State and one representing the United States, but the two columns entitled "channel losses" -- required United States representative could not vote. Art. V(a). a great deal of speculation, and to some extent Accordingly, the Commission could take official action they may have been used as residual categories to only with the concurrence of both state Commissioners. "balance the books." See S. Doc. 109, at 41-42; The Commission was given broad powers to make all Report of Review of Basic Data to Engineering findings of fact necessary to administer the Compact, Advisory Committee, Pecos River Commission Arts. V(d)(5)-(10), as well as to "[engage] in studies of 24 (1960) (stipulated exhibit No. 8) (Review of water supplies of the Pecos River" and to "[collect], Basic Data). analyze, correlate, preserve and report on data as to the stream flows, storage, diversions, salvage, and use of the On the basis of the 1947 Study and the waters of the Pecos River and its tributaries," Arts. Inflow-Outflow Manual, the [***9] two States V(d)(3), (4). 7 successfully negotiated the Pecos River Compact. It was signed by the Commissioners from both States on 7 Further relevant provisions in Arts. V and VI December 3, 1948, and thereafter ratified by both state are discussed infra, at 568, n. 14, 571-572. legislatures and -- as required under the Compact Clause For roughly 15 years, the Pecos River Commission of the Constitution 6 -- approved by Congress. Ch. 184, functioned more or less as had been contemplated in the 63 Stat. 159. The 1947 Study and the Inflow-Outflow Compact. It met regularly, passed resolutions, and Manual were [**2563] incorporated into S. Doc. 109, undertook studies of various questions of importance to and they unquestionably provided the basis upon which those who use the waters of the Pecos. The apparent Congress approved the Compact, see S. Rep. No. 409, harmony that characterized the Commission in those 81st Cong., 1st Sess. (1949). years, however, seems largely to have been the result of a 6 [HN1] "No State shall, without the Consent of tacit agreement to defer disagreement on a problem of Congress, . . . Compact with another State, or serious magnitude. For it became clear soon after the with a foreign Power . . . ." U.S. Const., Art. I, § Compact went into effect that the 1947 Study and, more 10, cl. 3. importantly, the tables in the Inflow-Outflow Manual did not describe the actual state of the river. In almost every The crucial substantive provision of the Pecos River year following adoption of the Compact, state-line flows Compact is found at Art. III(a): [HN2] "New Mexico were significantly [***10] below the amount that one shall not deplete by man's activities the flow of the Pecos would have predicted on the basis of the Inflow-Outflow River at the New Mexico-Texas state line below an Manual, with no obvious change either in natural amount which will give to Texas a quantity of water conditions along the river or in "man's activities." equivalent to that available to Texas under the 1947 condition." The term "1947 condition" was expressly The initial response of the Commission to this problem was to authorize, in 1957, an ambitious "Review Page 11 462 U.S. 554, *560; 103 S. Ct. 2558, **2563; 77 L. Ed. 2d 1, ***10; 1983 U.S. LEXIS 67 of Basic Data," [*561] which would essentially retrace 9 The Commission did not meet at all between the steps of the engineering committee's 1947 Study to January 1967 and November 1968, during which provide a more accurate description of the "1947 period the identities of four key persons changed. condition." The Review of Basic Data was presented to Both the Texas Commissioner (first appointed the Commission in 1960; it essentially duplicated the immediately after the Compact was ratified) and 1947 Study, but using different periods of time, revised the Engineering Advisor to the United States records, a number of different assumptions, and different Commissioner (also chairman of the engineering hydrological and mathematical procedures. The committee and principal author of the 1947 Study Commission took no action on the Review of Basic Data and Inflow-Outflow Manual) died. The New until two years later, when it directed the engineering Mexico and United States Commissioners (the committee to proceed with a draft of a new latter an important force in the original compact Inflow-Outflow Manual, and adopted as findings of fact a negotiations) retired. Thus, by late 1968, set of figures derived from the new study showing that administration of the Compact was largely in the the cumulative shortfall of state-line flows for the years hands of people with no personal connection to 1950-1961 was approximately 53,000 acre-feet. 8 the Commission's early work. 8 This figure was far less than the shortfall that B would have been found had the tables in the original Inflow-Outflow Manual been used. The In June 1974, Texas invoked the original jurisdiction Commission did not determine whether any of this Court [***11] under Art. III, § 2, cl. 2, of the difference between expected flows and actual United States Constitution and 28 U. S. C. § 1251. Its bill flows was due to "man's activities" in New of complaint alleged that New Mexico had breached its Mexico, and later engineering committee reports obligations under Art. III(a) of the Compact "by indicated that adjustments to the 1950-1961 countenancing and permitting depletions by man's figures were contemplated. activities within New Mexico to the extent that from 1950 through 1972 there has occurred a cumulative [**2564] This was essentially the Commission's departure of the quantity of water available from the flow last action with respect to the all-important question of of the Pecos River at the Texas-New Mexico State Line Texas' right under the Compact to receive as much water in excess of 1,200,000 acre-feet from the equivalent as it would have received under the "1947 condition." 9 available under the 1947 condition . . . ." Texas sought a Disputes that had been deferred and avoided in the past decree commanding New Mexico to deliver water in now surfaced. They came to a head at a special meeting accordance with the Compact. The United States of the Commission in July 1970, at which the Texas intervened to protect its own claims on the waters of the Commissioner stated his position that, calculated Pecos River, which had been preserved in Arts. XI-XII of according to the original Inflow-Outflow Manual, there the Compact. We granted leave to file the complaint, 421 had been a cumulative shortfall in state-line flows of 1.1 U.S. 927 (1975), and appointed a Special Master, 423 million [*562] acre-feet for the years 1950-1969, that U.S. 942 (1975). the Review of Basic Data was "incomplete and replete with errors," and that Texas had a right to an annual In 1979, the Special Master made his first report to determination of departures in state-line flows under the this Court. In that report, he recommended that we reject original assumptions of the 1947 Study until the Texas' position that the phrase "1947 condition" in Art. Commission adopted a different method. Thereafter, the III(a) of the Compact should be taken to mean an Texas and New Mexico staffs prepared different reports artificial condition [*563] as described by the 1947 in 1971 and 1974 on cumulative shortfalls under the Study embodied in S. Doc. 109, however erroneous the "1947 condition," with Texas relying on the original data in that study might have been. Instead, he concluded Inflow-Outflow Manual and New Mexico on the Review that "[the] 1947 condition is that situation in the Pecos of Basic Data. Attempts to mediate between the two River Basin which produced in New Mexico the positions failed, and the Commission took no action for man-made depletions resulting from the stage of lack of agreement between the two voting development existing at the beginning of the year 1947 . . Commissioners. . ," and that a new Inflow-Outflow Manual was required. Page 12 462 U.S. 554, *563; 103 S. Ct. 2558, **2564; 77 L. Ed. 2d 1, ***11; 1983 U.S. LEXIS 67 1979 Report 41. We approved the report in full. 446 conclude an agreement such as the Pecos River Compact U.S. 540 (1980). without the consent of the United States Congress. However, once given, "congressional consent transforms Over the following two years, the Special Master an interstate compact within this Clause into a law of the received evidence on the question of what corrections to United States." Cuyler v. Adams, 449 U.S. 433, 438 the 1947 Study and the Inflow-Outflow Manual were (1981); see Pennsylvania v. Wheeling & Belmont Bridge required to produce an accurate description of the 1947 Co., 13 How. 518, 566 (1852).One consequence of this condition, and thus of New Mexico's obligations under metamorphosis is that, unless the compact to which Art. III(a) of the Compact. In his 1982 Report, however, Congress has consented is somehow unconstitutional, no he concluded that resolution of these issues [**2565] court may order relief inconsistent with its express terms. would require that we "exercise administrative powers Yet that is precisely what the Special Master has delegated to the [Pecos River Commission]" and that recommended. [HN5] The Pecos River Compact clearly "such exercise of administrative power is beyond the delimits the role of the United State Commissioner. judicial function." 1982 Report 27. Recognizing that the Although the United States Commissioner must be Commission would be unlikely to act by unanimous vote present at a Commission meeting in order to provide a of both State Commissioners, and that continued impasse quorum and serves as its presiding officer, and although favored the upstream State, the Special Master the engineering advisers to the United States recommended: Commissioner have consistently participated fully in the work of the various engineering committees and "[The] equity powers of the Court are adequate to subcommittees, Art. V(a) of the Compact specifies that provide a remedy. If within a reasonable time . . . the "the Commissioner representing the United States . . . States do not agree on a tie-breaking procedure, the Court shall not have the right to vote in any of the deliberations would be justified in ordering . . . that either the of the Commission." No other third party is given the representative of the United States, or some other right to vote on matters before the Commission. To third-party, be designated and empowered to participate [*565] provide a third, tie-breaking vote on regular in all Commission deliberations and act decisively when Commission business would be to alter fundamentally the the States are not in agreement. The order should provide structure of the Commission. that the decision of the tie-breaker is final, subject only to appropriate review by the Court. Upon the selection of a [***LEdHR6] [6][HN6] Congress may vest a federal tie-breaker, the States should be ordered to return to the official with the responsibility to administer the division Commission for determination of this long-standing of interstate streams. See Arizona v. California, 373 U.S. controversy." Id., at 26. 546, 564-567 (1963).Other interstate compacts, approved by Congress contemporaneously with the Pecos River [*564] At the same time, the Special Master Compact, allow federal representatives a vote on rejected two pending motions, [***12] one by New compact-created commissions, or expressly provide for Mexico for dismissal of the case altogether, and one by arbitration by federal officials of commission disputes. Texas to adopt a simpler method than the Inflow-Outflow E. g., Upper Colorado Basin Compact, 63 Stat. 31, 35-37; Manual provides for determining the extent of shortfalls Arkansas River Compact, 63 Stat. 145, 149-151; in state-line water deliveries. Yellowstone River Compact, 65 Stat. 663, 665-666. The II Pecos River Compact clearly lacks the features of these other compacts, and we are not free to rewrite it. Both the United States and New Mexico have filed exceptions to the Special Master's key recommendation -- [**2566] [***LEdHR7] [7]Without doubt, the that either the United States Commissioner or some other structural likelihood of impasse on the Pecos River third party be given a vote on the Pecos River Commission is a serious matter. In light of other States' Commission and empowered to participate in all experience, Texas and New Mexico might well consider Commission deliberations. We sustain their exceptions. amending their Compact to provide for some mutually acceptable method for resolving paralyzing impasses [***LEdHR1A] [1B] [***LEdHR4] [4] [***LEdHR5] such as the one that gave rise to this suit. Nevertheless, [5][HN4] Under the Compact Clause, two States may not [***13] the States' failure to agree on one issue, however Page 13 462 U.S. 554, *565; 103 S. Ct. 2558, **2566; 77 L. Ed. 2d 1, ***13; 1983 U.S. LEXIS 67 important, does not render the Compact void, nor does it commission's decisions without providing the provide a justification for altering its structure by judicial States an opportunity to challenge them, see Iowa decree. The Commission has acted on many matters by v. Illinois, 151 U.S. 238 (1894). We have, unanimous vote. 10 We cannot say whether unanimity however, been willing to appoint a River Master would have been achieved had a tie breaker stood ready solely to perform ministerial tasks. New Jersey v. to endorse one State's position over the other's. [HN7] New York, 347 U.S. 995, 1002-1004 (1954). Under the Compact as it now stands, the solution for impasse is judicial resolution of such disputes as are III amenable to judicial resolution, and further negotiation In the alternative, the Special Master recommends for those disputes that are not. See infra, at 569-571. "continuance of [this] suit as presently postured." 1982 10 For instance, the Commission has taken a Report 28. New Mexico excepts to this recommendation number of concrete actions with regard to insofar as it embodies a certain conception of this Court's salt-cedar eradication and salinity alleviation, role in resolving the present dispute. It contends that this especially at Malaga Bend. Furthermore, it has Court may do nothing more than review official actions participated in and coordinated studies of various of the Pecos River Commission, on the deferential model features of the river, and it has maintained the of judicial review of administrative action by a federal numerous gauges and other equipment used in agency, and that this case [*567] should be dismissed if such studies. we find either that there is no Commission action to review or that the actions the Commission has taken were not arbitrary or capricious. Thus, in New Mexico's view, this suit may be maintained only as one for judicial [*566] [***LEdHR8] [8]Texas, in support of the review of the Commission's [***14] quantification of Special Master's recommendation, argues that the 1950-1961 shortfall, and the implied acceptance of reformation of the Compact is within this Court's the Review of Basic Data which, New Mexico argues, equitable powers. Indeed, in its complaint Texas that entailed. 12 According to New [**2567] Mexico, specifically requested that we appoint a Master "to "[this] Court has no authority to act de novo or assume control the diversion, storage and use of [the] Pecos River the powers of the Pecos River Commission." Motion of Basin waters within the State of New Mexico"; given the New Mexico to Recommend Final Decree (filed Feb. 19, scope of the Commission's mandate, a tie breaker on the 1982), p. 2. We disagree. Commission would be the functional equivalent of such a Master. Texas has not, however, identified a single 12 We note that the Special Master's 1979 instance where we have granted similar relief. 11 [HN8] Report, which we approved, decisively rejected We have expressly refused to make indefinite New Mexico's argument that the Pecos River appointments of quasi-administrative officials to control Commission in fact adopted the Review of Basic the division of interstate waters on a day-to-day basis, Data, but that same report did not suggest that we even with the consent of the States involved. E. g., dismiss this action. See 1979 Report 40-41, 44. Vermont v. New York, 417 U.S. 270 (1974); Wisconsin v. Thus, at least by implication, the argument New Illinois, 289 U.S. 710, 711 (1933). Continuing Mexico now advances was also rejected. New supervision by this Court of water decrees would test the Mexico did not object to those portions of the limits of proper judicial functions, and we have thought it Special Master's Report, although it did object to wise not to undertake such a project. Vermont v. New others. New Mexico's Objections to the Report of York, supra, at 277. the Special Master and Brief (filed Nov. 29, 1979). 11 On occasion in the past, before the device of appointing special masters in original jurisdiction cases became common, we have gone so far as to appoint a commission with broad powers to [***LEdHR9A] [9A] [***LEdHR10] [10][HN9] There resolve factual questions in a controversy between is no doubt that this Court's jurisdiction to resolve two States, see Iowa v. Illinois, 147 U.S. 1 (1893), controversies between two States, U.S. Const., Art. III, § but even then we declined to accept the 2, cl. 1; 28 U. S. C. § 1251(a)(1), extends to a properly Page 14 462 U.S. 554, *567; 103 S. Ct. 2558, **2567; 77 L. Ed. 2d 1, ***LEdHR10; 1983 U.S. LEXIS 67 framed suit to apportion the waters of an interstate stream 14 Article V(f) provides: "Findings of fact made between States through which it flows, e. g., Kansas v. by the Commission shall not be conclusive in any Colorado, 185 U.S. 125, 145 (1902), or to a suit to court, or before any agency or tribunal, but shall enforce a prior apportionment, e. g., Wyoming v. constitute prima facie evidence of the facts Colorado, 298 U.S. 573 (1936).13 It also extends to a suit found." That language is ambiguous as to the role by one State to enforce its compact with another State or of the Supreme Court, but an earlier version of to declare rights under a compact. Virginia v. West Art. V(f) -- one that was proposed by New Virginia, 206 U.S. 290, 317-319 (1907); cf. West Mexico -- sheds further light: "The findings of the Virginia ex rel. Dyer v. Sims, 341 U.S. 22, 30 (1951) Commission shall not be conclusive in any court (jurisdiction to interpret a compact on writ of certiorari); or tribunal which may be called upon to interpret Green v. Biddle, 8 Wheat. 1, 91 (1823). If there is a or enforce this Compact." Minutes of Meeting of compact, it is a law of the United States, see supra, at the Pecos River Compact Commission, Sept. 28, 564, and our first and last order of business is interpreting 1943, p. 11 (proposed Art. XII, para. 4). Since the the [*568] compact. [HN10] "Where Congress has so only parties with rights and duties to be enforced exercised its constitutional power over waters, courts under any draft of the Compact were the United have no power to substitute their own notions of an States and the two signatory States, it is clear that 'equitable apportionment' for the apportionment chosen the New Mexico draft reflected the assumption by Congress." Arizona v. California, 373 U.S., at that this Court might be called upon to enforce the 565-566. Nevertheless, as Virginia v. West Virginia Compact. Article V(f) assumed its present from at proves, the mere existence of a compact does not a late stage in the negotiations and with no foreclose the possibility that we will be required to discussion on the record; its change was most resolve a dispute between the compacting States. likely due to the efforts of a federal drafting expert brought in after all significant disputes had 13 [***LEdHR9A] [9B]That jurisdiction exists been resolved, see Pecos River Compact even though litigation of such disputes is Commission Meeting, Nov. 8-13, 1948, p. 61, obviously a poor alternative to negotiation reprinted in S. Doc. 109, at 101. In the light of between the interested States. See Vermont v. the other factors discussed in text, we need not New York, 417 U.S. 270, 277-278 (1974); infra, at consider whether, standing alone, this history 575-576. would be dispositive. 15 Cf. Kansas v. Colorado, 206 U.S. 46, 117 [***LEdHR2A] [2B]The question for decision, (1907). See also Frankfurter & Landis, The therefore, is what role the Pecos River Compact leaves to Compact Clause of the Constitution -- A Study in this Court. The Compact itself does not expressly Interstate Adjustments, 34 Yale L. J. 685, 701 address the rights of the States to seek relief in the (1925) ("[One] answer is clear: no one State can Supreme Court, although it clearly contemplates some control the power to feed or to starve, possessed independent exercise of judicial authority. 14 by a river flowing through several States"); Fundamental [***15] structural considerations, Bannister, Interstate Rights in Interstate Streams however, militate against New Mexico's theory. First, if in the Arid West, 36 Harv. L. Rev. 960, 979-980 all questions under the Compact had to be decided by the (1923) (describing practice in international law). Commission in the first instance, New Mexico could indefinitely prevent authoritative Commission action [***LEdHR2A] [2C] [***LEdHR11] [11] solely by exercising its veto on the Commission. As New [***LEdHR12] [12]If it were clear that the Pecos River Mexico is the upstream State, with effective [*569] Commission was intended to be the exclusive forum for power to deny water altogether to Texas except under disputes between the States, then we would withdraw. extreme flood conditions, the Commission's failure to But the express terms of the Pecos River Compact do not take action to enforce New Mexico's obligations under constitute the Commission as the sole arbiter of disputes Art. III(a) would invariably work to New Mexico's between the States over New Mexico's Art. III [**2568] benefit. 15 Under New Mexico's interpretation, obligations. [HN11] Our equitable power to apportion this Court would be powerless to grant Texas relief on its interstate streams and the power of the States and claim under the Compact. Congress acting in concert to accomplish the same result Page 15 462 U.S. 554, *569; 103 S. Ct. 2558, **2568; 77 L. Ed. 2d 1, ***LEdHR12; 1983 U.S. LEXIS 67 are to a large extent complementary. See Frankfurter & it." Id., at 91. Landis, The Compact Clause of the Constitution -- A Study in Interstate Adjustments, 34 Yale L. J. 685, 705-708 (1925). Texas' right to invoke the original [***16] [***LEdHR13] [13] [***LEdHR14A] jurisdiction of this Court was an important part of the [14A]Considerations outside the Compact itself also context in which the Compact was framed; indeed, the render New Mexico's theory of the role of this Court threat of such litigation undoubtedly contributed to New untenable. According to New Mexico, Texas may seek Mexico's willingness to enter into a compact. It is judicial review in this Court of decisions actually made difficult to conceive that Texas would trade away its right by the Commission -- presumably on the votes of both to seek an equitable apportionment of the river in return States' Commissioners. That is not the proper function of for a promise that New Mexico could, for all practical our original jurisdiction to decide controversies between purposes, avoid at will. 16 [HN12] In the absence of an two States. In recent years, [HN13] we have consistently explicit provision or other clear indications that a bargain interpreted 28 U. S. C. § 1251(a) as providing us with to that effect was made, we shall not construe a compact substantial discretion to make case-by-case judgments as to preclude a [*570] State from seeking judicial relief to the practical necessity of an original forum in this when the compact does not provide an equivalent method Court for particular disputes within our constitutional of vindicating the State's rights. Cf. Green v. Biddle, 8 original jurisdiction. See Maryland v. Louisiana, 451 Wheat., at 91. 17 U.S. 725, 743 (1981); Ohio v. Wyandotte Chemicals 16 Note that under Art. XIV of the Compact Corp., 401 U.S. 493, 499 (1971). We exercise that Texas may withdraw from the Compact only with discretion with an eye to promoting the most effective the concurrence of the New Mexico State functioning of this Court within the overall federal Legislature. [**2569] system. See ibid. If authorized representatives 17 In Green v. Biddle, the owners of certain of the compacting States have reached an agreement lands in Kentucky sued their tenant to recover the [*571] within the scope of their congressionally ratified lands. The tenant relied on two Kentucky statutes powers, recourse to this Court when one State has second which gave him a good defense to the action, and thoughts is hardly "necessary for the State's protection," the owners responded that the statutes were Massachusetts v. Missouri, 308 U.S. 1, 18 (1939). 18 invalid as violations of a compact between [HN14] Absent extraordinary cause, we shall not review Kentucky and Virginia, ratified by Congress, the Pecos River Commission's actions without a more which provided that "all private rights, and precise mandate from Congress than either the Compact interests of lands within [Kentucky] derived from or 28 U. S. C. § 1251 provides. the laws of Virginia prior to [the separation of 18 Kentucky from Virginia], shall remain valid and secure under the laws of [Kentucky], and shall be [***LEdHR14A] [14B]Cf. Illinois v. determined by the laws now existing in Milwaukee, 406 U.S. 91, 93 (1972) (original [Virginia]." 8 Wheat., at 3. An argument was jurisdiction will not be taken where there is an made -- similar to New Mexico's argument in this adequate alternative forum for resolution of the case -- that disputes concerning the compact could dispute). The model case for invocation of this only be resolved by a commission to be appointed Court's original jurisdiction is a dispute between under the terms of the agreement, and not by the States of such seriousness that it would amount to courts that would ordinarily resolve questions of casus belli if the States were fully sovereign. title to land. We rejected the argument because North Dakota v. Minnesota, 263 U.S. 365, the possibility that one State could defeat the 372-374 (1923); Missouri v. Illinois, 200 U.S. rights of the other's citizens or allow the 496, 519-521 (1906). When it is able to act, the occupants of the land to enrich themselves Commission is a completely adequate means for without title simply by refusing to appoint vindicating either State's interests. The need for commissioners "is too monstrous to be for a burdensome original jurisdiction litigation, which moment entertained. The best feelings of our prevents this Court from attending to its appellate nature revolt against a construction which leads to docket, would seem slight. Page 16 462 U.S. 554, *571; 103 S. Ct. 2558, **2569; 77 L. Ed. 2d 1, ***LEdHR14A; 1983 U.S. LEXIS 67 Therefore, we accept the Special Master's alternative The vertical axis measures corresponding 3-year averages recommendation that this suit continue as presently of the measured "outflow" at the state line. The data framed. points form a smooth curve that, according to the Manual, "fairly accurately [covers] the entire range of IV expected water supply so far as such a supply is affected by meteorological factors" under the "1947 condition" as [***LEdHR3A] [3B]The Special Master also described in the 1947 Study. S. Doc. 109, at 149. recommends that we deny a motion made by Texas -- apparently at the Special Master's invitation -- to adopt 19 The Inflow-Outflow Manual appended to the what it calls a "Double Mass Analysis" as the method for engineering committee's 1947 Study describes the determining when a shortfall in state-line flows has inflow-outflow method as follows: occurred. 1982 Report 21. Texas excepts to that recommendation. We overrule the exception. "The inflow-outflow method involves the determination of the correlation between an index [***17] Once again, we turn to the provisions of of the inflow to a basin as measured at certain the Compact. Article VI provides: gaging stations and the outflow from the basin. It is obviously impossible to measure all of the [HN15] "The following principles shall govern in inflow. The gaging stations which are utilized to regard to the apportionment made by Article III of this measure a part of the inflow are termed index Compact: inflow stations because the amount of water measured at those stations is an acceptable index .... of the inflow to the basin. From the plotting by "(c) Unless and until a more feasible method is years of the sum of the index inflows against the devised and adopted by the Commission the outflow there is developed a correlation curve inflow-outflow method, as described in the Report of the showing the relationship between inflow and Engineering Advisory Committee, shall be used to: outflow. Any changes thereafter in the basin which occur between the points of inflow and the [*572] "(i) Determine the effect on the state-line point of outflow and which affect the water flow of any change in depletions by man's activities or supply of the basin can be measured by the otherwise, of the waters of the Pecos River in New change in correlation between the inflow and Mexico." outflow from that indicated by the correlation curve previously developed. For example, if over It is clear that the Commission has not adopted "a a period of years additional depletions occur more feasible method," so the question is whether Texas' between the inflow points and the outflow point, "Double Mass Analysis" fairly comes within the the correlation between the inflow and the Compact phrase "inflow-outflow method, as described in outflow will change: With a given inflow into the the Report of the Engineering Advisory Committee." If it basin there will be less outflow." S. Doc. 109, at does not, then we may not use it to measure state-line 149. shortfalls in enforcing the Compact. At this point in the litigation, it has been decided As an illustration of the method, 19 and to permit that the actual curve provided by the original administration of the Compact to begin, the Inflow-Outflow Manual does not accurately describe the Inflow-Outflow Manual provides a correlation curve and correlation between inflows and the state-line outflow set of tables for the critical reach of the river between under the 1947 condition. The parties' evidence now Alamogordo Dam and the state line. See Appendix to this must be directed [***18] to drawing a new curve, like opinion. Plotted along the horizontal axis are the old one but using more accurate data, and the disputes overlapping 3-year averages [**2570] of the sums of between them involve questions of which inflows should four "index inflows" -- the actual, measured flow into be "index inflows" and how the historic values of those Alamogordo Reservoir, and unmeasured estimates of inflows should be deduced and incorporated into the "flood inflows," see n. 5, supra, in three sub-reaches curve. See n. 21, infra. Texas' motion to substitute its between Alamogordo [*573] Dam and the state line. Page 17 462 U.S. 554, *573; 103 S. Ct. 2558, **2570; 77 L. Ed. 2d 1, ***18; 1983 U.S. LEXIS 67 "Double Mass Analysis" represents a bold effort to at 150-151. The "Double Mass Analysis" represents a simplify this initial process by reducing the number of sharply different approach to how to go about measuring index inflows to one, directly measurable value -- the shortfalls at the state line, an approach which the measured flow past Alamogordo Dam. In essence, Compact leaves the Commission free to adopt, but which Texas' position is that this single inflow provides an this Court may not apply against New Mexico in the adequate index for all the inflows into the river that are absence of Commission action. more difficult (if not impossible) to measure. If so, the correlation curve described by plotting 3-year averages of V the single inflow against the state-line outflow would In a pretrial order dated October 31, 1977, the furnish an adequate benchmark to which post-Compact Special Master identified four [**2571] broad questions flows could be compared to determine whether Texas is to be resolved. The first was settled by our approval of receiving the water it may expect to receive under the his 1979 Report, 446 U.S. 540 [***19] (1980). See Compact. 20 supra, at 563. The crucial question that remains to be 20 It deserves emphasis that neither the decided is the fourth: "[Has] New Mexico fulfilled her Inflow-Outflow Manual in any of its past or obligations under Article III(a) of the Pecos River projected versions nor the Texas "Double Mass Compact?" [*575] Pretrial Order 6. That question Analysis" has anything to say about whether a necessarily involves two subsidiary questions. First, particular shortfall in state-line water deliveries is under the proper definition of the "1947 condition," see due to "man's activities," a critical qualification on supra, at 563, what is the difference between the quantity New Mexico's obligation to deliver water under of water Texas could have expected to receive in each Art. III(a) of the Compact. At best, correlation year and the quantity it actually received? For the curves for sub-reaches of the river can be helpful 1950-1961 period, that difference has been determined by in identifying where a shortfall seems to originate. unanimous vote of the Commission; for 1962 to the present, determining the extent of the shortfall will [*574] Although simplification would be desirable, require adjudicating disputes between the States as to and the question is a close one, on balance we conclude specific issues raised by the 1947 Study, the Review of that the "Double Mass Analysis" is not close enough to Basic Data, and the Inflow-Outflow Manual. The States what the Compact terms an "inflow-outflow method, as have fully briefed their positions, however, and the described in the Report of the Engineering Advisory Special Master has already heard extensive evidence on Committee" to make it acceptable for use in determining these questions. 21 Second, to what extent were the New Mexico's compliance with its Art. III obligations. shortfalls due to "man's activities in New Mexico"? The flows past Alamogordo Dam do not always bear a physical relationship to the state-line outflow. In its 21 New Mexico has generally relied on the natural state, the Pecos actually dries up for long periods Review of Basic Data. Texas has submitted a of time between Alamogordo and the state line, so the document entitled "Texas 'Workability' water that crosses the state line is not the same water that Statement," filed Nov. 18, 1981, which identifies passes the dam, except in periods of extreme flood. The nine "[questions] which must be resolved in Compact, by reference to the 1947 Study, clearly connection with the flood inflow computation." contemplates that the adequacy of state-line flows can be Id., at 4-5. Not all of them involve large determined without taking into account all inflows into quantities of water. At this stage of the litigation, the Pecos, but the intent of the Compact's framers was there seems to be no more than three or four clearly to use as much information as possible rather than issues upon which the Special Master will have to relying on a single index inflow, even if that inflow resolve difficult questions of fact or of reflects the same meteorological factors that produce the hydrological method. We leave to the Special other inflows. The Inflow-Outflow Manual expressly Master's discretion whether these issues should be indicates that the engineering committee intended to considered as framed in § 4(b) of his original develop more precise correlation curves for smaller pretrial order or whether a revised formulation sub-reaches of the river, taking into account inflows not would be more appropriate. See Order of Dec. incorporated into the curve it provided. See S. Doc. 109, 29, 1981, pp. 5-7; 1982 Report 10-11. Page 18 462 U.S. 554, *575; 103 S. Ct. 2558, **2571; 77 L. Ed. 2d 1, ***19; 1983 U.S. LEXIS 67 Time and again we have counseled States engaged in return this case to the Special Master for determination of litigation with one another before this Court that their the unresolved issues framed in his pretrial order, in a dispute "is one more likely to be wisely solved by manner consistent with this opinion. co-operative study and by conference and mutual concession on the part of representatives of the States so It is so ordered. vitally interested in it than by proceedings in any court [*577] [SEE appendix to opinion of the court IN however constituted." New York v. New Jersey, 256 U.S. ORIGINAL] [***20] [**2572] APPENDIX TO 296, 313 (1921); cf. Vermont v. New York, 417 U.S., at OPINION OF THE COURT 277-278; Minnesota v. Wisconsin, 252 U.S. 273, 283 (1920); Washington v. Oregon, 214 U.S. 205, 218 [See Illustration in Original] (1909). It is within this Court's power to determine whether New Mexico is in compliance with Art. III(a) of [*578] Inflow-outflow relationships, Alamogordo the [*576] Pecos River Compact, but it is difficult to Dam to New Mexico-Texas State line believe that the bona fide differences in the two States' views of how much water Texas is entitled to receive [1,000 acre-feet units] justify the expense and time necessary to obtain a judicial resolution of this controversy. With that observation, we Outflow Index inflow relationship 140 77 150 83 160 89 170 96 180 102 190 109 200 115 210 122 220 129 230 136 240 143 250 151 260 159 270 166 280 174 290 182 300 189 310 197 320 205 330 212 340 220 Page 19 462 U.S. 554, *578; 103 S. Ct. 2558, **2572; 77 L. Ed. 2d 1, ***20; 1983 U.S. LEXIS 67 350 228 400 267 450 307 500 352 550 402 600 454 650 506 750 615 800 671 850 728 900 786 [1,000 acre-feet units] [**2573] Inflow-outflow calculations, Alamogordo Dam to New Mexico-Texas State line (from 1947 condition theoretical studies) Accumulated differences Index Routed Outflow Differences inflow outflow from curve Omitting All years 1942-44 1919-21 557.8 412.3 410.1 +2.2 +2.2 +2.2 1920-22 370.3 259.9 243.8 +16.1 +18.3 +18.3 1921-23 392.3 259.6 261.0 -1.4 +16.9 +16.9 1922-24 268.4 156.3 164.9 -8.6 +8.3 +8.3 1923-25 300.1 178.0 189.1 -11.1 -2.8 -2.8 1924-26 318.7 200.6 204.0 -3.4 -6.2 -6.2 1925-27 325.9 203.9 209.1 -5.2 -11.4 -11.4 1926-28 307.2 187.5 194.8 -7.3 -18.7 -18.7 1927-29 250.2 150.2 151.2 -1.0 -19.7 -19.7 1928-30 275.0 168.8 170.0 -1.2 -20.7 -20.7 1929-31 294.4 189.2 185.1 +4.1 -16.8 -16.8 1930-32 377.2 251.7 249.2 +2.5 -14.3 -14.3 1931-33 342.2 236.0 221.8 +14.2 -.1 -.1 1932-34 292.0 191.9 183.4 +8.5 +8.4 +8.4 1933-35 223.6 136.0 131.5 +4.5 +12.9 +12.9 1934-36 227.4 127.8 134.2 -6.4 +6.5 +6.5 Page 20 462 U.S. 554, *578; 103 S. Ct. 2558, **2573; 77 L. Ed. 2d 1, ***20; 1983 U.S. LEXIS 67 1935-37 367.1 243.5 241.3 +2.2 +8.7 +8.7 1936-38 388.5 253.1 258.0 -4.9 +3.8 +3.8 1937-39 392.2 256.3 161.0 -4.7 -.9 -.9 1938-40 269.0 151.1 165.3 -14.2 -15.1 -15.1 1939-41 267.1 639.8 634.2 +5.6 -9.5 -9.5 1940-42 859.7 732.3 739.2 -6.9 -16.4 -16.4 1941-43 859.3 746.2 738.8 +6.4 -10.1 -10.0 1942-44 337.4 246.2 217.9 +28.3 +18.3 1943-45 224.8 139.0 132.4 +6.6 +24.9 -3.4 1944-46 201.2 121.0 115.8 +5.2 +30.1 +1.8 Supreme Court of the United States 58 REFERENCES L Ed Index to Annos, States; Supreme Court of the 32A Am Jur 2d, Federal Practice and Procedure 537, 556; United States; Waters 72 Am Jur 2d, States, Territories, and Dependencies 5; 78 Am Jur 2d, Waters 309-315 ALR Quick Index, Federal Courts; Riparian Owners; States; Waters and Watercourses 8 Federal Procedure, L Ed, Courts and Judicial System 20:200, 20:219 Federal Quick Index, Compacts; Riparian Rights; Rivers; States; Supreme Court of the United States; Waters and 2 Federal Procedural Forms, L Ed, Appeal, Certiorari, Watercourses and Review 3:721-3:742 Annotation References: USCS, Constitution, Article I, Section 10, Clause 3, and Article III, Section 2, Clause 1; 28 USCS 1251(a) Original jurisdiction of United States Supreme Court in suits between states. 68 L Ed 2d 969. US L Ed Digest, States, Territories, and Possessions 58 Page 1 TRINOVA CORPORATION v. MICHIGAN DEPARTMENT OF TREASURY No. 89-1106 SUPREME COURT OF THE UNITED STATES 498 U.S. 358; 111 S. Ct. 818; 112 L. Ed. 2d 884; 1991 U.S. LEXIS 842; 59 U.S.L.W. 4097; 91 Cal. Daily Op. Service 1278; 91 Daily Journal DAR 2066 October 1, 1990, Argued February 19, 1991, Decided PRIOR HISTORY: CERTIORARI TO THE the tax base measure attributed to the state and the SUPREME COURT OF MICHIGAN. contribution of state business activity to the entire value added process. The court concluded that the corporation DISPOSITION: 433 Mich. 141, 445 N. W. 2d 428, failed to meet its burden of proving by clear and cogent affirmed. evidence that the state's apportionment provided a distorted result. CASE SUMMARY: OUTCOME: The Court affirmed the judgment denying the corporation's claim for a refund because the PROCEDURAL POSTURE: Appellant corporation three-factor apportionment formula of the appellee state's sought review of the judgment from the Supreme Court single business tax did not violate either the Due Process of Michigan, which denied its claim for a refund of taxes Clause or the Commerce Clause of the Federal assessed under appellee state's single business tax statute. Constitution. Mich. Comp. Laws § 208.1 et seq. (1979). CORE TERMS: apportionment, tax base, business OVERVIEW: The corporation filed a suit for a refund of activity, formula, depreciation, payroll, apportionment taxes assessed under the state's single business tax (SBT) formula, geographic, taxation, apportioned, income taxes, statute. The state supreme court affirmed the judgment taxing, adjusted, business tax, unitary, interstate denying his claim for a refund. On certiorari, the commerce, gross receipts, value-added, interstate, corporation contended that the state's SBT was not fairly realized, out-of-state, subtraction, assigned, tax year, apportioned as applied to it and that the tax discriminated taxable income, company-wide, discriminate, calculated, against interstate commerce. The court affirmed the multiplied, taxed judgment denying his claim for a refund and held that the three-factor apportionment formula of the state's SBT, LexisNexis(R) Headnotes Mich. Comp. Laws § 208.1 et seq. (1979), did not violate either the Due Process Clause or the Commerce Clause of the Federal Constitution. The court found that the SBT was applied to an activity with a substantial nexus with the taxing state, was fairly apportioned, and did not Tax Law > State & Local Taxes discriminate against interstate commerce. The court [HN1] Value added is an economic concept. Value added determined that there was a rational relationship between is defined as the increase in the value of goods and Page 2 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 services brought about by whatever a business does to General Overview them between the time of purchase and the time of sale. Tax Law > State & Local Taxes > Value Added Tax The value a business adds to a single product is the [HN4] A value added tax (VAT) differs in important difference between the value of the product at sale and respects from a corporate income tax. A corporate the cost of goods purchased from other businesses that income tax is based on the philosophy of ability to pay, went into the product. It follows that the sale price of a as it consists of some portion of the profit remaining after product is the total of all value added by each step of the a company has provided for its workers, suppliers, and production process to that point. other creditors. A VAT, on the other hand, is a much broader measure of a firm's total business activity. Even if a business entity is unprofitable, under normal Tax Law > Federal Income Tax Computation > circumstances it adds value to its products and, as a Valuation > Business Interests consequence, will owe some VAT. Because value added Tax Law > State & Local Taxes > Value Added Tax is a measure of actual business activity, a VAT correlates [HN2] A business adds value by handling or processing more closely to the volume of governmental services these goods with its labor force, machinery, buildings and received by the taxpayer than does an income tax. capital. Value added usually refers to the activities of a Further, because value added does not fluctuate as widely single business enterprise. The term can, however, be as net income, a VAT provides a more stable source of used with regard to a single product, or even an entire revenue than the corporate income tax. economy. Value added is a means of consistently measuring the size of business firms and other economic enterprises comprising the total economy. Gross National Tax Law > Federal Income Tax Computation > Product is virtually equivalent to national value added. Deductions for Amortization, Depletion & Depreciation > Amortization, Cost Recovery & Depreciation (IRC secs. 167-169, 171, 178, 194-195, 197, 216, 248, 280F) > Tax Law > State & Local Taxes > Income Tax > General Overview Corporations & Unincorporated Associations > General Tax Law > State & Local Taxes > Personal Property Overview Tax > General Overview Tax Law > State & Local Taxes > Minimum Tax [HN5] Depreciation is the reduction in value of a firm's Tax Law > State & Local Taxes > Value Added Tax assets, through wear and tear, obsolescence, or other [HN3] One of the acknowledged advantages of value factors, and thus roughly measures consumption of added as a measure of taxation is its neutrality. A value capital. added tax (VAT) is neutral in the sense that it taxes all business activity alike: Under a pure VAT, all forms of business organization (corporation, partnership, Tax Law > Federal Income Tax Computation > General proprietorship), all types of financing (debt, equity) and Overview all methods of production (capital intensive, labor Tax Law > State & Local Taxes > Franchise Tax > intensive) bear the same tax burden. Tax factors are General Overview minimized in business decisions; inherent advantages and [HN6] The Michigan single business tax (SBT) is levied relative efficiencies are allowed to operate in the market against any person with business activity within the State economy with minimum tax distortions. This neutrality of Michigan. Mich. Comp. Laws § 208.31(1). In order to of a value-added tax is in notable contrast to the effects of calculate the amount of a taxpayer's SBT the taxpayer both the corporation income tax and the payroll taxes. must, first, determine its total tax base. The total tax base The former, by definition, is applied only to corporations consists of the taxpayer's value added, calculated by the and varies with their reliance on equity rather than debt addition method: Cost of Labor + Depreciation + Interest capital and the efficiency with which they use equity + Profit. Under Mich. Comp. Laws § 208.9, the taxpayer capital -- that is, their net profits. begins with federal taxable income (representing profit), adds other elements that reflect consumption of labor and capital including compensation, depreciation, dividends, Governments > Public Improvements > General and interest paid by the taxpayer, and makes other Overview detailed adjustments. Tax Law > State & Local Taxes > Income Tax > Page 3 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 Tax Law > State & Local Taxes > Franchise Tax > Constitutional Law > Congressional Duties & Powers > General Overview Commerce Clause > General Overview Tax Law > State & Local Taxes > Personal Property Tax Law > State & Local Taxes > Sales Tax > General Tax > General Overview Overview [HN7] Business activity is broadly defined as a transfer [HN10] The Court will sustain a tax against Commerce of legal or equitable title to or rental of property, whether Clause challenge so long as the tax is applied to an real, personal, or mixed, tangible or intangible, or the activity with a substantial nexus with the taxing state, is performance of services, or a combination thereof, made fairly apportioned, does not discriminate against or engaged in, or caused to be made or engaged in, within interstate commerce, and is fairly related to the services this state, whether in intrastate, interstate, or foreign provided by the state. commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others, but Constitutional Law > Bill of Rights > Fundamental shall not include the services rendered by an employee to Rights > Procedural Due Process > Scope of Protection his employer, services as a director of a corporation, or a Energy & Utilities Law > Taxation casual transaction. Mich. Comp. Laws § 208.3 (1979) Tax Law > State & Local Taxes > General Overview [HN11] The due process requires that there be a minimal Tax Law > State & Local Taxes > Franchise Tax > connection between the interstate activities and the taxing General Overview state, and a rational relationship between the income Tax Law > State & Local Taxes > Personal Property attributed to the state and the intrastate values of the Tax > General Overview enterprise. [HN8] If a taxpayer does business both within and without Michigan, it must determine the portion of its Tax Law > State & Local Taxes > Franchise Tax > total value added attributable to Michigan. That portion is General Overview the average of three ratios: (1) Michigan payroll to total Tax Law > State & Local Taxes > Personal Property payroll, (2) Michigan property to total property, and (3) Tax > General Overview Michigan sales to total sales. The total tax base is [HN12] In a unitary enterprise, compensation, multiplied by the portion of business activity attributable depreciation, and profit are not independent variables to to Michigan (under the three-factor formula), and the be adjusted without reference to each other. result, subject to several further adjustments, is the taxpayer's adjusted tax base. Mich. Comp. Laws § 208.31(2). Mich. Comp. Laws § 208.23(a) permits a Energy & Utilities Law > Taxation taxpayer to deduct a portion of its capital acquisitions, Tax Law > State & Local Taxes > Administration & and Mich. Comp. Laws § 208.31(5) permits a Proceedings > Audits & Investigations labor-intensive taxpayer to reduce its adjusted tax base by Tax Law > State & Local Taxes > Franchise Tax > a percentage equal to the percentage by which General Overview compensation exceeds 63 percent of the total tax base, [HN13] Separate accounting, while it purports to isolate but with such reduction not to exceed a maximum of 37 portions of income received in various states, may fail to percent. Actual tax liability equals the adjusted tax base account for contributions to income resulting from multiplied by a tax rate of 2.35 percent. functional integration, centralization of management, and economies of scale. Because these factors of profitability arise from the operation of the business as a whole, it Tax Law > State & Local Taxes > Franchise Tax > becomes misleading to characterize the income of the General Overview business as having a single identifiable source. Although Tax Law > State & Local Taxes > Personal Property separate geographical accounting may be useful for Tax > General Overview internal auditing, for purposes of state taxation it is not [HN9] The amended Mich. Comp. Laws § 208.69 creates constitutionally required. a presumption that the statutory apportionment formula fairly represents the taxpayer's business activity in Michigan unless the adjusted tax base meets one of two Tax Law > State & Local Taxes > Franchise Tax > tests. Page 4 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 General Overview tax revenues that, under the theory of the tax, belong of [HN14] In the case of a more-or-less integrated business right to other jurisdictions. The Court has always enterprise operating in more than one state, arriving at declined to undertake the essentially legislative task of precise territorial allocations of value is often an elusive establishing a single constitutionally mandated method of goal, both in theory and in practice. taxation. DECISION: Constitutional Law > Bill of Rights > Fundamental Rights > Procedural Due Process > Scope of Protection Michigan's value added, single business tax, as Tax Law > State & Local Taxes applied to particular foreign corporation during particular Tax Law > State & Local Taxes > Income Tax > tax year, held not to violate commerce clause (Art I, 8, cl General Overview 3) or due process. [HN15] The first component of fairness in an apportionment formula is what might be called internal SUMMARY: consistency -- that is, the formula must be such that, if applied by every jurisdiction, it would result in no more The state of Michigan levied, on any person with than all of the unitary business income being taxed. The business activity in the state, a tax which was (1) called second and more difficult requirement is what might be the "single business tax," and (2) described by some as a called external consistency -- the factor or factors used in type of "value added tax." For purposes of the tax, the the apportionment formula must actually reflect a total tax base generally consisted of the taxpayer's "value reasonable sense of how income is generated. added," calculated under an "addition method" as cost of labor plus depreciation plus interest plus profit. As applied to taxpayers doing business both within and Tax Law > State & Local Taxes > Value Added Tax without the state, (1) such taxpayers were authorized to [HN16] In order to prevail on a challenge that an use an apportionment formula which multiplied the total apportionment formula fails the external consistency test, tax base by a factor which consisted of the average of the an income taxpayer must prove by clear and cogent three ratios of (a) Michigan payroll to total payroll, (b) evidence that the income attributed to the state is in fact Michigan property to total property, and (c) Michigan out of all appropriate proportions to the business sales to total sales; (2) several further adjustments were transacted in that state, or has led to a grossly distorted permitted, including (a) a deduction by taxpayers of a result. The party must demonstrate that, in the context of portion of their capital acquisitions, and (b) a limited a value added tax, there is no rational relationship reduction by labor-intensive taxpayers of excessive between the tax base measure attributed to the state and compensation; and (3) the actual tax liability equaled the the contribution of state business activity to the entire tax base, as finally adjusted, multiplied by a 2.35-percent value added process. tax rate. During 1980, an Ohio corporation which manufactured automobile components made more than $ Tax Law > State & Local Taxes 103 million worth of sales in Michigan, but maintained Transportation Law > Intrastate Commerce only a 14-employee sales office in the state. The [HN17] States are free to structure their tax systems to corporation had a net loss of taxable income for that year, encourage the growth and development of intrastate but was liable, under the Michigan apportionment commerce and industry. formula, for a single business tax of about $ 294,000, based upon (1) multiplying the corporation's total tax base of about $ 221 million by an 8.9717-percent factor, Tax Law > State & Local Taxes > General Overview which was the average of a (a) payroll ratio of 0.2328 [HN18] In reviewing state taxation schemes under the percent, (b) property ratio of 0.0930 percent, and (c) sales Commerce Clause, the Court attempts to ensure that each ratio of 26.5892 percent; and (2) reducing the initial state taxes only its fair share of an interstate transaction. result of about $ 19.8 million to a tax base, as finally The Court acts as a defense against state taxes which, adjusted, of about $ 12.5 million, through (a) about a $ whether by design or inadvertence, either give rise to 9,000 capital-acquisitions deduction, and (b) about a $ serious concerns of double taxation, or attempt to capture 7.3 million labor-intensive reduction. In 1985, the Page 5 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 Michigan Court of Appeals, an intermediate appellate the location of its plant and equipment and much of its court, ruled in another case that a state statutory provision compensation, the tax, for apportionment purposes, was entitled certain taxpayers to relief from the apportionment (a) an indivisible tax upon a bona fide measure of formula for the single business tax. The Ohio corporation business activity--the value added--not (b) three separate then filed an amended return and refund claim for the and independent taxes on compensation, depreciation, 1980 tax year. When the Michigan treasury department and income; (4) the corporation had failed to prove by denied relief, the corporation sued for a refund in the clear and cogent evidence that the state's apportionment Michigan Court of Claims, which ruled in the formula provided a distorted result, where the state had corporation's favor based upon the prior Court of Appeals consistently applied the formula, the elements of which decision. While the department's appeal was pending, a appeared to reflect a very large share of activities from restrictive amendment to the statutory relief provision which value was generated, with further relief for was enacted, and the Court of Appeals, in ordering a labor-intensive taxpayers such as the corporation; and (5) reversal and remand, ruled that the amendment was to be the corporation had failed to show that the tax given retroactive effect (166 Mich App 656, 421 NW2d discriminated against out-of-state businesses. 258). On appeal, the Michigan Supreme Court, in affirming on other grounds without addressing the Scalia, J., concurring in the judgment, expressed the amendment's retroactivity, expressed the view that (1) the view that (1) the court's conclusion that Michigan's single statutory relief provision applied only if necessary to save business tax was not facially discriminatory was the single business tax against unconstitutional sufficient to comply with the requirements of the application; (2) under the Federal Constitution's commerce clause; and (2) the single business tax did not commerce clause (Art I, 8, cl 3) and under the due violate the due process clause, because (a) the process clause of the Constitution's Fourteenth corporation conceded that there was a minimal Amendment, "business activity," as defined for purposes connection between the corporation's interstate activities of the single business tax, was not susceptible to accurate and the taxing state, and (b) the single business tax did analysis when only one component of the total business not tax extraterritorial values. effort was analyzed; and (3) the averaged ratios of the Stevens, J., joined by Blackmun, J., dissenting, corporation's payroll, property, and sales were a fair expressed the view that (1) although the parties referred representation of the corporation's business activity in to the single business tax as a value added tax, the Michigan, thus making the corporation ineligible for Michigan tax, as a practical matter, was nothing more relief on statutory or constitutional grounds (433 Mich than an amalgam of three separate taxes on payroll, 141, 445 NW2d 428). depreciable fixed assets, and income; (2) because the On certiorari, the United States Supreme Court value added by the two principal components of the affirmed. In an opinion by Kennedy, J., joined by single business tax--labor and capital--are fully realized Rehnquist, Ch. J., and White, Marshall, and O'Connor, and thus can be precisely quantified and geographically JJ., it was held that Michigan's value added, single assigned when the actual purchase of labor services and business tax, as applied to the Ohio corporation during use of capital occur, Michigan's apportionment of a 1980, did not violate either the commerce clause or the taxpayer's entire payroll and capital expenses resulted in due process clause, because (1) the corporation did not the unconstitutional taxation by Michigan of a portion of dispute that its business activities had a substantial nexus the taxpayer's extraterritorial activities, in violation of with the state and subjected the corporation to the state's due process; and (3) with respect to the case at hand, taxing authority; (2) the corporation did not argue that the although less than 1 percent of the corporation's property amount of tax that the corporation was required to pay and payroll expenses were incurred within Michigan's bore no fair relation to the services provided by the state; borders, the state, by applying its apportionment formula (3) it was proper for the state to apportion the tax, for the to the corporation's payroll and capital, treated 9 to 10 state, absent an apportionment formula, was unable to percent of the corporation's labor and capital costs as if assign the tax base and its principal components to they were in-state expenses. separate geographic locations and to separate accounts in Souter, J., did not participate. each state without serious theoretical and practical difficulty, where, even if the corporation could identify Page 6 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 LAWYERS' EDITION HEADNOTES: A "pure" value added tax (VAT)--without any special exemptions, deductions, or other adjustments--is neutral in the sense that the VAT taxes all business COMMERCE §238 activity alike, for the same tax burden is borne by (1) all forms of business organization (corporation, partnership, CONSTITUTIONAL LAW §605; proprietorship); (2) all types of financing (debt, equity); foreign corporation -- state value added tax -- and (3) all methods of production (capital intensive, labor apportionment -- nondiscrimination -- due process -- ; intensive). Headnote:[1A][1B][1C][1D][1E][1F][1G] INCOME TAXES §1 A state's value added, single business tax, as applied TAXES §3; during a particular tax year to a foreign manufacturing corporation which had more than $ 103 million in sales, value added tax -- nature -- computation -- ; but maintained only a 14-employee sales office in that state in that year, does not violate either the Federal Headnote:[3] Constitution's commerce clause (Art I, 8, cl 3) or the due process clause of the Constitution's Fourteenth A value added tax (VAT) differs in important Amendment--where the state (1) uses a total tax base respects from a corporate income tax: (1) a corporate calculating "value added" as cost of labor plus income tax is based on the philosophy of ability to pay, depreciation plus interest plus profit, (2) authorizes the as such a tax consists of some portion of the profit use of an apportionment formula which multiplies the remaining after a company has provided for its workers, total tax base by a factor which consists of the average of suppliers, and other creditors, but a VAT is a much the three ratios of (a) in-state payroll to total payroll, (b) broader measure of a firm's total activity, because even if in-state property to total property, and (c) in-state sales to a business entity is unprofitable, such an entity, under total sales, (3) permits several further adjustments to the normal circumstances, adds value to its products and thus tax base, including (a) a deduction by taxpayers of a will owe some VAT; (2) a VAT correlates more closely portion of their capital acquisitions, and (b) a limited to the governmental services received by the taxpayer reduction by labor-intensive taxpayers of excessive than does an income tax, because value added is a compensation, and (4) calculates actual tax liability as the measure of actual business activity; and (3) a VAT tax base, as finally adjusted, multiplied by a tax rate of provides a more stable source of revenue than the 2.35 percent--because (1) the corporation does not corporate income tax, because value added does not dispute that its business activities have a substantial fluctuate as widely as net income. nexus with the state and subject the corporation to the state's taxing authority; (2) the corporation does not argue TAXES §192; that the amount of tax that the corporation is required to pay bears no fair relation to the services provided by the value added tax -- computation -- ; state; (3) it is proper for the state to apportion the tax; (4) the corporation has failed to prove by clear and cogent Headnote:[4A][4B][4C] evidence that the state's apportionment formula provides a distorted result; and (5) the corporation has failed to A value added tax is assessed as a percentage of show that the tax discriminates against out-of-state "value added" for the relevant fiscal period, where value businesses. (Stevens and Blackmun, JJ., dissented from added may be calculated under either a "subtraction" or this holding.) an "addition" method, each of which provides an identical measurement, given that (1) under the subtraction method, value added equals revenues minus TAXES §68; cost of materials, and (2) under the addition method, value added equals cost of labor plus depreciation plus value added tax -- what taxable -- ; interest plus profit. Headnote:[2] Page 7 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 COMMERCE §238 "addition method" as cost of labor plus depreciation plus interest plus profit, for (1) even if the corporation can CONSTITUTIONAL LAW §603; identify the location of its plant and equipment and much of its compensation, the tax, for apportionment purposes, state tax on multistate business -- due process -- ; is (a) an indivisible tax upon a bona fide measure of business activity--the value added--not (b) three separate Headnote:[5] and independent taxes on compensation, depreciation, A state tax on a multistate business will be sustained and income; (2) since the corporation was unprofitable in against a challenge under the Federal Constitution's that year, so that overall value added amounted to less commerce clause (Art I, 8, cl 3), so long as the tax (1) is than compensation plus depreciation, a nonapportionment applied to an activity with a substantial nexus with the approach would require a conclusion that (a) the taxing state, (2) is fairly apportioned, (3) does not corporation added value at its out-of-state factory through discriminate against interstate commerce, and (4) is fairly the consumption of capital and labor, but (b) the related to the services provided by the state; this four-part corporate products somehow lost value outside of that test, while responsive to commerce clause dictates, process, perhaps between the time that they left the encompasses as well the requirement, under the due factory and the time that they were delivered to in-state process clause of the Constitution's Fourteenth customers; (3) such an approach is incompatible with the Amendment, that there be (1) a minimal connection rationale of a value added tax and unsupported in the between the interstate activities and the taxing state, and record, where (a) for all that the record shows, production (2) a rational relationship between (a) the income operations might have added little value and the sales attributed to the state, and (b) the intrastate values of the office might have added significant value through enterprise; the principles which govern the validity of superior marketing skill, liaison between the corporation such state taxes seek (1) to accommodate the necessary and its customers, or mere fortuity, (b) in a unitary abstractions of tax theory to the realities of the enterprise such as the corporation, compensation, marketplace, (2) to avoid formalism, and (3) to rely upon depreciation, and profit are not independent variables to a consistent and rational method of inquiry focusing on be adjusted without reference to the other, and (c) it the practical effect of the challenged tax. would distort the application of the tax in both theory and practice to confine the value added consequences of the state market to solely the labor and capital expended by COMMERCE §238 the in-state sales force; (4) given that "value added" also may be calculated by a "subtraction method"--which uses CONSTITUTIONAL LAW §605 revenues minus cost of materials, but reaches an identical result--(a) the difference between the addition and EVIDENCE §979.2; subtraction methods is one of form and lacks Headnote:[6A][6B][6C][6D][6E][6F][6G][6H ][6I] constitutional significance, and (b) under either method, value added includes a residual that cannot be For purposes of determining liability under a state's geographically located with economic precision, since, value added, single business tax, it is proper, under the under the subtraction method, even though both revenues Federal Constitution's commerce clause (Art I, 8, cl 3) and the purchase of materials might be located, value and under the due process clause of the Constitution's added would itself be a remainder which would be no Fourteenth Amendment, for the state to apportion the more assignable than income; (6) the same factors--such "value added" of a foreign manufacturing corporation as functional integration, centralization of management, which had more than $ 103 million in sales, but and economies of scale--which lead to a conclusion that maintained only a 14-employee sales office in the state in separate geographical accounting is not constitutionally a particular tax year, because the state, absent an required for state income taxation of a unitary business apportionment formula, is unable to assign the tax base make it impossible to determine the location of value and its principal components to separate geographic added with exact precision; and (7) in the case of a locations and to separate accounts in each state without more-or-less integrated business enterprise operating in serious theoretical and practical difficulty, where the state more than one state, arriving at precise territorial uses a total tax base calculating "value added" under an allocations of "value" is often an elusive goal, in both Page 8 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 theory and practice. (Stevens and Blackmun, JJ., Headnote:[9] dissented from this holding). For purposes of determining a state's authority, under the Federal Constitution's commerce clause (Art I, 8, cl 3) COMMERCE §238; and under the due process clause of the Constitution's Fourteenth Amendment, to apportion the state's value state tax on multistate business -- apportionment -- ; added, single business tax--as applied to a foreign manufacturing corporation which had more than $ 103 Headnote:[7] million in sales, but maintained only a 14-employee sales Under the Federal Constitution's commerce clause office in the state in a particular tax year--the United (Art I, 8, cl 3), apportionment of a state tax on a States Supreme Court can and must assume that the multistate business is permitted only when precise corporation's in-state sales were part of the corporation's geographical measurement is not feasible, for to allow essential economic strategies and were an integral part of apportionment where there is no practical or theoretical corporationwide value added, where (1) without those justification could provide the opportunity for a state to in-state sales, the corporation's value added would have export tax burdens and import tax revenues. been lowered to a remarkable degree; (2) the market demand that sustained those sales did not arise solely, perhaps not even substantially, from the activities of the COMMERCE §238 corporation's in-state sales personnel; but (3) the requirements of the state market determined the direction CONSTITUTIONAL LAW §605; of the corporation's design, production, and distribution process; and (4) the corporation, by serving that market state value added tax -- apportionment -- foreign and by meeting that market's demands, generated value corporation -- due process -- ; added in the sums that the corporation did. (Stevens and Headnote:[8] Blackmun, JJ., dissented from this holding). For purposes of determining whether apportionment COMMERCE §239 of a state's single business tax is permitted, under the Federal Constitution's commerce clause (Art I, 8, cl 3) CONSTITUTIONAL LAW §603; and under the due process clause of the Constitution's Fourteenth Amendment, with respect to a foreign state tax -- due process -- ; manufacturing corporation which had sales and a sales office in the state in a particular tax year, the tax cannot Headnote:[10] be analyzed as a tax upon "business activity," where the state's tax statute (a) does not say that the tax is a tax For purposes of determining whether a state is upon business activity, but (b) provides that the tax is a permitted, under the Federal Constitution's commerce tax of 2.35 percent upon the adjusted tax base of every clause (Art I, 8, cl 3) and under the due process clause of person with business activity in the state which is the Constitution's Fourteenth Amendment, to apportion allocated or apportioned to the state; even though in-state the state's value added, single business tax, the business activity is a threshold requirement for the single Constitution does not require a formalistic analysis business tax, and even though "value added" is the resulting in a penalty for the state's selection of an easier measure of that tax, an attempt to label the tax as a tax calculation method for the state's taxpayers. upon business activity does not permit the court to forgo examination of the actual tax base and the tax's COMMERCE §238 apportionment provisions. CONSTITUTIONAL LAW §605 EVIDENCE §414; EVIDENCE §979.2; state tax -- validity -- assumptions -- ; Headnote:[11A][11B][11C][11D][11E][11F] Page 9 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 A foreign manufacturing corporation which had APPEAL §1092 more than $ 103 million in sales, but maintained only a 14-employee sales office in the state in a particular tax COMMERCE §330 year fails to prove by clear and cogent evidence that a CONSTITUTIONAL LAW §607; distorted result, in violation of the Federal Constitution's commerce clause (Art I, 8, cl 3) or the due process clause failure to contest issue -- income apportionment -- of the Constitution's Fourteenth Amendment, is provided state tax on multistate business -- due process -- ; by the state's apportionment formula to calculate the corporation's in-state "value added" subject to the state's Headnote:[12] value added, single business tax for that tax year, where (1) the corporation's liability is based upon an adjusted With respect to a state tax on a unitary, multistate tax base of about $ 12.5 million, which base is calculated business, the test for fair income apportionment, under by (a) multiplying the corporation's total "value added" the Federal Constitution's commerce clause (Art I, 8, cl 3) tax base of about $ 221 million by an 8.9717-percent and under the due process clause of the Constitution's factor, which is the average of a (i) 0.2328-percent ratio Fourteenth Amendment, has two components: (1) internal of in-state payroll to total payroll, (ii) 0.0930-percent consistency, that is, the formula must be such that, if ratio of in-state property to total property, and (iii) applied by every jurisdiction, the formula would result in 26.5892-percent ratio of in-state sales to total sales, and no more than all of the unitary business' income being (b) reducing the initial result of about $ 19.8 million taxed, and (2) external consistency, that is, the factor or through (a) about a $ 9,000 capital-acquisitions factors used in the apportionment formula must actually deduction, and (b) about a $ 7.3 million reduction for reflect a reasonable sense of how income is generated; excessive compensation by a labor-intensive taxpayer; (2) the United States Supreme Court, on certiorari to review the corporation does not contest the internal consistency a foreign corporation's challenge to the apportionment of the state's apportionment formula; and (3) with respect formula of a state's tax, need not consider the internal to the formula's external consistency, (a) a three-factor consistency of the state's formula, where the corporation formula of payroll, property, and sales has been approved does not contest such internal consistency. for the apportionment of state income taxes, for, even though the one-third weight given to each factor is not EVIDENCE §414; precise for every case, the three factors appear in combination to reflect a very large share of the activities burden of proof -- validity -- income tax -- value by which value is generated, (b) sales do not have to be added tax -- ; excluded for value added purposes, for (i) sales, as a measure of market demand, have a profound impact upon Headnote:[13] the amount of an enterprise's value added, and (ii) value added is not subject to geographic ascertainment, (c) thus, In order to prevail on a claim, under the Federal the single business tax does not tax value earned outside Constitution's commerce clause (Art I, 8, cl 3) and under the state's borders, and (d) it is not necessary to say for the due process clause of the Constitution's Fourteenth certain whether the three-factor formula or one of several Amendment, that a state tax on the income of a multistate other proposed formulas gives the most accurate business violates the external consistency test, a taxpayer calculation, where (i) the corporation has not must prove by clear and cogent evidence that the income convincingly demonstrated which formula is the most attributed to the state (1) is in fact out of all appropriate accurate, and (ii) the corporation gives no estimate of the proportions to the business transacted in that state, or (2) value added that would take into account both in-state has led to a grossly distorted result; the same test applies sales activity and in-state market demand for the to apportionment of a state value added tax. corporation's products, but (iii) the state has consistently applied a formula, the elements of which appear to reflect APPEAL §1662; a very large share of activities from which value is generated, with further relief for labor-intensive effect of decision on other grounds -- ; taxpayers such as the corporation. (Stevens and Blackmun, JJ., dissented from this holding.) Headnote:[14A][14B] Page 10 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 On certiorari to review a foreign corporation's claim state tax -- nondiscrimination -- apportionment -- ; that a state's value added tax violates the Federal Constitution's commerce clause (Art I, 8, cl 3) and the Headnote:[16] due process clause of the Constitution's Fourteenth With respect to a state tax on a multistate business, Amendment, the United States Supreme Court need not the Federal Constitution's commerce clause (Art I, 8, cl 3) consider the state's alternative claim that the state, instead has a deeper meaning that may be implicated even though of taxing value added, could have taxed gross receipts of state provisions do not allocate tax burdens between sales into the state, where the Supreme Court concludes insiders and outsiders in a manner that is facially that neither the commerce clause nor the due process discriminatory; thus, the commerce clause requires more clause is violated by the state's value added tax, as than mere facial neutrality, but the content of that applied to the corporation in a particular tax year. requirement is fair apportionment, and the deeper meaning is embodied in the requirement of fair COMMERCE §239 apportionment, as expressed in the tests of internal and external consistency. COURTS §124.5 EVIDENCE §918; COMMERCE §238 nondiscrimination -- state value added tax -- motive COURTS §124; -- ; state tax -- fair share -- double taxation -- legislative Headnote:[15A][15B][15C] task -- ; A foreign corporation fails to demonstrate that a Headnote:[17] state's value added, single business tax discriminates against out-of-state businesses in violation of the Federal In reviewing state taxation schemes under the Constitution's commerce clause (Art I, 8, cl 3), where (1) Federal Constitution's commerce clause (Art I, 8, cl 3), the corporation cannot point to any treatment of in-state the United States Supreme Court (1) attempts to insure and out-of-state firms that is discriminatory on its face; that each state taxes only its fair share of an interstate (2) in the absence of any facial discrimination, the transaction; and (2) acts as a defense against state taxes corporation, other than a vague accusation of which, whether by design or inadvertence, either (a) give discrimination, presents no other standard--not involving rise to serious concerns of double taxation, or (b) attempt fair apportionment--by which the constitutionality of the to capture tax revenues that, under the theory of the tax, tax might be considered; and (3) although the state's belong of right to other jurisdictions; but (3) declines to governor said that the tax was enacted to promote the undertake the essentially legislative task of establishing a development and investment of business within the state, single constitutionally mandated method of taxation. (a) it is a laudatory goal in the design of a tax system to promote investment that will provide jobs and prosperity SYLLABUS to citizens of the taxing state, (b) states are free to Michigan's single business tax (SBT) is a value structure their tax systems to encourage the growth and added tax (VAT) levied against entities having "business development of intrastate commerce and industry, (c) all activity" within the State. As part of the SBT the contemporaneous evidence concerning passage of the computation, a taxpayer doing business both within and tax suggests a benign motivation, combined with the without the State must determine its apportioned tax base practical need to increase revenues, and (d) neither the by multiplying its total value added -- which consists of corporation nor the secondary sources that the its profit, as represented by its federal taxable income, corporation relies upon present any evidence that the tax plus compensation paid to labor, depreciation on capital, was inspired as a way to export tax burdens or import tax and other factors -- by the portion of its business activity revenues. attributable to Michigan -- which consists of the average of three ratios: (1) Michigan payroll to total payroll, (2) COMMERCE §238; Michigan property to total property, and (3) Michigan Page 11 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 sales to total sales. During 1980, the tax year in question, cannot be assigned to one geographic location with any petitioner Trinova, an Ohio corporation, maintained a precision, the decision to apportion the tax is not 14-person sales office in Michigan. Under the SBT unconstitutional. Although Trinova's compensation and formula, its 1980 payroll and property apportionment depreciation may appear in isolation to be susceptible of factors were only 0.2328% and 0.0930% respectively, geographic designation, those elements cannot be while its sales factor was 26.5892%, representing separated from income, which cannot be located in a Michigan sales of over $ 100 million. Although its 1980 single State. The SBT is not a combination or series of federal taxable income showed a loss of almost $ 42.5 several smaller taxes on compensation, depreciation, and million, Trinova's SBT computation resulted in a tax of income, but is an indivisible tax upon a different, bona over $ 293,000. Trinova paid the tax, but subsequently fide measure of business activity, the value added. This filed an amended return and refund claim, alleging that it conclusion is no different from the one this Court has was entitled to relief under Michigan law because the reached in upholding the validity of state apportionment SBT's apportionment provisions did not fairly represent of income taxes. The same factors that prevent the extent of its business activity within the State. The determination of the geographic location where income is amended return proposed that Trinova's company-wide generated -- such as functional integration of the compensation and depreciation be excluded from its intrastate and extrastate activities of a unitary business preapportionment value added, and that its actual enterprise, centralization of management, and economies Michigan compensation and depreciation be added back of scale -- make it impossible to determine the location of into its apportioned tax base, which would result in a value added with exact precision. See, e. g., Mobil Oil negative value added apportioned to Michigan and entitle Corp., supra, at 438; Amerada Hess Corp. v. Director, the company to a refund for its entire 1980 SBT payment. Div. of Taxation, N. J. Dept. of Treasury, 490 U.S. 66, When respondent Department of Treasury denied relief, 74, 104 L. Ed. 2d 58, 109 S. Ct. 1617. Thus, although Trinova sued for a refund in the State Court of Claims, Trinova had no federal income during 1980, it cannot be which ruled in its favor. However, the State Court of relieved of tax upon its Michigan business. Such relief Appeals held that Trinova was not entitled to statutory would be incompatible with the rationale of a VAT, relief, and the State Supreme Court affirmed, holding, under which tax becomes due even if the taxpayer was among other things, that the SBT's three-factor unprofitable, and is unsupported by the record. Trinova's apportionment formula did not violate either the Due approach would require the conclusion that it added value Process Clause or the Commerce Clause of the Federal only at the factory through the consumption of capital Constitution. and labor, while the record would as easily support a finding that its production operations added little value Held: As applied to Trinova during the tax year at and its sales offices added significant value. Although issue, the SBT's three-factor apportionment formula does Trinova's 14 Michigan sales personnel need not be relied not violate either the Due Process Clause or the on as the sole, or even a substantial, source of all the Commerce Clause. Pp. 372-387. value added that can be apportioned fairly to Michigan, it cannot be doubted that, without the company's $ 100 (a) Under the test stated in Complete Auto Transit, million in Michigan sales, its total value added would Inc. v. Brady, 430 U.S. 274, 279, 51 L. Ed. 2d 326, 97 S. have been lower to a remarkable degree. It distorts the Ct. 1076, a state tax levied upon multistate businesses is SBT both in application and theory to confine value valid under the Commerce Clause if, as relevant here, it is added consequences of the Michigan market solely to the fairly apportioned and does not discriminate against labor and capital expended by the resident sales force. Pp. interstate commerce. Moreover, the Complete Auto test 373-379. encompasses the Due Process Clause requirement that, inter alia, a rational relationship exist between the (c) The SBT's three-factor apportionment formula income attributed to the State and the intrastate values of cannot be ruled unfair, since Trinova has failed to meet the enterprise. See, e. g., Mobil Oil Corp. v. its burden of proving, by clear and cogent evidence, that Commissioner of Taxes of Vt., 445 U.S. 425, 436-437, 63 there is no rational relationship between its tax base L. Ed. 2d 510, 100 S. Ct. 1223. measure attributed to Michigan and the contribution of its Michigan business activity to the entire value added (b) Because the SBT attempts to tax a base that process. Cf., e. g., Container Corp. of America v. Page 12 498 U.S. 358, *; 111 S. Ct. 818, **; 112 L. Ed. 2d 884, ***; 1991 U.S. LEXIS 842 Franchise Tax Bd., 463 U.S. 159, 169, 180-181, 77 L. COUNSEL: Peter S. Sheldon argued the cause for Ed. 2d 545, 103 S. Ct. 2933; Moorman Mfg. Co. v. Bair, petitioner. With him on the briefs were Thomas D. 437 U.S. 267, 274, 57 L. Ed. 2d 197, 98 S. Ct. 2340. This Hammerschmidt, Jr., Jeffery V. Stuckey, Benjamin O. Court has approved the same formula for apportionment Schwendener, Jr., William F. Sheehan, Collette C. of income, see, e. g., Butler Bros. v. McColgan, 315 U.S. Goodman, and Walter Hellerstein. 501, 86 L. Ed. 991, 62 S. Ct. 701, and the formula has gained wide acceptance in that context "because payroll, Richard R. Roesch, Assistant Attorney General of property, and sales appear in combination to reflect a Michigan, argued the cause for respondent. With him on very large share of the activities by which value is the brief were Frank J. Kelley, Attorney General, Gay generated," Container Corp., supra, at 183 (emphasis Secor Hardy, Solicitor General, and Thomas L. Casey, added). Trinova's argument -- that the formula leads to a Assistant Solicitor General. * distorted result, out of all proportion to the company's * Briefs of amici curiae urging reversal were Michigan business, because sales have no relationship to, filed for Alcan Aluminum Corp. et al. by Patrick and add nothing to, the value that compensation and R. Van Tiflin, Myra L. Willis, and James H. depreciable plant contribute to the Michigan tax base -- is Geary; and for Caterpillar Inc. by Don S. Harnack rejected, since sales (as a measure of market demand) do and Richard A. Hanson. have a profound impact upon the amount of an enterprise's value added, and since there is no basis for Benna Ruth Solomon and Charles Rothfeld distinguishing similar arguments that were pressed, and filed a brief for the Council of State Governments rejected by this Court, with regard to the apportionment et al. as amici curiae urging affirmance. of income. Because the three-factor formula causes no distortion, the SBT does not tax value earned outside Michigan. The argument that the value was added in Ohio, by labor and capital, and that no value has been JUDGES: KENNEDY, J., delivered the opinion of the added in Michigan, wrongly assumes that value added is Court, in which REHNQUIST, C. J., and WHITE, subject to geographic ascertainment and that a sales MARSHALL, and O'CONNOR, JJ., joined. SCALIA, J., factor is inappropriate in apportionment. Trinova gives no filed an opinion concurring in the judgment, post, p. 387. estimate of the value added that would take account of STEVENS, J., filed a dissenting opinion, in which both its Michigan sales activity and Michigan market BLACKMUN, J., joined, post, p. 388. SOUTER, J., took demand for its products, whereas the State has no part in the consideration or decision of the case. consistently applied the three-factor formula and has enacted further provisions giving relief to labor intensive OPINION BY: KENNEDY taxpayers like Trinova. Pp. 379-384. OPINION (d) The SBT does not discriminate against interstate commerce. Trinova cannot point to any treatment of [*361] [***896] [**823] JUSTICE KENNEDY in-state and out-of-state firms that is discriminatory on its delivered the opinion of the Court. face. Although American Trucking Assns., Inc. v. Scheiner, 483 U.S. 266, 281, 97 L. Ed. 2d 226, 107 S. Ct. [***LEdHR1A] [1A]The principal question before 2829, states that the Commerce Clause has a "deeper us is whether the three-factor apportionment formula of meaning" that may be implicated even absent facial the Michigan single business tax (SBT), Mich. Comp. discrimination, that meaning is embodied in the Laws § 208.1 et seq. (1979), violates either the Due requirement of fair apportionment and does not Process Clause or the Commerce Clause of the Federal encompass Trinova's vague accusation of discrimination. Constitution. The applicability of a three-factor formula Nor is that accusation supported by a statement of to a state income tax is well settled, but we have not Michigan's Governor that the SBT was enacted to considered whether a similar apportionment formula may promote business development and investment within the be applied to a value added tax (VAT). We granted State. Such promotion is a laudable goal in the absence of certiorari to consider this question and to determine evidence of an impermissible motive to export tax whether the Michigan SBT discriminates against burdens or import tax revenues. Pp. 384-386. out-of-state businesses. Page 13 498 U.S. 358, *361; 111 S. Ct. 818, **823; 112 L. Ed. 2d 884, ***LEdHR1A; 1991 U.S. LEXIS 842 [*362] I advantages of value added as a measure of taxation is its neutrality. A VAT is neutral in the sense that it taxes all Although in Europe and Latin [***897] America business activity alike: Under a pure VAT, all forms of VAT's are common, see Lindholm, The Origin of the business organization (corporation, partnership, Value-Added Tax, 6 J. Corp. L. 11 (1980); Due, proprietorship), all types of financing (debt, equity) and Economics of the Value Added Tax, 6 J. Corp. L. 61 all methods of production (capital intensive, labor (1980), in the United States they are much studied but intensive) bear the same tax burden. little used. Michigan is the first and, the parties tell us, the only State to have enacted a VAT as a tax on business "Tax factors are minimized in business activity. We begin with a description of value added and decisions; inherent advantages and relative VAT's in general, and then discuss the Michigan SBT. efficiencies are allowed to operate in the market economy with minimum tax A distortions. [HN1] Value added is an economic concept. "Value "This neutrality of a value-added tax added is defined as the increase in the value of goods and is in notable contrast to the effects of both services brought about by whatever a business does to the corporation income tax and the payroll them between the time of purchase and the time of sale." taxes. The former, by definition, is applied Haughey, The Economic Logic of the Single Business only to corporations and varies with their Tax, 22 Wayne L. Rev. 1017, 1018 (1976) (hereinafter reliance on equity rather than debt capital Haughey). The value a business adds to a single product and the efficiency with which they use is "the difference between the value of the product at sale equity capital -- that is, their net profits." and the cost of goods purchased from other businesses Smith, Value-added tax: [***898] the that went into the product." Taxation and Economic case for, 48 Harv. Bus. Rev. 77, 79 Policy Office, Michigan Department of Treasury, (Nov.-Dec. 1970). Analysis of the Michigan Single Business Tax 20-21 (1985) (hereinafter SBT Analysis). It follows that the sale Though neutral in theory, VAT's often depart in practice price of a product is the total of all value added by each from the pure value added model because of special step of the production process to that point. "The value exemptions, deductions, and other adjustments. These added of a loaf of bread is the sum of the value features can eliminate much of the claim to neutrality. contributed at each stage of the production and See generally The Value-Added Tax: Lessons from distribution process. Among others, it includes the Europe (H. Aaron ed. 1981). contribution of the farmer, miller, baker, wholesaler and retailer." Haughey 1019. [***LEdHR3] [3][HN4] A VAT differs in important respects from a corporate income tax. A [HN2] A business "adds value by handling or corporate income tax is based on the philosophy of ability processing these [goods] with its labor force, machinery, to pay, as it consists of some portion of the profit buildings and capital." R. Kleine, Advisory Commission remaining after a company has provided for its workers, on Intergovernmental Relations, The Michigan Single [*364] suppliers, and other creditors. A VAT, on the Business Tax: A Different Approach to State Business other hand, is a much broader measure of a firm's total Taxation 1 (1978) (hereinafter Kleine). In this litigation, business activity. Even if a business entity is value added usually refers to the [*363] activities of a unprofitable, under normal circumstances it adds value to single business enterprise. The term can, however, be its products and, as a consequence, will owe some VAT. used with regard to a single product, or even an entire Because value added is a measure of actual business economy. "[Value added] is a means of consistently activity, a VAT correlates more closely to the volume of measuring the size of business firms and other economic governmental services received by the taxpayer than does enterprises [**824] comprising the total economy . . . . an income tax. Further, because value added does not Gross National Product is virtually equivalent to national fluctuate as widely as net income, a VAT provides a value added." Haughey 1017. more stable source of revenue than the corporate income tax. See generally Kleine 3, figure 1. "'The logic or [***LEdHR2] [2][HN3] One of the acknowledged Page 14 498 U.S. 358, *364; 111 S. Ct. 818, **824; 112 L. Ed. 2d 884, ***LEdHR3; 1991 U.S. LEXIS 842 rationale of the [VAT] rests squarely on the benefits 1983); P. Samuelson & W. Nordhaus, Economics received principle of taxation -- government services are 902 (12th ed. 1985). essential to the operation of any business enterprise . . . 2 See, e. g., Aaron, Introduction and Summary, and a part of these public service costs should properly be in The Value-Added Tax: Lessons from Europe 1, included in the cost of doing business.'" Id., at 4 (citation 2 (H. Aaron ed. 1981) (hereinafter Aaron); omitted). Haughey 1018; Special Committee on the Value-Added Tax of the Section of Taxation, [***LEdHR4A] [4A]The SBT Analysis, at 20-21, American Bar Association, The Choice Between provides us with the following simplified example of Value-Added and Sales Taxation at Federal and how value added is determined. Assume a bakery's sole State Levels in the United States, 29 Tax Lawyer revenue comes from the sale of bread. The bakery's costs 457, 459 (1976) (addition and subtraction consist of materials (flour, sugar, spices, utilities), labor methods "reac[h] the same result by the opposite (baker, sales clerk), capital (building, mixer, utensils, means"); SBT Analysis 20 (addition and oven), and credit (interest paid on loans). Any excess of subtraction are "two alternative, but equivalent revenues over costs represents profit. Thus: ways of calculating value added. . . . The important point is that, conceptually, these two Revenues = Cost of Labor + Cost of Materials + calculations are equal"). Depreciation 1 + Interest + Profit. 3 The nations of the European Economic Community (EEC) each levy a VAT under yet a Because value added is defined as the difference third method, as a multistage sales tax. See between the value of products sold (revenues), and the generally Aaron. Under the EEC system, the cost of materials going into the products, we can bakery in our example would be taxed on each represent value added (for the entire firm) by a second sale of bread and would receive a credit for each simple equation: purchase of materials going into production of the [*365] Value added = Revenues - Cost of bread. Similarly, at each other link in the chain of Materials. production and distribution, tax is assessed on sales, but credit is provided on purchases. This The same result is reached by another common multistage sales tax system places the burden on method. If we subtract Cost of Materials [**825] from the taxpayer to demonstrate that it did, in fact, each side of the first equation above, we have: purchase goods for which it requests a credit. The multistage sales tax version of the VAT has been Revenues - Cost of Materials = Cost of Labor + advocated as promoting tax compliance, though Depreciation + Interest + Profit. the evidence does not necessarily support this view. See Oldman & Woods, Would a [***899] So in practice value added can be Value-Added Tax System Relieve Tax calculated as either Revenues - Cost of Materials; or Cost Compliance Problems, in Income Tax of Labor + Depreciation + Interest + Profit. Not Compliance: A Report of the ABA Section of surprisingly, these are referred to as the "subtraction" and Taxation Invitational Conference on Income Tax the "addition" methods. Each provides an identical Compliance 317 (1983) (multistage consumption measurement of a taxpayer's value added. 2 Once value VAT has traditionally been regarded as added is determined, the VAT is assessed as a percentage self-enforcing because the tax credit mechanism is of the value added for the relevant fiscal period. 3 said to induce firms to report transactions accurately). 1 In calculating value added, a firm's use of capital is represented by depreciation. [HN5] The requirement of "fiscal frontiers" to Depreciation is the reduction in value of a firm's record and tax interstate transactions makes the assets, through wear and tear, obsolescence, or multistage sales tax approach impracticable for an other factors, and thus roughly measures individual State. McLure, State and Federal consumption of capital. See McGraw-Hill Relations in the Taxation of Value Added, 6 J. Dictionary of Modern Economics 130 (3d ed. Corp. L. 127, 130-131 (1980); see also Haughey Page 15 498 U.S. 358, *365; 111 S. Ct. 818, **825; 112 L. Ed. 2d 884, ***899; 1991 U.S. LEXIS 842 1025 ("invoice credit method is not workable in a L. Ed. 2d 99, 81 S. Ct. 124 (1960). The arguments subeconomy without the legal authority and in that case focused on whether the BAT was best means to control the flow of imports and characterized as a tax on income or a tax on gross exports"). receipts, with the concern that under our jurisprudence of the time a "direct" tax on gross On international transactions, the EEC's receipts from interstate commerce would be VAT's are assessed in the jurisdiction of unconstitutional. destination. As a result, no tax is applied on exports, while full tax is applied to imports. See The Michigan SBT is an addition method VAT, id., at 1024-1025; Aaron 4. The destination although it inevitably permits various exclusions, principle does not, however, purport to determine exemptions, and adjustments that depart from the simple whether value was added in the jurisdiction of value added examples described above. Subject to destination, or the jurisdiction of origin. exemptions contained at Mich. Comp. Laws § 208.35 (1979), [HN6] the Michigan SBT is levied against any [*366] B person with "business activity" within the State of Michigan. § 208.31(1). 5 In order to calculate the amount The Michigan SBT went into effect on January 1, of a taxpayer's SBT the taxpayer must, first, determine its 1976. 1975 Mich. Pub. Acts 228. 4 The SBT replaced total tax base. The total tax base consists of the taxpayer's seven [***900] different business taxes. Kleine 22; value added, calculated by the addition method: Cost of Brief for Respondent 8. Before 1976, a typical Labor + Depreciation + Interest + Profit. Under § 208.9, manufacturer with business activity in [*367] Michigan the taxpayer begins with federal taxable income would have been subject to a franchise tax, an income (representing profit), adds other elements that reflect tax, an intangible property tax, and an ad valorem consumption of labor and capital including property tax upon inventories. Mitchell, Taxes Repealed compensation, depreciation, dividends, and interest paid and Amended, 22 Wayne L. Rev. 1029 (1976); Brief for by the taxpayer, and makes other detailed adjustments. Respondent 8-9. After enactment [**826] of the SBT, the same manufacturer would pay only one tax. 5 "[HN7] Business activity" is broadly defined as "a transfer of legal or equitable title to or rental 4 The SBT was not Michigan's first experiment of property, whether real, personal, or mixed, with a VAT. Between 1953 and 1967, Michigan tangible or intangible, or the performance of had utilized a Business Activities Tax (BAT) services, or a combination thereof, made or similar to the Michigan SBT. Although the BAT engaged in, or caused to be made or engaged in, was a subtraction method VAT, and permitted within this state, whether in intrastate, interstate, different adjustments than the SBT, the BAT tax or foreign commerce, with the object of gain, base included "a company's payroll, profits, and benefit, or advantage, whether direct or indirect, capital outlay less depreciation allowed," Lock, to the taxpayer or to others, but shall not include Rau, & Hamilton, The Michigan Value-Added the services rendered by an employee to his Tax, 8 Nat. Tax J. 357, 363 (1955), and was employer, services as a director of a corporation, apportioned among States by the same or a casual transaction. . . ." Mich. Comp. Laws § three-factor formula that is challenged here. See 208.3 (1979). Mich. Stat. Ann. §§ 7.557(1)-7.557(24) (Supp. 1955), repealed, 1967 Mich. Pub. Acts 281. The Second, [HN8] if a taxpayer does business both Michigan Supreme Court upheld the BAT against within and without Michigan, it must determine the a challenge on facts remarkably similar to those portion of its total value added attributable to Michigan. presented here by Trinova. Armco Steel Corp. v. That portion, the crux of this case, is the average of three State, 359 Mich. 430, 102 N.W.2d 552, 555-556 ratios: (1) Michigan payroll [*368] to total payroll, (2) (1960) (Ohio corporation had nominal Michigan Michigan property to total property, and (3) Michigan property and payroll, but substantial Michigan sales to total sales. §§ 208.45, 208.46, 208.49, 208.51. sales). We dismissed an appeal of the judgment in The total tax base is multiplied by the portion of business Armco for want of a substantial federal question. activity attributable to Michigan (under the three-factor Armco Steel Corp. v. Michigan, 364 U.S. 337, 5 Page 16 498 U.S. 358, *368; 111 S. Ct. 818, **826; 112 L. Ed. 2d 884, ***900; 1991 U.S. LEXIS 842 formula), and the result, subject to several further this alternative calculation, no firm's Michigan adjustments, is the taxpayer's "adjusted tax base." § SBT liability will ever exceed 1.175% of 208.31(2). apportioned gross receipts. Two further adjustments are relevant here: § II 208.23(a), which permits a taxpayer to deduct a portion of its capital acquisitions, and § 208.31(5), which permits Trinova, an Ohio corporation, manufactures a labor-intensive taxpayer to reduce its adjusted tax base automobile components. Its principal office is located in by a percentage equal to the percentage by which Maumee, Ohio, a suburb of Toledo located near the compensation exceeds 63% of the total tax base, but with Michigan border. During 1980, the tax year in question, such reduction not to exceed a maximum of 37%. Actual Trinova maintained a fixed presence in Michigan: a sales tax liability [***901] equals the adjusted tax base office of 14 employees who solicited orders, maintained multiplied by a tax rate of 2.35%. 6 contact with Trinova's Michigan customers, and performed clerical work. Michigan, with its automobile 6 Any taxpayer can, in the alternative, calculate industry, was a major market for Trinova's products. its adjusted tax base as total gross receipts Indeed, Trinova made $ 103,981,354 worth of sales to multiplied by the apportionment figure (derived Michigan during 1980, 26.5892% of its total sales of $ using the three-factor formula) divided by two. 391,065,866. Trinova calculated its 1980 SBT adjusted This figure is then multiplied by the 2.35% tax tax base as follows: [*369] rate to give actual tax liability. § 208.31(2). Under U. S. taxable income (loss) ($ 42,466,114) Add: Compensation $ 226,356,271 Depreciation $ 23,262,909 Dividends, interest, and royalties paid $ 22,908,950 Other $ 549,526 Subtotal $ 230,611,542 Subtract: Dividends, interest, and royalties received ($ 9,486,223) Total Tax Base $ 221,125,319 Apportionment: Payroll Factor 0.2328% Property Factor 0.0930% Sales Factor 26.5892% Average Factor 8.9717% Apportioned Tax Base: $ 221,125,319 Page 17 498 U.S. 358, *369; 111 S. Ct. 818, **826; 112 L. Ed. 2d 884, ***901; 1991 U.S. LEXIS 842 x 8.9717% time, § 208.69 provided that if the apportionment [**827] See 433 Mich. 141, 150-152, 445 N.W.2d provisions of the SBT did not "fairly represent the extent 428, 431-433 (1989). Trinova further adjusted its tax base of the taxpayer's business activity" in Michigan, the by subtracting a capital acquisition deduction ($ 9,063) taxpayer could, among other alternatives, petition for the and by taking the maximum (37%) reduction for employment of "any other method to effectuate an labor-intensive [***902] taxpayers. These adjustments equitable allocation and apportionment of the taxpayer's resulted in a 1980 adjusted tax base of $ 12,492,671. tax base." When multiplied by the tax rate of 2.35%, Trinova's tax liability amounted to $ 293,578 ($ 12,492,671 x 2.35%). Soon after the decision in Jones & Laughlin, Trinova 7 Trinova timely filed its return and paid its tax liability. filed an amended return and refund claim for the 1980 tax year. Based on the relief granted in Jones & Laughlin, 7 Trinova could have calculated its tax liability Trinova proposed that despite admitted company-wide under the alternative gross receipts method, Mich. value added of $ 221 million and Michigan sales of over Comp. Laws § 208.31(2) (1979), as follows: Total $ 100 million, for purposes of the Michigan SBT it gross receipts ($ 391,065,866) multiplied by should be treated as if it had negative total value added. Michigan apportionment factor (8.9717%) Value added apportioned to Michigan would also have divided by two (equals $ 17,542,628) multiplied been negative, and Trinova would have been entitled to a by 2.35% equals tax liability of $ 412,251. This refund for its entire 1980 SBT payment. 8 Upon denial of figure amounts to less than 0.4% of Trinova's relief by the Michigan Department of [*371] Treasury, Michigan sales. Of course, Trinova did not use Trinova sued for a refund in the Michigan Court of this method, as it was required to pay only $ Claims, which ruled in Trinova's favor on the authority of 293,578 (or 0.28% of Michigan sales) under the Jones & Laughlin. No. 86-10430-CM (May 5, 1987); apportionment method challenged here. App. to Pet. for Cert. 42a-51a. [*370] In 1985, a Michigan intermediate Court of 8 The amended return proposed that Trinova's Appeals ruled that taxpayers similarly situated to Trinova company-wide compensation and depreciation be were entitled to "relief" under Mich. Comp. Laws § excluded from the preapportionment tax base, and 208.69 (1979), a provision of the SBT. Jones & Laughlin actual Michigan compensation and depreciation Steel Corp. v. Department of Treasury, 145 Mich. App. be added back into the apportioned tax base, as 405, 377 N.W.2d 397, leave to appeal and follows: reconsideration denied, 424 Mich. 895 (1986). At the Total Tax Base -- statutory formula: $ 221,125,319 Deduct Compensation ($ 226,356,271) Deduct Depreciation ($ 23,262,909) Trinova's Proposed Total Tax Base: ($ 28,493,861) Apportionment (8.9717%) ($ 2,556,384) Add Michigan Compensation $ 511,774 Add Michigan Depreciation $ 2,152 Page 18 498 U.S. 358, *371; 111 S. Ct. 818, **827; 112 L. Ed. 2d 884, ***902; 1991 U.S. LEXIS 842 Trinova's averaged ratios of payroll, property, and sales 433 Mich. 141, 147, n.4, 445 N.W.2d 428, are a fair representation of the extent of its business 431, n.4 (1989). activity in Michigan, making it ineligible for relief on statutory or constitutional grounds. Id., at 163-166, 445 [***903] While the Department of Treasury's N.W.2d at 438-439. We granted Trinova's petition for a appeal was pending in the Michigan Court of Appeals, writ of certiorari. 494 U.S. 1015 (1990). the legislature amended § 208.69. 1987 Mich. Pub. Acts 39. [HN9] The amended § 208.69 creates a presumption III that the statutory apportionment formula fairly represents the taxpayer's business activity in [**828] Michigan [***LEdHR5] [5]The principles which govern the unless the adjusted tax base meets one of two tests, validity of state taxes levied upon multistate businesses neither of which Trinova could satisfy, and which do not seek to accommodate the necessary abstractions of tax merit discussion here. See Mich. Comp. Laws Ann. § theory to the realities of the marketplace. Under the test 208.69(3) (West Supp. 1990). The Court of Appeals stated in Complete Auto Transit, Inc. v. Brady, 430 U.S. referred to the legislature's statement that its Act was 274, 279, 51 L. Ed. 2d 326, 97 S. Ct. 1076 intended to be (1977),[HN10] we will sustain a tax against Commerce Clause challenge so long as "the tax is applied to an "curative, expressing the original intent activity with a substantial nexus with the taxing State, is of the legislature that the single business fairly apportioned, does not discriminate against tax . . . is an indivisible value added type interstate commerce, and is fairly related to the services of tax and not a combination or series of provided by the State." We applied this four-part test in several smaller taxes and that relief from later cases addressing a wide variety of taxes. See formulary apportionment should be Goldberg v. Sweet, 488 U.S. 252, 260, n.12, 102 L. Ed. granted only under extraordinary 2d 607, 109 S. Ct. 582 (1989) (citing applications in circumstances." 1987 Mich. Pub. Acts 39, cases involving sales, severance, use, corporate income, § 2. and business and occupation taxes). Relying upon this language, the Court of Appeals [***904] In Complete Auto, we renounced the determined that the amendment was to be given formalistic approach of Spector Motor Service, Inc. v. retroactive effect as a "remedial and procedural" statute O'Connor, 340 U.S. 602, 95 L. Ed. 573, 71 S. Ct. 508 and that Trinova was not entitled to statutory relief. 166 (1951), which had prohibited a State from taxing the Mich. App. 656, 666, 421 N.W.2d 258, 262 (1988). privilege of doing business in the State, treating it as a tax upon interstate commerce and so beyond the authority of The Michigan Supreme Court affirmed the Court of the [*373] State. We seek to avoid formalism and to rely Appeals. 433 Mich. 141, 445 N.W.2d 428 (1989). upon a "consistent and rational method of inquiry Without addressing retroactive application of the [focusing on] the practical effect of a challenged tax." amendments to § 208.69, it construed § 208.69 as a Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 "constitutional 'circuit [*372] breaker'" to be applied U.S. 425, 443, 63 L. Ed. 2d 510, 100 S. Ct. 1223 (1980). only if required in order to save the SBT against The Complete Auto test, while responsive to Commerce unconstitutional application. 433 Mich. 141 at 156, 445 Clause dictates, encompasses as well [HN11] the due N.W.2d at 434. The court then upheld the SBT against process requirement that there be "a 'minimal connection' Trinova's federal constitutional challenges. The Michigan between the interstate activities and the taxing State, and Supreme Court noted that formulary apportionment of a rational relationship between the income attributed to income taxes is uncontroversial and that it did "not the State and the intrastate values of the enterprise." believe that 'business activity' as defined under the [SBT] Mobil Oil Corp., supra, at 436- 437; see also Amerada is susceptible to accurate analysis when only one Hess Corp. v. Director, Div. of Taxation, N. J. Dept. of component of the total business effort is examined." Id., Treasury, 490 U.S. 66, 80, 104 L. Ed. 2d 58, 109 at 163, 445 N.W.2d at 438. The court concluded that [**829] S. Ct. 1617 (1989) (SCALIA, J., concurring). Page 19 498 U.S. 358, *373; 111 S. Ct. 818, **829; 112 L. Ed. 2d 884, ***LEdHR1A; 1991 U.S. LEXIS 842 [***LEdHR1A] [1B]In this Court, Trinova does not arguments by Michigan and some amici curiae that the dispute that its business activities have a substantial Michigan SBT can be analyzed as a tax upon "business nexus with Michigan and subject it to the State's taxing activity." Brief for Council of State Governments et al. as authority. Nor does Trinova argue that the amount of tax Amici Curiae 11. The statute does not say that the SBT is it is required to pay bears no fair relation to the services a tax upon business activity, but rather that it is a "tax of provided by the State. Complete Auto, supra, at 279. 2.35% upon the adjusted tax base of every person with Trinova instead contends that Michigan's SBT fails the business activity in this state which is allocated or other two prongs of the Complete Auto test: that the SBT apportioned to this state." Mich. Comp. Laws § 208.31(1) is not fairly apportioned as applied to Trinova and that (1979) (emphasis added). While Michigan business the tax discriminates against interstate commerce. We activity is a threshold requirement for the tax, and value consider these claims and begin with the matter of added is its measure, labeling the SBT a tax on "business apportionment. activity" does not permit us to forgo examination of the actual tax base and apportionment provisions. "A tax on A sleeping measured by the number of pairs of shoes you have in your closet is a tax on shoes." Jenkins, State [***LEdHR6A] [6A]Trinova's claim that Taxation of Interstate Commerce, 27 Tenn. L. Rev. 239, apportionment of the tax is unconstitutional concentrates 242 (1960). on the elements of the apportionment formula. The original rationale for apportionment of income was the [***LEdHR6A] [6C]Trinova errs in the opposite difficulty of identifying the geographic source of the direction. It would dissect the tax base as if the SBT were income earned by a multistate enterprise. See Underwood three separate and independent taxes: a tax on Typewriter Co. v. Chamberlain, 254 U.S. 113, 120-121, compensation, a tax on depreciation, and a [*375] tax on 65 L. Ed. 165, 41 S. Ct. 45 (1920) (legislature "faced income, each apportioned. Trinova insists that with the impossibility of allocating specifically the profits compensation and depreciation can be located and can be earned by the [taxpayer's] processes conducted within its separated from the total value added calculation. As a borders"). As we stated the problem in Container Corp. result, Trinova would be taxed upon its Michigan of America v. Franchise Tax Bd., 463 U.S. 159, 192, 77 compensation and Michigan depreciation. It would owe L. Ed. 2d 545, 103 S. Ct. 2933 (1983): "Allocating no additional tax upon income [**830] apportionable to income among various taxing jurisdictions [*374] bears Michigan, because it had no income during the relevant some resemblance . . . to slicing a shadow. " Trinova tax year. argues that because its SBT tax base is composed in large part of compensation and depreciation, elements which This characterization, and with it Trinova's can be assigned to a geographic source, we must reject constitutional argument, fails. Doubtless Trinova can apportionment altogether. identify the location of its plant and equipment and much of its compensation. The Michigan SBT, however, is not [***LEdHR6A] [6B] [***LEdHR7] [7]We can three separate and independent taxes, and Trinova cannot accept the premise that apportionment is permitted only purport to identify the geographic source of value added when precise geographic measurement is not feasible, for by assuming that two elements can be located in a single to allow apportionment where there is no practical or State while the third cannot. Trinova's proposed theoretical justification could provide the opportunity for apportionment for the 1980 tax year, n.8, supra, provides a State to export tax burdens and import tax revenues. a good example of the problems that accompany its The Commerce Clause prohibits this competitive argument. mischief. The issue becomes whether, without an apportionment formula, Michigan can assign the SBT tax In 1980, Trinova's company-wide value added base and its principal components to separate geographic amounted to much less than its compensation plus locations [***905] and to separate accounts in each depreciation. In short, Trinova was unprofitable. Under a State. Michigan has decided it cannot do so without VAT, however, tax becomes due in any event. Trinova's serious theoretical and practical difficulty, and upon approach would require us to conclude that Trinova review of the case we accept that determination. added value at the factory through the consumption of capital and labor, but that its products somehow lost [***LEdHR8] [8]We reject at the outset, however, Page 20 498 U.S. 358, *375; 111 S. Ct. 818, **830; 112 L. Ed. 2d 884, ***LEdHR6A; 1991 U.S. LEXIS 842 value outside of this process, perhaps between the time method. The addition and subtraction methods of they left the factory and the time they were delivered to calculating value, however, are but two different paths to customers in Michigan. This approach is incompatible the same result. See n.2, supra. Had Michigan calculated with the rationale of a VAT and is unsupported in the the SBT tax base by the subtraction method, reporting record. total revenues minus total cost of materials, Trinova's characterization would collapse of its own weight. For all this record shows, Trinova's production Trinova could geographically locate its revenues and operations might have added little value and its sales even determine where it purchased its materials. The offices might have added significant value, through Michigan apportionment formula [*377] assumes as superior marketing skill, liaison between the company much. But were Trinova to calculate value added based and its customers, or mere fortuity. See Moorman Mfg. upon the location of its revenues, it would apportion a Co. v. Bair, 437 U.S. 267, 272, 57 L. Ed. 2d 197, 98 S. much greater share of its value added to Michigan Ct. 2340 (1978) (record lacked analysis of what portion (26.5892%) than was apportioned under Michigan's of profits was apportionable [***906] to sales, to [**831] three-factor formula (8.9717%). An manufacturing, or to other phase of company's apportionment of value added based solely on the source operations). of revenues is no less justifiable than an apportionment based solely upon the location of compensation or [*376] But we need not rely upon Trinova's 14 depreciation. Michigan sales personnel as the source of all the value added that can be apportioned fairly to Michigan. [HN12] [***LEdHR6A] [6F] [***LEdHR10] [10]The In a unitary enterprise, compensation, depreciation, and difference between the addition and subtraction methods profit are not independent variables to be adjusted is one of form and lacks constitutional significance. without reference to each other. If Trinova had paid an Michigan chose the addition method of calculating value additional $ 100 million in compensation during 1980, added as a convenience to taxpayers, for whom federal there is no way of knowing whether, or to what extent, taxable income provided an easy starting point. Kleine value added would have increased. In fact, value added 6-7 (discussing advantages of addition method); SBT would not have increased so long as revenues did not Analysis 21 (same). The Constitution does not require a increase. These elements of value added are inextricable, formalistic analysis resulting in a penalty for Michigan's codependent variables. selection of an easier calculation method for its taxpayers. [***LEdHR6A] [6D] [***LEdHR9] [9]Without Trinova's $ 100 million in 1980 Michigan sales, the [***LEdHR4A] [4C] [***LEdHR6A] [6G]Both company's value added would have been lower to a methods of calculation, moreover, illustrate the remarkable degree. The market demand that sustained justification for the State's adoption of an apportionment those sales did not arise solely, perhaps not even formula. Under either [***907] method, value added substantially, from the activities of Trinova's 14 includes a remainder or residual that cannot be located Michigan sales personnel. But there can be little doubt with economic precision. Under the addition method, that requirements of the Michigan market determined the value added contains the element of income, one direction of Trinova's design, production, and distribution calculated by and dependent upon factors (revenues process. By serving that market and meeting its demands, minus total costs) not included in the addition method Trinova generated value added in the sums that it did. We equation; under the subtraction method, value added is can and must assume that Michigan sales were a part of itself a remainder, no more assignable than income. It the company's essential economic strategies and were an would be impractical to locate value added by a integral part of company-wide value added. It distorts the geographic test. We thus agree with the Michigan tax both in application and theory to confine value added Legislature's statement that the SBT is not, for consequences of the Michigan market solely to the labor apportionment purposes, "a combination or series of and capital expended by the resident sales force. several smaller taxes," 1987 Mich. Pub. Acts 39, § 2, but an "indivisible," ibid., tax upon a different, bona fide [***LEdHR4A] [4B] [***LEdHR6A] measure of business activity, the value added. [6E]Trinova's attempted characterization is arguable only [***LEdHR6A] [6H]This conclusion is no different from because Michigan calculates value added by the addition Page 21 498 U.S. 358, *377; 111 S. Ct. 818, **831; 112 L. Ed. 2d 884, ***LEdHR6A; 1991 U.S. LEXIS 842 the one we have reached in upholding the validity of state New Jersey corporate income tax, which used federal apportionment of income taxes. As with a VAT, the taxable income as a benchmark and required certain discrete components of a state income tax may appear in [**832] adjustments (as does the Michigan SBT). New isolation susceptible of geographic [*378] designation. Jersey required oil companies to [*379] add back into Nevertheless, since Underwood Typewriter Co. v. income any deduction taken for taxes paid under the Chamberlain, 254 U.S. 113, 65 L. Ed. 165, 41 S. Ct. 45 federal windfall profits tax. The taxpayers objected (1920), we have recognized the impracticability of [***908] that the windfall profits tax is "an exclusively assuming that all income can be assigned to a single out-of-state expense because it is associated with the source. In this respect, Trinova's argument becomes a production of oil outside New Jersey." Id., at 74. familiar and often rejected genre of tax-payer challenge: In like manner, Trinova objects to the SBT's "Apportionability often has been requirement that it add compensation and depreciation to challenged by the contention that . . . the federal taxable income on the grounds that these are, with source of [particular] income may be limited exception, out-of-state expenses. In Amerada ascertained by separate geographical Hess Corp. we rejected outright the idea that accounting. The Court has rejected that geographically assignable costs of production must be contention so long as the intrastate and excluded from an apportionment of income: extrastate activities formed part of a single unitary business. See Butler Bros. v. "Just as each [taxpayer's] oil-producing McColgan, 315 U.S. 501, 506-508, 86 L. revenue -- as part of a unitary business -- Ed. 991, 62 S. Ct. 701 (1942); Ford Motor is not confined to a single State, Exxon Co. v. Beauchamp, 308 U.S. 331, 336, 84 Corp., 447 U.S. 207 at 226, 65 L. Ed. 2d L. Ed. 304, 60 S. Ct. 273 (1939); cf. 66, 100 S. Ct. 2109, . . . so too the costs of Moorman Mfg. Co. v. Bair, 437 U.S. at producing this revenue are unitary in 272. In these circumstances, the Court has nature. See Container Corp., 463 U.S. at noted that [HN13] separate accounting, 182 (the costs of a unitary business cannot while it purports to isolate portions of be deemed confined to the locality in income received in various States, may which they are incurred)." Ibid. fail to account for contributions to income resulting from functional integration, [***LEdHR1A] [1C] [***LEdHR6A] [6I]The centralization of management, and reasoning of Amerada Hess Corp. applies with equal economies of scale. Butler Bros. v. force to the case here. The same factors that prevent McColgan, 315 U.S. at 508-509. Because determination of the geographic location where income is these factors of profitability arise from the generated, factors such as functional integration, operation of the business as a whole, it centralization of management, and economies of scale, becomes misleading to characterize the make it impossible to determine the location of value income of the business as having a single added with exact precision. In concluding that Michigan identifiable 'source.' Although separate can apportion the SBT, we merely reaffirm what we have geographical accounting may be useful for written before: "[HN14] In the case of a more-or-less internal auditing, for purposes of state integrated business enterprise operating in more than one taxation it is not constitutionally required." State, . . . arriving at precise territorial allocations of Mobil Oil Corp., 445 U.S. at 438. 'value' is often an elusive goal, both in theory and in practice." Container Corp., 463 U.S. at 164. In a recent challenge to this unitary business B principle, we rejected the argument that particular [***LEdHR1A] [1D] [***LEdHR11A] assignable costs of a business should be excluded from a [11A]Having determined that Michigan's SBT attempts broader tax base. Amerada Hess Corp. v. Director, Div. to tax a base that cannot be assigned to one location with of Taxation, N. J. Dept. of Treasury, 490 U.S. 66, 104 L. any precision, and that apportionment is proper, we must Ed. 2d 58, 109 S. Ct. 1617 (1989). We considered the Page 22 498 U.S. 358, *379; 111 S. Ct. 818, **832; 112 L. Ed. 2d 884, ***LEdHR11A; 1991 U.S. LEXIS 842 next [*380] consider whether Michigan's apportionment apportionment for every case, the formula "has gained formula for Trinova's value added is fair. wide approval precisely because payroll, property, and [***LEdHR11A] [11B] [***LEdHR12] [12]Container sales appear in combination to reflect a very large share Corp. states our test for fair income apportionment: of the activities by which value is generated." Container Corp., supra, at 183 (emphasis added). The three-factor "[HN15] The first, and again obvious, formula is widely used and is included in the Uniform component of fairness in an apportionment Division of Income for Tax Purposes Act, 7A U. L. A. formula is what might be called internal 331 (1990 Cum. Supp.) (approved in 1957 by the consistency -- that is, the formula must be National Conference of Commissioners on Uniform State such that, if applied by every jurisdiction, Laws and the American Bar Association). it would result in no more than all of the unitary business' income being taxed. The Trinova argues that on the facts of this case, the second and more difficult requirement is three-factor formula leads to a distorted result, out of all what might be called external consistency proportion to the business done by Trinova in Michigan. -- the factor or factors used in the Trinova's Michigan payroll constituted 0.2328% of total apportionment formula must actually payroll, its Michigan property constituted 0.0930% of reflect a reasonable sense of how income total property, and its Michigan sales constituted is generated." Id., at 169. 26.5892% of total sales. The three-factor formula averages these ratios, with the result that 8.9717% of Trinova does not contest the internal consistency of the Trinova's value added, or $ 19,838,700, is assigned to SBT's apportionment formula, and we need not consider Michigan. Because Trinova is a labor-intensive taxpayer, that question. [***LEdHR11A] [11C] [***LEdHR13] and can deduct capital acquisitions, the tax base is further [13]Instead, Trinova argues that the SBT [HN16] reduced to $ 12,492,671. apportionment formula fails the external consistency test. In this Court, Trinova proposes an alternative In order to prevail on such a challenge, an income two-factor apportionment, excluding the sales factor. taxpayer must prove "by 'clear and cogent evidence' that Under the two-factor formula, only 0.1629% of Trinova's the income attributed to the State is in fact 'out of all value added, or $ 360,213, would be assigned to appropriate proportions [***909] to the business Michigan. Brief for Petitioner 33-34. 9 transacted . . . in that State,' [Hans Rees' Sons, Inc.,]283 U.S. 123 at 135, 51 S. Ct. 385, 75 L. Ed. 879, or has 'led 9 Trinova's proposed two-factor apportionment to a grossly distorted result,' [Norfolk & Western R. differs drastically from the apportionment Trinova Co.,]390 U.S. 317 at 326, 88 S. Ct. 995, 19 L. Ed. 2d requested in the Michigan state courts. Under the 1201." Moorman Mfg. Co., 437 U.S. at 274.We conclude approach Trinova took in state court, following that the same test applies to apportionment of a VAT. Jones & Laughlin Steel Corp. v. Department of Trinova must demonstrate that, in the context of a VAT, Treasury, 145 Mich. App. 405, 377 N.W.2d 397 there is no rational relationship between the tax base (1985), Trinova's apportioned tax base would be measure attributed to the State and the contribution of -$ 2,042,458. See n.8, supra. Under the two-factor Michigan business activity to the entire value [**833] formula that Trinova now urges upon us, it is $ added process. See Container Corp., supra, at 180-181. 360,213. [***LEdHR11A] [11D]The Michigan SBT uses the same three-factor apportionment formula we first approved for [*382] Although the three-factor formula "can be apportionment of income in Butler Brothers v. justified as a rough, practical approximation of the McColgan, 315 U.S. 501, 86 L. Ed. 991, 62 S. Ct. 701 distribution of either a corporation's sources of income or (1942).This standard has become "something of a the social costs which it generates," General Motors benchmark against [*381] which other apportionment Corp. v. [***910] District of Columbia, 380 U.S. 553, formulas are judged." Container Corp., supra, at 170; see 561, 14 L. Ed. 2d 68, 85 S. Ct. 1156 (1965), Trinova also Moorman Mfg. Co., supra, at 282 (BLACKMUN, J., argues that the formula does not reflect how the value dissenting); id., at 283-284 (Powell, J., dissenting). added tax base is generated. The principal flaw, it Although the one-third weight given to each of the three contends, is that the formula includes a sales factor. factors -- payroll, property, and sales -- is not a precise "Sales have no relationship to, and add nothing to, the Page 23 498 U.S. 358, *382; 111 S. Ct. 818, **833; 112 L. Ed. 2d 884, ***910; 1991 U.S. LEXIS 842 value that [compensation and depreciable plant] Moorman Mfg. Co., whatever the merit of Trinova's contribute to the tax base in Michigan." Brief for argument that sales do not contribute to value added Petitioner 31. Trinova's position finds some support "from the standpoint of economic theory or legislative among economists. See Barlow & Connell, The Single policy, it cannot support a claim in this litigation that [the Business Tax, in Michigan's Fiscal and Economic State] in fact taxed profits not attributable to activities Structure 673, 704 (H. Brazer ed. 1982); Kleine 7, 14, within the State during the yea[r 1980]." 437 U.S. at 272. n.5. Trinova gives no basis for distinguishing the same arguments that were pressed, and rejected, with regard to We have, supra, at 376, already concluded that sales the apportionment of income. We could not accept (as a measure of market demand) do have a profound Trinova's argument that the sales factor distorts impact upon the amount of an enterprise's value added, Michigan's apportionment formula without rejecting our and therefore reject the complete exclusion of sales as precedents which approve [***911] the use of the same somehow resulting in more accurate apportionment. We formula to apportion income. further reject this critique because it cannot distinguish application of the three-factor formula to a VAT from As we find no distortion caused by the three-factor application to an income tax. In fact, nearly identical formula, it follows that the Michigan SBT does not tax criticisms were levied against the three-factor formula as "value earned outside [Michigan's] borders." ASARCO a method for apportioning income by economists who Inc. v. Idaho Tax Comm'n, 458 U.S. 307, 315, 73 L. Ed. theorize that income (like value added) is the product of 2d 787, 102 S. Ct. 3103 (1982). The argument that the labor and capital, and that the [**834] marketplace value was added in Ohio, by labor and capital, and that contributes nothing to production of income. See no value has been added in Michigan assumes that value Studenski, The Need for Federal Curbs on State Taxes on added is subject to geographic ascertainment and assumes Interstate Commerce: An Economist's Viewpoint, 46 Va. further the inappropriateness of a sales factor in L. Rev. 1121, 1131-1132 (1960); Harriss, Economic apportionment. For the reasons we have given, we reject Aspects of Interstate Apportionment of Business Income, both arguments. 37 Taxes 327, 362-363 (1959); Harriss, Interstate Apportionment of Business Income, 49 Am. Econ. Rev. [*384] [***LEdHR1A] [1E] [***LEdHR11A] 398, 400 (1959). If it were not for their age, these [11E] [***LEdHR14A] [14A]We need not say for criticisms could have been taken almost verbatim from certain which method -- unadjusted apportionment by the Trinova's brief: three-factor formula ($ 19,838,700), apportionment by Trinova's alternative two-factor formula ($ 360,213), [*383] "Sales-by-destination are not a Trinova's Jones & Laughlin apportionment urged in state proper allocation factor . . . . Taken by court (-$ 2,042,458), or the adjusted tax base as themselves, they do not necessarily calculated in Trinova's original 1980 return ($ represent the location of the company's 12,492,671) -- gives the most accurate calculation of productive income-creating effort. Only Trinova's value added in Michigan. Trinova has not the location of the company's capital and convincingly demonstrated which figure is most accurate. labor, which may be wholly different from Trinova gives no estimate of the value added that would the destination of the sales, identifies the take account of both its Michigan sales activity and location of that effort and hence the situs Michigan market demand for its products. Michigan, on for the imposition of a state income tax the other hand, has consistently applied a formula, the upon it." Studenski, supra, at 1131-1132. elements of which appear to reflect a very large share of the activities by which value is generated, with further relief for labor-intensive taxpayers such as Trinova. Despite such criticism, the Uniform Division of Trinova has failed to meet its burden of proving "by 'clear Income for Tax Purposes Act decided upon an income and cogent evidence,'" Moorman Mfg. Co., supra, at 274, apportionment formula that included sales, and the that the State of Michigan's apportionment provides a importance of sales in generating value has been distorted result. 10 acknowledged by this Court. Container Corp., 463 U.S. at 183. Thus, as we responded to a similar argument in 10 [***LEdHR11A] [11F] [***LEdHR14A] Page 24 498 U.S. 358, *384; 111 S. Ct. 818, **834; 112 L. Ed. 2d 884, ***LEdHR14A; 1991 U.S. LEXIS 842 [14B] 483 U.S. 266, 281, 97 L. Ed. 2d 226, 107 S. Ct. 2829 (1987), that "the Commerce Clause has a deeper meaning As an alternative ground for upholding the that may be implicated even though state provisions . . . tax, Michigan reminds us that, instead of taxing do not allocate tax burdens between insiders and value added, it could have taxed gross receipts of outsiders in a manner that is facially discriminatory." The sales into Michigan. We have repeatedly upheld Commerce Clause requires more than mere facial such taxes. Standard Pressed Steel Co. v. neutrality. The content of that requirement is fair Washington Revenue Dept., 419 U.S. 560, 564, 95 apportionment. The "deeper meaning" to which American S. Ct. 706, 42 L. Ed. 2d 719 (1975); General Trucking refers is embodied in the requirement of fair Motors Corp. v. Washington, 377 U.S. 436, 448, apportionment, as expressed in the tests of internal and 12 L. Ed. 2d 430, 84 S. Ct. 1564 (1964); external consistency. Other than the vague accusation of McGoldrick v. Berwind-White Coal Mining Co., discrimination, Trinova presents no other standard by 309 U.S. 33, 58, 84 L. Ed. 565, 60 S. Ct. 388 which we might consider the constitutionality of the (1940). While we accept the analogy Michigan Michigan SBT. [***LEdHR15A] [15C]In further has drawn between a VAT and an income tax, we support of its discrimination argument, Trinova relies recognize that the SBT also bears some upon the 1987 statement of Michigan's Governor that the similarities to a gross-receipts tax. Further, the SBT was enacted "'to promote the development and SBT's alternative method of taxation (based upon investment of business within Michigan.'" Executive gross receipts) might provide an additional limit Message of Governor James J. Blanchard to the Michigan on any distortion or possibility that out-of-state Supreme Court, Nov. 6, 1987, App. to Pet. for Cert. 73a. values might be taxed. See n.6, supra. In light of This statement helps Trinova not at all. It is a laudatory our disposition, we need not address these goal in the design of a tax system to promote investment arguments. that will provide jobs and prosperity to the citizens of the taxing State. [HN17] States are free to "structure their tax [**835] C systems to [*386] encourage the growth and development of intrastate commerce and industry." [***LEdHR1A] [1F] [***LEdHR15A] Boston Stock Exchange, supra, at 336.Although Trinova [15A]Trinova also urges that the Michigan SBT should repeats the Governor's statement in an attempt to be struck down because it discriminates against demonstrate an impermissible motive on the part of the out-of-state businesses in violation of the Commerce State, all the contemporaneous evidence concerning Clause. Trinova cannot point to any treatment of in-state passage of the SBT suggests a benign motivation, and out-of-state firms that is discriminatory on its face, as combined with a practical need to increase revenues. 11 in the cases it cites. See, e. g., [*385] Westinghouse Neither Trinova nor the secondary sources it relies upon Electric Corp. v. Tully, 466 U.S. 388, 393, 80 L. Ed. 2d [**836] present any evidence that the SBT was inspired 388, 104 S. Ct. 1856 (1984) (tax credit was limited to as a way to export tax burdens or import tax revenues. gross receipts from export products shipped from a regular place of business of the taxpayer within New 11 According to Kleine, proponents of the SBT York); Boston Stock Exchange v. State Tax Comm'n, 429 argued as follows: (1) because of Michigan's U.S. 318, 324-328, 50 L. Ed. 2d 514, 97 S. Ct. 599 volatile economy, the State's corporate income tax (1977) (tax facially discriminated against transactions on had proven unpredictably cyclical, and therefore a securities exchanges located outside of New York and poor source of revenue. The SBT would provide a had been enacted in an [***912] effort to discourage much broader tax base, and thus prove a more growth of such exchanges); Halliburton Oil Well stable revenue source; (2) the SBT would lessen Cementing Co. v. Reily, 373 U.S. 64, 10 L. Ed. 2d 202, the tax burden on capital, thereby encouraging 83 S. Ct. 1201 (1963) (sales tax exempted isolated sales new investment; (3) the SBT would replace within State, but use tax lacked a similar exemption for numerous taxes, resulting in less paperwork for similar isolated sales outside of the State). both the taxpayer and the tax collector; (4) the [***LEdHR15A] [15B] [***LEdHR16] [16]In the SBT would not discriminate against businesses on absence of any facial discrimination, Trinova recalls our the basis of their forms of organization; and (5) statement in American Trucking Assns., Inc. v. Scheiner, the SBT would tax inefficient and efficient firms Page 25 498 U.S. 358, *386; 111 S. Ct. 818, **836; 112 L. Ed. 2d 884, ***LEdHR15A; 1991 U.S. LEXIS 842 equally for their use of government services, the view that this suffices to comply with the whereas an income tax would burden more requirements of the Commerce Clause, see Amerada heavily efficient, highly profitable firms. In Hess Corp. v. Director, Div. of Taxation, N. J. Dept. of addition, at the time of the SBT's enactment, Treasury, 490 U.S. 66, 80, 104 L. Ed. 2d 58, 109 S. Ct. Michigan faced a fiscal crisis. The legislature 1617 (1989) (SCALIA, J., concurring in judgment); Tyler provided that the new SBT would overlap with Pipe Industries, Inc. v. Washington State Dept. of the old corporate franchise tax, resulting in Revenue, 483 U.S. 232, 265, 107 S. Ct. 2810, 97 L. Ed. additional cash flow of $ 180 million. Kleine 2d 199 (1987) (SCALIA, J., concurring in part and 20-23. The argument that a VAT would permit dissenting in part), I would forgo the additional "exporting" the tax to taxpayers outside the State Commerce Clause analysis articulated in Complete Auto "was not used to any great extent by the Transit, Inc. v. Brady, 430 U.S. 274, 279, 51 L. Ed. 2d proponents of the Michigan [SBT]." Id., at 23. 326, 97 S. Ct. 1076 (1977). Some elements of that analysis, however, are relevant to the quite separate IV question whether the tax complies with the requirements of the Due Process Clause, see Mobil Oil Corp. v. [***LEdHR1A] [1G] [***LEdHR17] [17][HN18] Commissioner of Taxes of Vt., 445 U.S. 425, 436-437, 63 In reviewing state taxation [***913] schemes under the L. Ed. 2d 510, 100 S. Ct. 1223 (1980); Amerada Hess Commerce Clause, we attempt "to ensure that each State Corp., supra, at 80-81 (SCALIA, J., concurring in taxes only its fair share of an interstate transaction." judgment). Goldberg v. Sweet, 488 U.S. 252, 260-261, 102 L. Ed. 2d 607, 109 S. Ct. 582 (1989). We act as a defense against Trinova concedes that there is a minimal connection state taxes which, whether by design or inadvertence, between its interstate activities and the taxing State, see either give rise to serious concerns of double taxation, or Mobil, supra; ante, at 373. The only issue, then, is attempt to capture tax revenues that, under the theory of whether the tax violates the Due Process Clause by taxing the tax, belong of right to other jurisdictions. We have extraterritorial values. For the reasons stated in Parts always "declined to undertake the essentially legislative III-A and III-B of the Court's opinion, I agree that it does task of establishing [*387] a 'single constitutionally not. mandated method of taxation.'" Id., at 261, quoting Container Corp., 463 U.S. at 171. We do not say today DISSENT BY: STEVENS whether other States should adopt a VAT, or whether Michigan's three-factor formula is the only acceptable DISSENT method of apportionment. We do hold that, as applied to Trinova during the tax year at issue, the Michigan SBT [*388] JUSTICE STEVENS, with whom JUSTICE does not violate the Due Process or Commerce Clauses of BLACKMUN joins, dissenting. the Constitution. Although the parties refer to Michigan's "Single The judgment of the Supreme Court of Michigan is Business Tax" (SBT) as a "Value Added Tax" (VAT), that term does not appear in the text of the statute. The Affirmed. text of the relevant Act describes the SBT as a tax on "certain commercial, [***914] business, and financial JUSTICE SOUTER took no part in the consideration activities." 1 As a practical matter, Michigan's SBT is or decision of this case. nothing more than an amalgam of three separate taxes: a tax on payroll, a tax on depreciable fixed assets, and a tax CONCUR BY: SCALIA on income. Payroll and depreciation represent [**837] over 90 percent of the SBT base, and the productive CONCUR activities that are measured by payroll and depreciation take place at geographic locations that are readily JUSTICE SCALIA, concurring in the judgment. identifiable. Because Michigan's SBT uses an As the Court notes, ante, at 384, the Michigan single apportionment formula to tax a portion of those activities business tax is not facially discriminatory. Since I am of occurring outside Michigan, I depart from the Court's analysis and conclude that the state taxation scheme Page 26 498 U.S. 358, *388; 111 S. Ct. 818, **837; 112 L. Ed. 2d 884, ***914; 1991 U.S. LEXIS 842 violates established principles of due process. In upholding the constitutionality of the SBT against a Due Process Clause challenge, the Court today 1 The preamble to the statute states, in part: concludes that even though the bulk of Trinova's property and payroll are located outside Michigan, it does not "AN ACT to provide for the imposition, levy, follow that the bulk of its value-adding activities are computation, collection, assessment and located outside Michigan and thus are not attributable to enforcement, by lien or otherwise, of taxes on or taxable by Michigan. Rather, the Court assumes that certain commercial, business, and financial the value added to a product is largely contingent upon activities . . . ." See Mich. Comp. Laws § 208.1, p. the revenue that the product generates when it is sold in 4 (1986). the marketplace. Because the value added by Trinova's use of labor and capital in Ohio is not realized until The Michigan Supreme Court's explanation Trinova's product is sold in Michigan and the product is of the significance of the label "value added tax" given market value by consumers, the Court concludes describes it as a tax upon business activity. In its that Michigan's sales contribute greatly to the value of opinion below, the Michigan court explained: Trinova's product, and thus that allowing a portion of the "In short, a value added tax is a tax upon value added by Trinova's business activities in Ohio to be business activity. The act employs a value added attributed to Michigan through use of an apportionment measure of business activity, but its intended formula is justified. effect is to impose a tax upon the privilege of The Court's assumption that value [***915] added conducting business activity within Michigan. It from labor and capital is not realized until the product is is not a tax upon income. MCL 208.31(4); MSA sold, however, is simply wrong. Finished goods, even 7.558(31) (4)." 433 Mich. 141, 149, 445 N.W.2d though stored in a warehouse and not yet sold, are more 428, 431-432 (1989). valuable than raw materials. Moreover, under the This Court today also states that "value added Michigan statute, the revenues generated by the sales of is a measure of actual business activity." Ante, at the finished product are reflected in the net income 364. component of the tax base. Thus, [*390] in this case, because Trinova operated at a loss, the value added by I labor and capital is reduced, rather than enhanced, by the ultimate sales made in Michigan. It necessarily follows Petitioner Trinova's executive offices and that allowing Michigan to apportion out-of-state expenses manufacturing facilities are located in Ohio. Most of its incurred for fixed assets and labor on the basis of employees live and work in Ohio. In fact, significantly Michigan sales in effect allows Michigan to tax less than one percent of [*389] Trinova's capital assets extraterritorial business activity. and labor were employed in Michigan in 1980. 2 The company operated at a substantial loss in that year. The Under this Court's due process jurisprudence, a State question presented is whether the fact that 26 percent of may constitutionally tax only those interstate business Trinova's unprofitable sales were made to Michigan activities or income to which it has a rational nexus. See customers provides a constitutionally sufficient Container Corp. of America v. Franchise Tax Bd., 463 justification for the State to attribute to Michigan (and U.S. 159, 165-166, 77 L. Ed. 2d 545, 103 S. Ct. 2933 thus to tax) approximately nine percent of Trinova's [**838] (1983). However, in the context of state income productive activities, almost all of which actually taxes on "unitary" interstate businesses, our cases allow occurred in Ohio. States to deviate from the fixed rule of geographic accounting in favor of a more flexible system of 2 The Company's total payroll was $ formulary apportionment. In so doing, we have cautioned 226,356,271; its Michigan payroll was only $ that "the functional meaning of this requirement [of a 511,774 or less than one-fourth of one percent. Its rational nexus between the taxing State and the taxed Michigan depreciation was only $ 2,152, activities] is that there be some sharing or exchange of representing less than one-tenth of one percent of value not capable of precise [geographic] identification or its entire depreciation. measurement . . . which renders formula apportionment a Page 27 498 U.S. 358, *390; 111 S. Ct. 818, **838; 112 L. Ed. 2d 884, ***915; 1991 U.S. LEXIS 842 reasonable method of taxation." Id., at 166. should not be deemed to be realized and should not be geographically assigned until Trinova's product is sold, The Court today extends its analysis upholding the and that the measure of value added by payroll and constitutionality of income apportionment as an capital expenses should be adjusted by the ultimate exception to the general rule of geographic accounting to revenue the product generates. situations in which the original justification for the use of an imprecise apportionment formula no longer holds. II Unlike the income of a unitary business, which we before have recognized may not be precisely allocated, the two The Court's assumption that value added by property principal elements of Michigan's SBT -- property and and payroll is not realized and cannot be determined until payroll -- are subject to precise geographic identification the product is sold is belied by the rationale underlying and thus do not warrant being subject to an the VAT. [*392] The "concept of value added . . . is apportionment formula. derived from the most basic of economic facts -- the scarcity of resources -- and hence consistently measures The Court concedes, as it must, that far less than one the amount of scarce labor and capital resources used up percent of Trinova's capital assets and labor were (and not available for use elsewhere) in every economic employed in Michigan in 1980, but rejects the logical activity." See Haughey, The Economic Logic of the result of such analysis by concluding that it does not Single Business Tax, 22 Wayne L. Rev. 1017, 1018 necessarily follow that far less than one percent of (1976). That a product is ultimately unprofitable does not Trinova's "value added" can be precisely [*391] diminish the [**839] amount of resources a company identified as having been realized outside Michigan. utilized in manufacturing the product. Nor does the value Instead, the Court concludes that the value added by added to the economy or gross national product by the Trinova's factors of production located outside of company's purchase of labor and utilization of capital Michigan cannot be precisely determined until the diminish when the product is not sold or is sold for a net ultimate product is sold and the market value or revenue loss. that the product commands is considered. As the Court states, "the Michigan SBT . . . is not three separate and Rather, value added is fully realized at each stage of independent taxes, and Trinova cannot purport to identify the production process -- at the stages where labor the geographic source of value added by assuming that services are sold and paid for by the company in the form two elements can be located in a single State while the of payroll expenses and where capital is consumed. The third cannot." Ante, at 375. Rather, "in a unitary amount of value added at these intermediate stages of enterprise, compensation, depreciation, and profit are not production is the price paid for the labor services and for independent variables to be adjusted without reference to the capital expended. See ibid. (value added may be each other. If Trinova had paid an additional $ 100 determined by "adding up all of the payments paid million in compensation [***916] during 1980, there is internally to the owners of the labor and capital used"). no way of knowing whether, or to what extent, value Regardless of the profitability (or unprofitability) of the added would have increased. In fact, value added would ultimate product, value added by labor and capital is not not have increased so long as revenues did not increase." eliminated or diminished if the ultimate product is unable Ante, at 376 (emphasis added). to command equivalent value or revenue in the marketplace. 3 As [***917] the Court itself concedes Driving the Court's analysis is the recognition that early in its opinion, [*393] "even if a business entity is Trinova in 1980 netted a loss of over $ 42 million. This, unprofitable, under normal circumstances it adds value to the Court concludes, means that the ultimate value added its products and, as a consequence, will owe some VAT." by Trinova's use of labor and capital resources was not Ante, at 364. This immunity of the VAT base from the equivalent to its actual payroll and capital expenses. vagaries of the marketplace is the basic justification for Resisting the perceived awkwardness of finding "that the SBT: "Because value added does not fluctuate as Trinova added value at the factory through the widely as net income, a VAT provides a more stable consumption of capital and labor, but that its products source of revenue than the corporate income tax." Ibid. somehow lost value outside of this process," id., at 375, the Court holds that the value added by capital and labor 3 Unlike the tax bases under the VAT schemes that are found in European and South American Page 28 498 U.S. 358, *393; 111 S. Ct. 818, **839; 112 L. Ed. 2d 884, ***917; 1991 U.S. LEXIS 842 countries, see ante, at 365-366, n.3, the tax base expenses results in the unconstitutional taxation [*394] under Michigan's SBT is affected by the revenues by Michigan of a portion of the taxpayer's extraterritorial that the product brings in only insofar as such activities. 4 In fact, in Trinova's case, although less than revenues are reflected in the company's net [**840] one percent of Trinova's property and payroll income, which is a component of the tax base expenses are incurred within its borders, Michigan, by under the additive method. In the foreign applying the apportionment formula to payroll and jurisdictions utilizing the VAT, however, the capital, treats nine to ten percent of Trinova's labor and starting point for computing the tax base is the capital costs as if they were in-state expenses. 5 Because revenue received by the taxpayer from sales made [***918] such extraterritorial taxation violates basic in the taxing jurisdiction, with certain amounts principles of due process, I respectfully dissent. exempted or subtracted from the in-state revenues. Although measuring value added with 4 "The taxation of property not located in the reference to revenues might therefore be taxing State is constitutionally invalid, both warranted in traditional European models of the because it imposes an illegitimate restraint on VAT, it is unjustified under Michigan's SBT, interstate commerce and because it denies to the because the income component of the VAT base taxpayer the process that is his due. A State will in Michigan already accounts for revenues. not be permitted, under the shelter of an imprecise allocation formula or by ignoring the peculiarities Concededly, under the Michigan statute, the task of of a given enterprise, to 'project the taxing power calculating precisely Trinova's value added by its capital of the state plainly beyond its borders. . . .' Any and labor resources without looking to its ultimate sales formula used must bear a rational relationship, or profit is complicated by the unprofitability of Trinova's both on its face and in its application, to property business during the tax year in question. Under values connected with the taxing State." Norfolk Michigan's method for calculating the SBT base, the & Western R. Co. v. Missouri State Tax Comm'n, corporation's profit is added to the sum of labor costs and 390 U.S. 317, 325, 19 L. Ed. 2d 1201, 88 S. Ct. capital expenditures (consisting of depreciation and 995 (1968) (footnote omitted). interest expenses) and represents the value added by the 5 The Court implies that it would be unjust to corporation's skill and entrepreneurial effort. Insofar as apportion Trinova's net income without also Trinova in 1980 netted a loss of over $ 42 million, apportioning its company-wide labor and Trinova's VAT base was actually reduced by "addition" appreciation. Ante, at 381-382, n.9. My reaction to of its profit to its labor and capital costs. the facts of this case is just the opposite. Because the apportioned share of the taxpayer's net loss far It is nevertheless clear that value added under the exceeds the actual use of labor and capital in additive method is realized at each stage of the Michigan, there is no more justification for production process and is undiminished if the product imposing the SBT on Trinova than there would be suffers a net loss. That Michigan chooses to allow a to collect an income tax from a taxpayer whose company's VAT base to be reduced by the extent of its company-wide operations, as well as its Michigan unprofitability does not in any way lead to the Court's operations, produced a substantial net loss. conclusion that the value added by labor and capital is not realized when (and where) those resources are purchased, REFERENCES and that the amount of that value added to the economy is 71 Am Jur 2d, State and Local Taxation 19, 75, 77, 110, not equivalent to the price paid by the company for those 285, 296-299, 305, 306 resources. USCS, Constitution, Art I, 8, cl 3; Amendment 14 Because the value added by the two principal components of Michigan's SBT -- labor and capital -- are L Ed Digest, Commerce 238, 244; Constitutional Law fully realized and thus can be precisely quantified and 605 geographically assigned when the actual purchase of labor services and use of capital occur, Michigan's L Ed Index, Apportionment and Allocation; Commerce; apportionment of a company's entire payroll and capital Corporate Taxes; Taxes Page 29 498 U.S. 358, *394; 111 S. Ct. 818, **840; 112 L. Ed. 2d 884, ***918; 1991 U.S. LEXIS 842 Index to Annotations, Apportionment and Allocation; Validity, under Federal Constitution, of state tax on, or Discrimination; Taxes measured by, net income of foreign corporation. 3 L Ed 2d 1787. Annotation References: Construction and application of Uniform Division of What issues will the Supreme Court consider, though not, Income for Tax Purposes Act. 8 ALR4th 934. or not properly, raised by the parties. 42 L Ed 2d 946. Comment Note.--Validity, under Federal Constitution, of Validity, under commerce clause of Federal Constitution, state tax on, or measured by, income of foreign of state gross receipts or income taxes involving interstate corporation. 67 ALR2d 1322. transactions-- Supreme Court cases. 34 L Ed 2d 749. Page 1 UNITED STATES TRUST COMPANY OF NEW YORK, TRUSTEE v. NEW JERSEY ET AL. No. 75-1687 SUPREME COURT OF THE UNITED STATES 431 U.S. 1; 97 S. Ct. 1505; 52 L. Ed. 2d 92; 1977 U.S. LEXIS 1 Argued November 10, 1976 April 27, 1977 PRIOR HISTORY: APPEAL FROM THE was not a reserved power that could not be contracted SUPREME COURT OF NEW JERSEY away. Also, the court also determined that the impairment was not reasonable or necessary to serve an important CASE SUMMARY: public purpose. OUTCOME: The court reversed a state's supreme court's PROCEDURAL POSTURE: Appellant, trustee for port affirmance of a lower court's holding that the statutory authority bonds, sought review of the Supreme Court of repeal of a statutory covenant did not violate the Contract New Jersey, which affirmed a lower court's holding that Clause of U.S. Constitution. The court held that the the statutory repeal of a statutory covenant was a repeal of the statutory covenant did violate the Contract reasonable exercise of the state's police power and was Clause because it impaired a financial contractual not prohibited by the Contract Clause, U.S. Const. art. I, obligation of the state and the impairment was not § 10, cl. 1. reasonable or necessary to serve an important public purpose. OVERVIEW: Appellant, trustee for port authority bonds, brought an action to contest the repeal of a CORE TERMS: covenant, port authority, repeal, statutory covenant limiting the ability of a port authority bondholder, impairment, transportation, mass transit, to subsidize rail passenger transportation from revenues deficit, toll, railroad's, bridge, police power, passenger, and reserves. Appellant claimed that repeal of the consolidated bonds, transit, reserve fund, N.J Laws, covenant impaired the obligation of the state's contract environmental, holder, impair, modification, impaired, with the bondholders because it totally eliminated its commuter, energy, tunnel, path, Y Laws, public purpose, security provision, which protected the port authority's contractual obligations, contractual reserve fund from depletion. The state superior court ruled that the statutory repeal was a reasonable exercise LexisNexis(R) Headnotes of the state's police power and found that it was not prohibited by the Contract Clause, U.S. Const. art. I, § 10, cl. 1. The state supreme court affirmed. Appellant challenged the decision. The court reversed, holding that Constitutional Law > Congressional Duties & Powers > the Contract Clause was violated because the repeal had Contracts Clause > General Overview the effect of impairing a contractual obligation of the [HN1] See U.S. Const. art. I, § 10, cl. 1. state. The court found that the state's financial obligation Page 2 431 U.S. 1, *; 97 S. Ct. 1505, **; 52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1 Constitutional Law > Congressional Duties & Powers > The states of New York and New Jersey, which had Contracts Clause > General Overview previously established the Port Authority of New York Contracts Law > Contract Modifications > General and New Jersey to effectuate a better coordination of Overview facilities of commerce in the port of New York, entered [HN2] It is not every modification of a contractual into a statutory covenant in 1962, as part of bi-state promise that impairs the obligation of contract under legislation authorizing Port Authority involvement in a federal law. construction project and the acquisition of a railroad, whereby the two states agreed with each other, and with the holders of bonds which the Port Authority had Constitutional Law > Congressional Duties & Powers > previously issued, that so long as any of such bonds Contracts Clause > General Overview remained outstanding and unpaid and the holders had not Contracts Law > Contract Modifications > General given their consent, neither the states nor the Port Overview Authority would use, for other than permitted purposes, Governments > Legislation > Effect & Operation > any revenues or reserves which were then, or in the future Retrospective Operation might be, pledged as security for such bonds. Both states [HN3] The Contract Clause, U.S. Const. art. I, § 10, cl. 1, passed legislation, effective in 1973, rendering the 1962 limits the power of the states to modify their own covenant inapplicable, or in effect repealed, with respect contracts as well as to regulate those between private to bonds issued by the Port Authority after such effective parties. Yet the Contract Clause does not prohibit the date. In 1974, both states enacted legislation which states from repealing or amending statutes generally, or repealed the 1962 covenant outright. Thereafter, a trustee from enacting legislation with retroactive effects. and holder of Port Authority bonds brought an action in the Superior Court of New Jersey, Law Division, Bergen Constitutional Law > Congressional Duties & Powers > County, New Jersey, challenging the constitutionality of Contracts Clause > General Overview New Jersey's 1974 repealing legislation. The Superior Governments > Legislation > Interpretation Court ruled that the statutory repeal was a reasonable [HN4] In general, a statute is itself treated as a contract exercise of New Jersey's police power, not prohibited when the language and circumstances evince a legislative under the contract clause of the United States intent to create private rights of a contractual nature Constitution (Art I, 10, cl 1), which prohibits state laws enforceable against the state. impairing the obligation of contracts, nor under the clause's counterpart in the New Jersey Constitution (134 NJ Super 124, 338 A2d 833). The Supreme Court of New Constitutional Law > Congressional Duties & Powers > Jersey affirmed (69 NJ 253, 353 A2d 514). Contracts Clause > General Overview [HN5] Contract rights are a form of property and as such On appeal, the United States Supreme Court may be taken for a public purpose provided that just reversed. In an opinion by Blackmun, J., joined by compensation is paid. Burger, Ch. J., and Rehnquist and Stevens, JJ., expressing the view of a majority of the seven participating members of the court, it was held that the 1974 New Jersey law Constitutional Law > Congressional Duties & Powers > violated the contract clause of the United States Contracts Clause > General Overview Constitution, since outright repeal of the 1962 covenant [HN6] Although the Contract Clause, U.S. Const. art. I, § impaired a contractual obligation of the states, having 10, cl. 1, appears literally to proscribe "any" impairment, eliminated an important security provision which was a the prohibition is not an absolute one and is not to be read purely financial obligation, and since such with literal exactness like a mathematical formula. Thus, impairment--allegedly justified as necessary for a finding that there has been a technical impairment is implementing the states' plan for encouraging private merely a preliminary step in resolving the more difficult automobile users to shift to public transportation--was question whether that impairment is permitted under the neither necessary to achievement of the states' plan nor Constitution. reasonable in light of the circumstances. SUMMARY: Burger, Ch. J., concurring, expressed the view that Page 3 431 U.S. 1, *; 97 S. Ct. 1505, **; 52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1 the constitutional prohibition against the impairment of (Art I, 10, cl 1) limits the power of the states to modify contracts had been violated because the state had failed to their own contracts as well as to regulate those between demonstrate that the impairment was essential to the private parties, but the clause does not prohibit the states achievement of an important state purpose and had not from repealing or amending statutes generally, or from shown that it did not know, and could not have known, enacting legislation with retroactive effects. the impact of the contract on that state interest at the time the contract was made. OUTLAWRY §1 Brennan, J., joined by White and Marshall, JJ., LAW §74 ; dissenting, expressed the view that there had been a relatively inconsequential infringement of contract rights bill of attainder -- ex post facto law -- state limitation in the pursuit of substantial and important public ends -- ; that was not violative of the contract clause. Headnote:[3A][3B] Stewart and Powell, JJ., did not participate. The prohibitions of the United States Constitution LAWYERS' EDITION HEADNOTES: against any state's enacting a bill of attainder or ex post facto law (Art I, 10, cl 1) limit the powers of the states LAW §216 ; only with regard to the imposition of punishment. contract clause -- statutory covenant -- repeal -- LAW §513 ; security provision for bondholders -- ; due process -- retrospective civil laws -- ; Headnote:[1A][1B][1C] Headnote:[4A][4B] A state statute which retroactively repeals a statutory covenant between two states and the holders of bonds The due process clause of the Fourteenth issued by the states' port authority--under which covenant Amendment generally does not prohibit retrospective it was agreed that so long as any bonds remained civil legislation, unless the consequences are particularly outstanding and unpaid and the holders had not given harsh and oppressive. their consent, the states and the port authority would not use, for other than permitted purposes, any revenues or reserves pledged as security for such bonds--violates the CONTRACTS §67 contract clause of the United States Constitution (Art I, 10, cl 1), prohibiting state law impairment of contract STATUTES §91 ; obligations, since outright repeal of the covenant statute as contract -- statute governing contract -- ; eliminates an important security provision which is a purely financial obligation, thus constituting an Headnote:[5A][5B] impairment of the states' contract obligation, and since such impairment is not reasonable and necessary to serve In general, a statute is treated as a contract when the the purposes claimed by the state. (Brennan, White, and language and circumstances evince a legislative intent to Marshall, JJ., dissenting from this holding.) create private rights of a contractual nature enforceable against the state; in addition, statutes governing the interpretation and enforcement of contracts may be LAW §135; regarded as forming part of the obligation of contracts contract clause -- limit on states -- statutes -- ; made under their aegis. Headnote:[2] STATES §51 ; The contract clause of the United States Constitution legislative covenant -- prospective repeal -- ; Page 4 431 U.S. 1, *; 97 S. Ct. 1505, **; 52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1 Headnote:[6A][6B] contract clause -- change in statutory remedy -- ; Two states, which had covenanted and agreed with Headnote:[9A][9B] each other, and with the holders of bonds of the states' port authority, that as long as such bonds remained Under the contract clause of the United States outstanding and the bondholders had not given their Constitution (Art I, 10, cl 1) protecting the obligation of consent, the states and the port authority would not use contracts from state impairment, it is not always any "revenues or reserves, which have been or shall be unconstitutional for changes in statutory remedies to pledged in whole or in part as security for such bonds, for affect preexisting contracts. ... other than permitted purposes," have the power to repeal the statutory covenant prospectively as to bonds LAW §207; issued after the repeal goes into effect. contract clause -- remedies and obligations -- modification -- ; STATES §51 ; Headnote:[10A][10B] legislative covenant -- contractual obligation -- ; Obligations as well as remedies may be modified Headnote:[7] without necessarily violating the contract clause of the A legislative covenant--under which two states United States Constitution (Art I, 10, cl 1), which "covenant and agree with each other and with the holders protects the obligation of contracts from state of ... bonds" of the states' port authority that so long as impairment. any of the bonds of such holders remained outstanding and unpaid and the bondholders had not given their LAW §10; consent, the states and the port authority would not use, for other than permitted purposes, any revenues or contract clause -- construction -- technical reserves pledged as security for the bonds--constitutes a impairment as necessitating further inquiry -- ; contractual obligation of the two states, since (1) the intent to make a contract appears in the language of the Headnote:[11] covenant, (2) the purpose of the covenant was to invoke, as security against repeal, the constitutional protection of Since the prohibition of the contract clause of the the contract clause of the United States Constitution (Art United States Constitution (Art I, 10, cl 1) against a I, 10, cl 1), which prohibits states from passing any law state's impairing the obligation of contracts is not an impairing the obligation of contracts, and (3) the states absolute one and is not to be read with literal exactness received, in return for their promise, public marketability like a mathematical formula, a finding that there has been of bonds to finance a construction project and acquisition a technical impairment is merely a preliminary step in of a railroad. resolving the more difficult question whether such impairment is permitted under the Constitution, and the court must attempt to reconcile the strictures of the LAW §530 ; contract clause with the essential attributes of sovereign power necessarily reserved by the states to safeguard the contract rights as property -- ; welfare of their citizens. Headnote:[8A][8B] LAW §214(1) ; Contract rights are a form of property and as such may be taken for a public purpose provided that just contract clause -- police power of states -- ; compensation is paid. Headnote:[12] LAW §286 ; The contract clause of the United States Constitution Page 5 431 U.S. 1, *; 97 S. Ct. 1505, **; 52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1 (Art I, 10, cl 1), prohibiting state impairment of contract Headnote:[15] obligations, limits otherwise legitimate exercises of state legislative authority, and the existence of an important Under the contract clause of the United States public interest is not always sufficient to overcome that Constitution (Art I, 10, cl 1), prohibiting state impairment limitation; whatever is reserved of state power must be of contract obligations, a state is not required to adhere to consistent with the fair intent of the constitutional a contract that surrenders an essential attribute of its limitation of that power, and the scope of the state's sovereignty. reserved power depends on the nature of the contractual relationship with which the challenged law conflicts. STATES §51 ; power -- financial contracts -- ; LAW §271 ; Headnote:[16] contract clause -- police power -- private contracts -- ; A state has the power to enter into effective financial contracts. Headnote:[13] Although the states must possess broad power to CORPORATIONS §45 adopt general regulatory measures without being concerned that private contracts will be impaired or even STATES §51 ; destroyed as a result, private contracts are not subject to unlimited modification under the states' police power for borrowing money -- contracts to repay -- ; purposes of the contract clause of the United States Constitution (Art I, 10, cl 1), prohibiting state impairment Headnote:[17A][17B] of contract obligations; legislation adjusting the rights States and cities, when they borrow money and and responsibilities of contracting parties must be upon contract to repay it with interest, are not acting as reasonable conditions and of a character appropriate to sovereignties, but their contracts have the same meaning the public purpose justifying its adoption, but, as is as similar contracts between private persons. customary in reviewing economic and social regulation, courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure. LAW §216; contract clause -- state's financial obligations -- LAW §214(2) ; private contracts -- public purpose -- ; contract clause -- reasonableness of impairment -- Headnote:[18] emergency -- ; The contract clause of the United States Constitution Headnote:[14A][14B] (Art I, 10, cl 1), which prohibits the states from passing any law impairing the obligation of contracts, is not an Although the existence of an emergency and the absolute bar to subsequent modification of a state's own limited duration of a relief measure are factors to be financial obligations; as with laws impairing the assessed in determining the reasonableness of an obligations of private contracts, an impairment may be impairment for purposes of the contract clause of the constitutional if it is reasonable and necessary to serve an United States Constitution (Art I, 10, cl 1), such factors important public purpose, although in applying such cannot be regarded as essential in every case. standard, complete deference to a legislative assessment of reasonableness and necessity is not appropriate, since LAW §142 ; the state's self-interest is at stake. (Brennan, White, and Marshall, JJ., dissented in part from this holding.) contract clause -- state contract -- ; Page 6 431 U.S. 1, *; 97 S. Ct. 1505, **; 52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1 LAW §216 ; SYLLABUS contract clause -- impairment of state's financial A 1962 statutory covenant between New Jersey and obligations -- reasonableness determination -- ; New York limited the ability of the Port Authority of New York and New Jersey to subsidize rail passenger Headnote:[19] transportation from revenues and reserves pledged as security for consolidated bonds issued by the Port An impairment of a state's own financial obligations Authority. A 1974 New Jersey statute, together with a is constitutional under the contract clause of the United concurrent and parallel New York statute, retroactively States Constitution (Art I, 10, cl 1), if the impairment is repealed the 1962 convenant. Appellant, both as a trustee reasonable and necessary to serve an important public for, and as a holder of, Port Authority bonds, brought suit purpose; the extent of impairment is a relevant factor in in the New Jersey Superior Court for declaratory relief, determining its reasonableness. claiming that the 1974 New Jersey statute impaired the obligation of the States' contract with the bondholders in STATES §68 ; violation of the Contract Clause of the United States Constitution. The Superior Court dismissed the financial obligations -- ; complaint after trial, holding that the statutory repeal was a reasonable exercise of New Jersey's police power and Headnote:[20] was not prohibited by the Contract Clause. The New Jersey Supreme Court affirmed. Held: The Contract A state cannot refuse to meet its legitimate financial Clause prohibits the retroactive repeal of the 1962 obligations simply because it would prefer to spend the covenant. Pp. 14-32. money to promote the public good rather than the private welfare of its creditors. (a) The outright repeal of the 1962 covenant totally eliminated an important security provision for the bondholders and thus impaired the obligation of the LAW §215 ; States' contract. Pp. 17-21. contract clause -- eminent domain -- ; (b) The security provision of the 1962 covenant was Headnote:[21A][21B] purely a financial obligation and thus not necessarily a compromise of the States' reserved powers that cannot be For purposes of the contract clause of the United contracted away. Pp. 21-25. States Constitution (Art I, 10, cl 1), which prohibits states from passing laws impairing the obligation of contracts, (c) The repeal of the 1962 covenant cannot be states are free to exercise their powers of eminent domain sustained on the basis of Faitoute Iron & Steel Co. v. to abrogate contractual rights upon payment of just City of Asbury Park, 316 U.S. 502, and W. B. Worthen compensation. Co. v. Kavanaugh, 295 U.S. 56, simply because the bondholders' rights were not totally destroyed. Pp. 26-28. LAW §216 ; (d) An impairment of contract such as is involved in this case can only be upheld if it is both reasonable and impairment of contract obligations -- state contracts necessary to serve an important public purpose, but here -- ; the impairment was neither necessary to achieve the States' plan to encourage private automobile users to shift Headnote:[22] to public transportation nor reasonable in light of changed circumstances. Total repeal of the 1962 covenant was not A state is not completely free to consider impairing essential, since the States' plan could have been the obligation of its own contracts on a par with other implemented with a less drastic modification of the policy alternatives, and is not free to impose a drastic covenant, and since, without modifying the covenant at impairment when an evident and more moderate course all, the States could have adopted alternative means of would serve its purposes equally well. achieving their twin goals of discouraging automobile use Page 7 431 U.S. 1, *; 97 S. Ct. 1505, **; 52 L. Ed. 2d 92, ***; 1977 U.S. LEXIS 1 and improving mass transit. Nor can the repeal be 1962 that had limited the ability of The Port Authority of claimed to be reasonable on the basis of the need for New York and New Jersey 2 to subsidize rail passenger mass transportation, energy conservation, and transportation from revenues and reserves. environmental protection, since the 1962 covenant was adopted with knowledge of such concerns. Pp. 28-32. 1 [HN1] "No State shall... pass any... Law impairing the Obligation of Contracts...." U.S. 69 N.J. 253, 353 A. 2d 514, reversed. Const., Art. I, § 10, cl. 1. BLACKMUN, J., delivered the opinion of the Court, 2 The name originally was "The Port of New in which BURGER, C.J., and REHNQUIST and York Authority." 1921 N.J. Laws, c. 151, p. 416; STEVENS, JJ., joined. BURGER, C.J., filed a 1921 N. Y. Laws, c. 154, p. 496. It was changed concurring statement, post, p. 32. BRENNAN, J., filed a to "The Port Authority of New York and New dissenting opinion, in which WHITE and MARSHALL, Jersey," effective July 1, 1972. 1972 N.J. Laws, JJ., joined, post, p. 33. STEWART, J., took no part in the c. 69; 1972 N. Y. Laws, c. 531. decision of the case. POWELL, J., took no part in the consideration or decision of the case. The suit, one for declaratory relief, [***98] was instituted by appellant United States Trust Company of COUNSEL: Devereux Milburn argued the cause for New York in the Superior Court of New Jersey, Law appellant. With him on the briefs were Robert A. Division, Bergen County. Named as defendants were the McTamaney and Robert B. Meyner. State of New Jersey, its Governor, and its Attorney General. Plaintiff-appellant sued as trustee for two series William F. Hyland, Attorney General of New Jersey, pro of Port Authority Consolidated Bonds, as a holder of Port se, argued the cause for appellees. With him on the brief Authority Consolidated Bonds, and on behalf of all were Michael I. Sovern and Murray J. Laulicht. * holders of such bonds. 3 * Louis J. Lefkowitz, Attorney General, Samuel 3 Appellant is trustee for the Fortieth and A. Hirshowitz, First Assistant Attorney General, Forty-first Series of Port Authority Consolidated and Daniel M. Cohen, Assistant Attorney Bonds, with an aggregate principal amount of $ General, filed a brief for the State of New York as 200 million. At the time the complaint was filed, amicus curiae urging affirmance. appellant also held approximately $ 96 million of Consolidated Bonds in its own account, as custodian, and as fiduciary in several capacities. There were then over $ 1,600 million of JUDGES: Burger, Brennan, White, Marshall, Blackmun, Consolidated Bonds outstanding. Rehnquist, Stevens;, Stewart took no part in the decision of the case. Powell took no part in the consideration or After a trial, the Superior Court ruled that the decision of the case. statutory repeal was a reasonable exercise of New Jersey's police power, and declared that it was not OPINION BY: BLACKMUN prohibited by the Contract Clause or by its counterpart in the New Jersey Constitution, Art. IV, § 7, P3. OPINION Accordingly, appellant's complaint was dismissed. 134 N.J. Super. 124, 338 A. 2d 833 (1975). The Supreme [*3] [***97] [**1508] MR. JUSTICE Court of New Jersey, on direct appeal and by per [*4] BLACKMUN delivered the opinion of the Court. curiam opinion, affirmed "substantially for the reasons set forth in the [trial court's] opinion." 69 N.J. 253, 256, [***LEdHR1A] [1A]This case presents a challenge 353 A. 2d 514, 515 (1976). We noted probable to a New Jersey statute, 1974 N.J. Laws, c. 25, as jurisdiction. 427 U.S. 903 (1976). 4 violative of the Contract Clause 1 of the United States Constitution. That statute, together with a concurrent and 4 The State of New York is not a party to this parallel New York statute, 1974 N. Y. Laws, c. 993, case, although its Attorney General has filed a repealed a statutory covenant made by the two States in brief as amicus curiae. A challenge to the parallel Page 8 431 U.S. 1, *4; 97 S. Ct. 1505, **1508; 52 L. Ed. 2d 92, ***98; 1977 U.S. LEXIS 1 New York statute has been pending in the the revenues derived from its operations. By Supreme Court of New York, County of New reason of these financial limitations two concepts York, since 1974. United States Trust Co. of New initially emerged which have played an important York v. New York, No. 09128/74. role in the realization of the purposes for which the Authority was created: first, the specific I projects undertaken by the Authority should be self-supporting, i. e., the revenues of each should BACKGROUND be sufficient to cover its operating expenses and debt service requirements; and second, since the A. Establishment of the Port Authority. The Port Authority is a public agency over which its Authority was established in 1921 by a bistate compact to creditors have no direct control, the bondholders effectuate "a better co-ordination of the terminal, should be protected by covenants with the transportation and other facilities of commerce in, about Authority and with the states which have ultimate and through the port of New York." 1921 N.J. Laws, c. control over its operations." 134 N.J. Super. 124, 151, p. 413; 1921 N. Y. Laws, c. 154, p. 493. See N.J. 139-140, 338 A. 2d 833, 841 (1975). Stat. Ann. § 32:1-1 et seq. (1940); N. Y. Unconsol. Laws § 6401et seq. (McKinney 1961). The compact, as the The two States subsequently took steps to Constitution requires, Art. I, § 10, cl. 3, received protect the Port Authority's financial integrity. congressional consent. 42 Stat. 174. See, for example, the 1925 statutory declarations not to authorize the construction of competitive The compact granted the Port Authority enumerated bridges within the district or to limit the right of powers and, by its Art. III, "such other and additional the Port Authority to levy such charges and tolls powers as shall be conferred upon it by the Legislature of as it deemed necessary to produce revenues to either State concurred in by the Legislature of the other, fund its bonds. 1925 N.J. Laws, c. 37, § 5; 1925 or by Act or Acts of Congress." The powers are N. Y. Laws, c. 210, § 5. enumerated in Art. VI. Among them is "full power and authority to purchase, construct, lease and/or [**1509] See generally E. Bard, The Port of New York operate any terminal or transportation facility within said Authority (1942). district." "Transportation facility" is defined, in Art. XXII, to include "railroads, steam or electric,... for use B. Initial Policy Regarding Mass Transit. Soon after for the transportation or carriage of persons or property." the Port Authority's inception, the two States, again with the consent of Congress, 42 Stat. 822, agreed upon a The Port Authority was conceived as a financially comprehensive plan for the entity's development. 1922 independent entity, with funds primarily derived from N.J. Laws, c. 9; 1922 N. Y. Laws, c. 43. This plan was private investors. The preamble to the compact speaks of concerned primarily, if not solely, with transportation of the "encouragement of [*5] the investment of capital," freight by carriers and not with the movement of and the Port Authority was given power to mortgage its passengers in the Port Authority district. The plan, facilities and to pledge its revenues to secure [***99] however, was not implemented. 6 The New [*6] Jersey the payment of bonds issued to private investors. 5 Legislature at that time declared that the plan "does not include the problem of passenger traffic," even though 5 The Port Authority possessed no taxing power that problem "should be considered in co-operation with and was unable to pledge the credit of either State. the port development commission." 1922 Laws, c. 104. The trial court found: The Port Authority itself recognized the existence of the "Under the terms of the Compact the power passenger service problem. 1924 Annual Report 23; to levy taxes or to pledge the credit of either state 1928 Annual Report 64-66; App. 574a-575a. was expressly withheld from the Authority. From 6 The parties are not in agreement as to the its inception, with the exception of monies original perception of the compact and the plan. advanced as loans by the states, the Authority was The appellant claims that the Port Authority was required to finance its facilities solely with money organized "as a freight coordinating agency," borrowed from the public and to be repaid out of Brief for Appellant 5, whereas the appellees Page 9 431 U.S. 1, *6; 97 S. Ct. 1505, **1509; 52 L. Ed. 2d 92, ***99; 1977 U.S. LEXIS 1 challenge that description and emphasize the The States in 1931 also enacted statutes creating the presence of a mass transit problem as a factor of general reserve fund of the Port Authority. 1931 N.J. profound concern in the Port Authority's Laws, c. 5; 1931 N. Y. Laws, c. 48. Surplus revenues development. Brief for Appellees 2-5. The trial from all Port Authority facilities were to be pooled in the court found that neither the commission which fund to create an irrevocably pledged reserve equal to recommended the creation of the Port Authority one-tenth of the par value of the Port Authority's nor the comprehensive plan contemplated outstanding bonds. This level was attained 15 years later, responsibility of the agency for passenger transit. in 1946. 134 N.J. Super., at 134-139, 338 A. 2d, at 838-841. In 1952, the Port Authority abandoned the practice of earmarking specific facility revenues as security for In 1927 the New Jersey Legislature, in an Act bonds of that facility. The Port Authority's Consolidated approved by the Governor, directed the Port Authority to Bond Resolution established the present method of make plans "supplementary to or amendatory of the financing its activities; under this method its bonds are comprehensive plan... as will provide adequate interstate secured by a pledge of the general reserve fund. 8 and suburban transportation facilities for passengers." 1927 Laws, c. 277. The New York Legislature followed 8 The appellees state that the creation of the suit in 1928, but its bill encountered executive veto. 7 general reserve fund "made the Port Authority's The [***100] trial court observed that this [**1510] fiscal strength possible." Brief for Appellees 6 n. veto "to all intents and purposes ended any legislative 7. effort to involve the Port Authority in an active role in The parties, however, are in disagreement as commuter transit for the next 30 years." 134 N.J. Super., to the actual and proper fiscal policy of the Port at 149, 338 A. 2d, at 846. Authority. Appellant claims that each facility 7 Governor Alfred E. Smith in his statement in should have prospects of producing sufficient support of his veto said: revenue to support itself. Appellees' position is apparent from their assertion that although the "[It] has been a great disappointment to me to self-supporting-facility concept may have find that the opposition of the railroads has "initially emerged," as the trial court stated, 134 prevented to date the making of real progress in N.J. Super., at 140, 338 A. 2d, at 841, "the working out the program of freight distribution in concept had no practical significance because it the port which always has been the main object was not attained prior to 1931 and was and purpose of the Port of New York Authority. I unnecessary after 1931," with the establishment of am satisfied that the Port Authority should stick to the general reserve fund. Brief for Appellees 7. this program and I am entirely unwilling to give my approval to any measure which at the expense The trial court observed that upon the of the solution of the great freight distribution adoption of the Consolidated Bonds Resolution in problem will set the Port Authority off on an 1952, the self-supporting-facility concept "ceased entirely new line of problem connected with the to have the significance previously attached to it." solution of the suburban passenger problem." 134 N.J. Super., at 143, 338 A. 2d, at 843. App. 573a-574a. [*8] D. Renewed Interest in Mass Transit. [*7] C. Port Authority Fiscal Policy. Four bridges Meanwhile, the two States struggled with the passenger for motor vehicles were constructed by the Port transportation problem. Many studies were made. The Authority. A separate series of revenue bonds was issued situation was recognized as critical, great costs were for each bridge. Revenue initially was below envisioned, and substantial deficits were predicted for expectations, but the bridges ultimately accounted for any mass transit operation. The Port Authority itself much of the Port Authority's financial strength. The financed a study conducted by the Metropolitan Rapid legislatures transferred the operation and revenues of the Transit Commission which the States had established in successful Holland Tunnel to the Port Authority, and this 1954. more than made up for the early bridge deficits. Page 10 431 U.S. 1, *8; 97 S. Ct. 1505, **1510; 52 L. Ed. 2d 92, ***100; 1977 U.S. LEXIS 1 In 1958, Assembly Bill No. 16 was introduced in the 605a. The committee concluded that the solution to New Jersey Legislature. This would have had the Port bondholder concern was "[l]imiting by a constitutionally Authority take over, improve, and operate interstate rail protected statutory covenant with Port Authority mass transit between New Jersey and New York. The bondholders the extent to which the Port Authority bill was opposed vigorously by the Port Authority on revenues and reserves pledged to such bondholders can in legal and financial grounds. The Port Authority also the future be applied to the deficits of possible future Port retaliated, in a sense, by including a new safeguard in its Authority passenger railroad facilities beyond the original contracts with bondholders. This prohibited the issuance Hudson & Manhattan Railroad system." Id., at 656a. of any bonds, [***101] secured by the general reserve And the trial court found that the 1962 New Jersey fund, for a new facility unless the Port Authority first Legislature "concluded it was necessary to place a certified that the issuance of the bonds would not limitation on mass transit deficit operations to be "materially impair the sound credit standing" of the Port undertaken by the Authority in the future so as to Authority. App. 812a. Bill No. 16 was not passed. promote continued investor confidence in the Authority." 134 N.J. Super., at 178, 338 A. 2d, at 863-864. In 1959, the two States, with the consent of Congress, Pub. L. 86-302, 73 Stat. 575, created the New The statutory covenant of 1962 was the result. The York-New Jersey Transportation Agency to deal "with covenant itself was part of the bistate legislation matters affecting public mass transit within and between authorizing the Port Authority to acquire, construct, and the 2 States." 1959 N.J. Laws, c. 13, § 3.1, as amended by operate the Hudson & Manhattan Railroad and the World c. 24; 1959 N. Y. Laws, c. 420, § 3.1. Trade Center. The statute in relevant part read: S Also in 1959, the two States enacted legislation "The 2 States covenant and agree with each other providing that upon either State's election the Port and [*10] with the holders of any affected bonds, as Authority would be authorized to purchase and own hereinafter defined, that so long as any of such bonds railroad passenger cars for the purpose of leasing them to remain outstanding and unpaid and the holders thereof [**1511] commuter railroads. 1959 N.J. Laws, c. 25; shall not have given [***102] their consent as provided 1959 N. Y. Laws, c. 638. Bonds issued for this purpose in their contract with the port authority, (a)... and (b) would be guaranteed by the electing State. New York so neither the States nor the port authority nor any elected, N. Y. Const., Art. X, § 7, effective January 1, subsidiary corporation in corporated for any of the 1962, and approximately $ 100 million of Commuter Car purposes of this act will apply any of the rentals, tolls, Bonds were issued by the Port Authority to purchase fares, fees, charges, revenues or reserves, which have about [*9] 500 air-conditioned passenger cars and eight been or shall be pledged in whole or in part as security locomotives used on the Penn Central and Long Island for such bonds, for any railroad purposes whatsoever Railroads. other than permitted purposes hereinafter set forth." 1962 N.J. Laws, c. 8, § 6; 1962 N.Y. Laws, c. 209, § 6. 9I E. The 1962 Statutory Covenant.In 1960 the takeover of the Hudson & Manhattan Railroad by the 9 Not at issue in the instant case is part (a) of § 6 Port Authority was proposed. This was a privately of the statutory covenant (omitted in the quoted owned interstate electric commuter system then linking material in the text), which promises that the Manhattan, Newark, and Hoboken through the Hudson States will not impair the Port Authority's control tubes. It had been in reorganization for many years, and over its fees or services. This provision has not in 1959 the Bankruptcy Court and the United States been repealed, even prospectively. District Court had approved a plan that left it with cash sufficient to continue operations for two years but with The "permitted purposes" were defined to include (i) no funds for capital expenditures. In re Hudson & the Hudson & Manhattan as then existing, (ii) railroad Manhattan R. Co., 174 F. Supp. 148 (SDNY 1959), aff'd freight facilities, (iii) tracks and related facilities on Port sub nom. Spitzer v. Stichman, 278 F. 2d 402 (CA2 Authority vehicular bridges, and (iv) a passenger railroad 1960). A special committee of the New Jersey Senate was facility if the Port Authority certified that it was formed to determine whether the Port Authority was "self-supporting" or, if not, that at the end of the "fulfilling its statutory duties and obligations," App. preceding calendar year the general reserve fund contained the prescribed statutory amount, and that all the Page 11 431 U.S. 1, *10; 97 S. Ct. 1505, **1511; 52 L. Ed. 2d 92, ***102; 1977 U.S. LEXIS 1 Port Authority's passenger revenues, including the Bonds, or the ability of the Port Authority to fulfill its Hudson & Manhattan, would not produce deficits in commitments to bondholders. This § 7 certification was excess of "permitted deficits." based on a projection [*12] that the annual net loss of the PATH system would level off at about $ 6.6 million A passenger railroad would be deemed from 1969 to 1991. At the time the certification was "self-supporting" if the amount estimated by the made the general reserve fund contained $ 69 million, Authority as average annual net income equaled or and thus the projected PATH deficit was close to the exceeded the average [**1512] annual debt service for level of "permitted deficits" under the 1962 covenant. the following decade. Though the covenant was not 134 N.J. Super., at 163, and n. 27, 338 A. 2d, at 855, and explicit on the point, the States, the Port Authority, and n. 27. its bond counsel have agreed that any state subsidy might be included in the computation of average annual net The PATH fare in 1962 was 30 cents and has income of the facility. remained at that figure despite recommendations for increase. App. 684a-686a. As a result of the [*11] "Permitted deficits," the alternative method continuation of the low fare, PATH deficits have far under permitted purpose (iv), was defined to mean that exceeded the initial projection. Thus, although the the annual estimated deficit, including debt service, of the general reserve fund had grown to $ 173 million by 1973, Hudson tubes and any additional non-self-sustaining substantially increasing the level of permitted deficits to railroad facility could not exceed one-tenth of the general about $ 17 million, the PATH deficit had grown to $ 24.9 reserve fund, or 1% of the Port Authority's total bonded million. In accordance with a stipulation of the parties, debt. id., at 682a-683a, the trial court found that the PATH deficit so exceeded the covenant's level of permitted The terms of the covenant were self-evident. Within deficits that the Port Authority was unable to issue bonds its conditions the covenant permitted, and perhaps even for any new passenger railroad facility that was not contemplated, additional Port Authority involvement in self-supporting. 134 N.J. Super., at 163 n. 26, 338 A. 2d, deficit rail mass transit as its financial position at 855 n. 26. 10 strengthened, since the limitation of the covenant was linked to, and would expand with, the general reserve 10 Notwithstanding the "permitted deficits" fund. formula, the covenant permits use of Port Authority revenues for mass transit if 60% of the A constitutional attack on the legislation containing bondholders give their consent. The procedures the covenant was promptly launched. New Jersey and for obtaining such consent are provided in § 16 New York joined in the defense. The attack proved (b) of the Consolidated Bond Resolution. App. unsuccessful. Courtesy Sandwich Shop, Inc. v. Port of 802a-809a. The Port Authority commissioned a New York Authority, 12 N.Y. 2d 379, 190 N.E. 2d 402, study by First Boston Corporation in 1971 that appeal dismissed, 375 U.S. 78 (1963). See Kheel v. Port proposed placing a surcharge on bridge and tunnel of New York Authority, 331 F. Supp. 118 (SDNY 1971), tolls, with the extra revenues going to a special aff'd, 457 F. 2d 46 (CA2), cert. denied, 409 U.S. 983 fund to secure bonds for mass transportation (1972). projects. This proposal would not have diminished the historic reserves pledged to secure With the legislation embracing the covenant thus the bonds. The study concluded, however, that effective, the Port Authority on September 1, 1962, some increase in the interest rates of existing assumed the ownership and operating responsibilities of bonds would have been necessary to obtain a the Hudson & Manhattan through a wholly owned favorable vote of the bondholders. Id., at [***103] subsidiary, Port Authority Trans-Hudson 696a-699a. There is some evidence in the record Corporation (PATH). Funds necessary for this were that such a proposal could not win bondholder realized by the successful sale of bonds to private approval, partly because the requisite procedures investors accompanied by the certification required by § are unwieldy. Id., at 191a-192a. 7 of the Consolidated Bond Resolution that the operation would not materially impair the credit standing of the [**1513] F. Prospective Repeal of the Covenant. Port Authority, the investment status of the Consolidated Page 12 431 U.S. 1, *12; 97 S. Ct. 1505, **1513; 52 L. Ed. 2d 92, ***103; 1977 U.S. LEXIS 1 Governor Cahill of New Jersey and Governor Rockefeller of the 1962 covenant, but its attitude changed with the of New York in April 1970 jointly sought increased Port election of a new Governor in 1973. In early 1974, when Authority participation in mass transit. In November bills were pending in the two States' legislatures to repeal 1972 they agreed upon a [*13] plan for expansion of the the covenant [*14] retroactively, a national energy crisis PATH system. This included the initiation of direct rail was developing. On November 27, 1973, Congress had service to Kennedy Airport and the construction of a line enacted the Emergency Petroleum Allocation Act, 87 to Plainfield, N.J., by way of Newark Airport. The plan Stat. 627, as amended, 15 U.S.C. § 751 et seq. (1970 ed., anticipated a Port Authority investment of something less Supp. V). In that Act Congress found that the hardships than $ 300 million out of a projected total cost of $ 650 caused by the oil shortage "jeopardize the normal flow of million, with the difference to be supplied by federal and commerce and constitute a national energy crisis which is state grants. It also proposed to make the covenant a threat to the public health, safety, and welfare." 87 Stat. inapplicable with respect to bonds issued after the 628, 15 U.S.C. § 751 (a)(3). This time, proposals for legislation went into effect. This program was enacted, retroactive repeal of the 1962 covenant were passed by effective May 10, 1973, and the 1962 covenant was the legislature and signed by the Governor of each State. thereby rendered inapplicable, or in effect repealed, with 1974 N.J. Laws, c. 25; 1974 N.Y. Laws, c. 993. 12 respect to bonds issued subsequent to the effective date of the new legislation. 1972 N.J. Laws, c. 208; [***104] 12 Governor Wilson of New York, upon signing 1972 N.Y. Laws, c. 1003, as amended by 1973 N.Y. that State's repealer, observed: Laws, c. 318. 11 "It is with great reluctance that I approve a 11 The introductory statement appended to the bill that overturns a solemn pledge of the State. I New Jersey bill recited: take this extraordinary step only because it will lead to an end of the existing controversy over the "The bill is also designed to preclude the validity of the statutory covenant, a controversy application of the 1962 covenant to holders of that can only have an adverse affect [sic] upon the bonds newly issued after the effective date of this administration and financing of the Port act, while maintaining in status quo the rights of Authority, and because it will lead to a speedy the holders of the bonds issued after March 27, resolution by the courts of the questions and 1962 (the effective date of the 1962 covenant issues concerning the validity of the statutory legislation) but prior to the effective date of this covenant. Because it is the province of the courts act." Id., at 707a. to decide questions of constitutionality, I will not prevent the covenant issue from being brought Earlier in 1972 the New York Legislature had before them, especially where it is the enacted, and the Governor had signed, a bill unanimously expressed desire of the members of repealing the 1962 covenant in its entirety. 1972 both houses of the New York State Legislature as N.Y. Laws, c. 1003. New Jersey did not adopt the well as the expressed will of the Governor and necessary complementary legislation at that time. both houses of the Legislature of the State of New The 1973 amendment to the New York Jersey to do so." App. 774a. legislation, noted in the text, was then enacted to conform to the New Jersey statute. On April 10, 1975, the Port Authority announced an increase in its basic bridge and tunnel tolls designed to G. Retroactive Repeal of the Covenant. It soon raise an estimated $ 40 million annually. App. developed that the proposed PATH expansion would not 405a-407a, 419a-421a, 528a. This went into effect May take place as contemplated in the Governors' 1972 plan. 5 and was, it was said, "[t]o increase [the Port New Jersey was unwilling to increase its financial Authority's] ability to finance vital mass transit commitment in response to a sharp increase in the improvements." Id., at 405a. projected cost of constructing the Plaintield extension. As a result the anticipated federal grant was not [**1514] II approved. App. 717a. At the time the Constitution was adopted, and for New Jersey had previously prevented outright repeal nearly a century thereafter, the Contract Clause was one Page 13 431 U.S. 1, *14; 97 S. Ct. 1505, **1514; 52 L. Ed. 2d 92, ***104; 1977 U.S. LEXIS 1 of the few express limitations on state power. The many the enactment of that statute, such a defaulting purchaser, decisions of [*15] [***105] this Court involving the under Texas law, could have reinstated his claim to the Contract Clause are evidence of its important place in our land upon written request and payment of delinquent constitutional jurisprudence. Over the last century, interest, unless rights of third parties had intervened. however, the Fourteenth Amendment has assumed a far This Court held that "[HN2] it is not every modification larger place in constitutional adjudication concerning the of a contractual promise that impairs the obligation of States. We feel that the present role of the Contract contract under federal law." Id., at 506-507. It observed Clause is largely illuminated by two of this Court's that the State "has the 'sovereign right... to protect the... decisions. In each, legislation was sustained despite a general welfare of the people'" and "'we must respect the claim that it had impaired the obligations of contracts. "wide discretion on the part of the legislature in determining what is and what is not necessary,"'" id., at Home Building & Loan Assn. v. Blaisdell, 290 U.S. 508-509, [***106] quoting East New York Savings 398 (1934), is regarded as the leading case in the modern Bank v. Hahn, 326 U.S. 230, 232-233 (1945). The Court era of Contract Clause interpretation. At issue was the recognized that "the power of a State to modify or affect Minnesota Mortgage Moratorium Law, enacted in 1933, the obligation of contract is not without limit," but held during the depth of the Depression and when that State that "the objects of the Texas statute make abundantly was under severe economic stress, and appeared to have clear that it impairs no protected right under the Contract no effective alternative. The statute was a temporary Clause." 379 U.S., at 509. measure that allowed judicial extension of the time for redemption; a mortgagor who remained in possession Both of these cases eschewed a rigid application of during the extension period was required to pay a the Contract Clause to invalidate state legislation. Yet reasonable income or rental value to the mortgagee. A neither indicated that the Contract Clause was without closely divided Court, in an opinion by Mr. Chief Justice meaning in modern constitutional jurisprudence, or that Hughes, observed that "emergency may furnish the its limitation on state power [**1515] was illusory. occasion for the exercise of power" and that the Whether or not the protection of contract rights comports "constitutional question presented in the light of an with current views of wise public policy, the Contract emergency is whether the power possessed embracees the Clause remains a part of our written Constitution. We particular exercise of it in response to particular therefore must attempt to apply that constitutional conditions." Id., at 426. It noted that the debates in the provision to the instant case with due respect for its Constitutional Convention were of little aid in the purpose and the prior decisions of this Court. construction of the Contract Clause, but that the general purpose of the Clause was clear: to encourage trade and [*17] III credit by promoting confidence in the stability of contractual obligations. Id., at 427-428. Nevertheless, a [***LEdHR1A] [1B] [***LEdHR2] [2] State "continues to possess authority to safeguard the [***LEdHR3A] [3A] [***LEdHR4A] [4A]We first vital interests of its people.... This principle of examine appellant's general claim that repeal of the 1962 harmonizing the constitutional prohibition with the covenant impaired the obligation of the States' contract necessary residuum of state power has had progressive with the bondholders. It long has been established recognition in the decisions of this Court." Id., at that[HN3] the Contract Clause limits the power of the 434-435. The great clauses of the Constitution are to be States to modify their own contracts as well as to regulate considered in the [*16] light of our whole experience, those between private parties. Fletcher v. Peck, 6 Cranch and not merely as they would be interpreted by its 87, 137-139 (1810);Dartmouth College v. Woodward, 4 Framers in the conditions and with the outlook of their Wheat. 518 (1819).Yet the Contract Clause does not time. Id., at 443. prohibit the States from repealing or amending statutes generally, or from enacting legislation with retroactive This Court's most recent Contract Clause decision is effects. 13 Thus, as a preliminary matter, appellant's claim El Paso v. Simmons, 379 U.S. 497 (1965). That case requires a determination that the repeal has the effect of concerned a 1941 Texas statute that limited to a 5-year impairing a contractual obligation. period the reinstatement rights of an interest-defaulting purchaser of land from the State. For many years prior to 13 [***LEdHR3A] [3B] [***LEdHR4A] [4B] Page 14 431 U.S. 1, *17; 97 S. Ct. 1505, **1515; 52 L. Ed. 2d 92, ***LEdHR4A; 1977 U.S. LEXIS 1 The Contract Clause is in the phrase of the a contract when the language and circumstances Constitution which contains the prohibition evince a legislative intent to create private rights against any State's enacting a bill of attainder or of a contractual nature enforceable against the ex post facto law. Notwithstanding Mr. Chief State. Compare Dodge v. Board of Education, Justice Marshall's reference to these two other 302 U.S. 74, 78-79 (1937), with Indiana ex rel. forbidden categories in Fletcher v. Peck, 6 Anderson v. Brand, 303 U.S. 95, 104-105 (1938). Cranch, at 138-139, it is clear that they limit the In addition, statutes governing the interpretation powers of the States only with regard to the and enforcement of contracts may be regarded as imposition of punishment. Cummings v. forming part of the obligation of contracts made Missouri, 4 Wall. 277, 322-326 (1867); Calder v. under their aegis. See n. 17, infra. See generally Bull, 3 Dall. 386, 390-391 (1798). The Due Hale, The Supreme Court and the Contract Process Clause of the Fourteenth Amendment Clause: II, 57 Harv. L. Rev. 621, 663-670 (1944). generally does not prohibit retrospective civil legislation, unless the consequences are 15 [***LEdHR6A] [6B] particularly "harsh and oppressive." Welch v. Between the enactment of the 1962 covenant Henry, 305 U.S. 134, 147 (1938). See Usery v. and its retrospective repeal in 1974, the Port Turner Elkhorn Mining Co., 428 U.S. 1, 14-20 Authority issued and sold to the public $ 1,260 (1976). million of Consolidated Bonds. The Fortieth and Forty-first Series, for which appellant is trustee, were issued after the 1973 prospective repeal and [***LEdHR5A] [5A] [***LEdHR6A] [6A] prior to the retrospective repeal. The holders of [***LEdHR7] [7]In this case the obligation was itself those bonds were not parties to the 1962 created by a statute, the 1962 legislative covenant. It is covenant, since the States undoubtedly had the unnecessary, however, to dwell on the criteria for power to repeal the covenant prospectively. determining whether state legislation gives rise to a SeeOgden v. Saunders, 12 Wheat. 213 (1827). contractual obligation. 14 The trial court [*18] [***107] The subsequent bondholders arguably are like found, 134 N.J. Super., at 183 n. 38, 338 A. 2d, at 866 n. third-party beneficiaries of the covenant. There is 38, and appellees do not deny, that the 1962 covenant testimony in the record that they were indirectly constituted a contract between the two States and the protected because the bonds outstanding at the holders of the Consolidated Bonds issued between 1962 time of the prospective repeal (in excess of $ 1 and the 1973 prospective repeal. 15 The intent to make a billion) could not be expected to be retired in the contract is clear from the statutory language: "The 2 foreseeable future. App. 1105a. We need not States covenant and agree with each other and with the decide whether that indirect relationship supports holders of any affected bonds...." 1962 N.J. Laws, c. 8, § standing to challenge the retroactive repeal, 6; 1962 N. Y. Laws, c. 209, § 6. Moreover, as the however. Appellant also sued as a holder of chronology set forth above reveals, the purpose of the Consolidated Bonds (some $ 72 million) issued covenant was to invoke the constitutional protection of between 1962 and 1973. Id., at 56a-57a. the Contract [**1516] Clause as security against repeal. The parties sharply disagree about the value of the In return for their promise, the States received the benefit 1962 [*19] covenant to the bondholders. Appellant they bargained for: public marketability of Port Authority claims that after repeal the secondary market for affected bonds to finance construction of the World Trade Center bonds became "thin" and the price fell in relation to other and acquisition of the Hudson & Manhattan Railroad. We formerly comparable bonds. This claim is supported by therefore have no doubt that the 1962 covenant has been the trial court's finding that "immediately following properly characterized as a contractual obligation of the repeal and for a number of months thereafter the market two States. price for Port Authority bonds was adversely affected." 14 [***LEdHR5A] [5B] 134 N.J. Super., at 180, 338 A. 2d, at 865. Appellees respond that the bonds nevertheless retained an "A" [HN4] In general, a statute is itself treated as rating from the leading evaluating services and that after Page 15 431 U.S. 1, *19; 97 S. Ct. 1505, **1516; 52 L. Ed. 2d 92, ***LEdHR6A; 1977 U.S. LEXIS 1 an initial adverse effect they regained a comparable price adopt the terms of their bargain in reliance on the position in the market. Findings of the trial court support law in effect at the time the agreement is reached. these claims as well. Id., at 179-182, 338 A. 2d, at 864-866. The fact is that no one can be sure precisely [***LEdHR9A] [9B]It is not always how much financial loss the bondholders suffered. unconstitutional, however, for changes in Factors unrelated to repeal may have influenced price. In statutory remedies to affect pre-existing contracts. addition, the market may not have reacted fully, even as During the early years when the Contract Clause yet, to the covernant's repeal, because of the pending was regarded as an absolute bar to any litigation and the possibility that the repeal would be impairment, this result was reached by treating nullified by the courts. remedies in a manner distinct from substantive contract obligations. Thus, for example, a State [***LEdHR8A] [8A] [***LEdHR9A] [9A] could abolish imprisonment for debt because [***LEdHR10A] [10A]In any event, the question of elimination of this remedy did not impair the valuation need not be resolved in the instant case because underlying obligation. Penniman's Case, 103 U.S. the State has made no effort to compensate the 714 (1881); Mason v. Haile, 12 Wheat. 370 bondholders for any loss [***108] sustained by the (1827); see Sturgesv.Crownishield, 4 Wheat. 122, repeal. 16 As a security provision, the covenant was not 200-201 (1819). superfluous; it limited the Port Authority's deficits and [***LEdHR10A] [10B]Yet it was also thus protected the general reserve fund from depletion. recognized very early that the distinction between Nor was the covenant merely modified or replaced by an remedies and obligations was not absolute. arguably comparable security provision. Its outright Impairment of a remedy was held to be repeal totally eliminated an important security provision unconstitutional if it effectively reduced the value and thus impaired the obligation of the States' contract. of substantive contract rights. Greenv. Biddle, 8 See Richmond Mortgage & Loan Corp. v. Wachovia Wheat. 1, 75-76, 84-85 (1823). See also Bronson Bank & Trust Co., 300 U.S. 124, 128-129 (1937). 17 v. Kinzie, 1 How. 311, 315-318 (1843); Von 16 [***LEdHR8A] [8B] Hoffman v. City of Quincy, 4 Wall., at 552-554. More recent decisions have not relied on the [HN5] Contract rights are a form of property remedy/obligation distinction, primarily because and as such may be taken for a public purpose it is now recognized that obligations as well as provided that just compensation is paid. remedies may be modified without necessarily Contributors to Pennsylvania Hospital v. violating the Contract Clause. El Paso v. Philadelphia, 245 U.S. 20 (1917); see El Paso v. Simmons, 379 U.S. at 506-507, and n. 9; Home Simmons, 379 U.S. 497, 533-534 (1965) (Black, Building & Loan Assn. v. Blaisdell, 290 U.S., at J., dissenting). 429-435. 17 The obligations of a contract long have been regarded as including not only the express terms Although now largely an outdated formalism, but also the contemporaneous state law pertaining the remedy/obligation distinction may be viewed to interpretation and enforcement. "This Court as approximating the result of a more has said that 'the laws which subsist at the time particularized inquiry into the legitimate and place of the making of a contract, and where expectations of the contracting parties. The it is to be performed, enter into and form a prt of parties may rely on the continued existence of it, as if they were expressly referred to or adequate statutory remedies for enforcing their incorporated in its terms.'" Home Building & agreement, but they are unlikely to expect that Loan Assn. v. Blaisdell, 290 U.S. 398, 429-430 state law will remain entirely static. Thus, a (1934), quoting Von Hoffman v. City of Quincy, reasonable modification of statutes governing 4 Wall. 535, 550 (1867). See also Ogden v. contract remedies is much less likely to upset Saunders, 12 Wheat., at 259-260, 297-298 expectations than a law adjusting the express (opinions of Washington and Thompson, JJ.). terms of an agreement. In this respect, the repeal This principle presumes that contracting parties of the 1962 covenant is to be seen as a serious Page 16 431 U.S. 1, *19; 97 S. Ct. 1505, **1516; 52 L. Ed. 2d 92, ***LEdHR10A; 1977 U.S. LEXIS 1 disruption of the bondholders' expectations. power to adopt general regulatory measures without being concerned that private contracts will be impaired, [*20] [**1517] The trial court recognized that or even destroyed, as a result. Otherwise, one would be there was an impairment in this case: "To the extent that able to obtain immunity from state regulation by making the repeal of the covenant authorizes the Authority to private contractual arrangements. This principle is assume greater deficits for such [*21] purposes, it summarized in Mr. Justice Holmes' well-known dictum: permits a diminution of the pleadged revenues and "One whose rights, such as they are, are subject to state reserves and may be said to constitute an impairment of restriction, cannot remove them from the power of the the states' contract with the bondholders." 134 N.J. State by making a contract about them." Hudson Water Super., at 183, 338 A. 2d, at 866. Co. v. McCarter, 209 U.S. 349, 357 (1908).18 Having thus established that the repeal impaired a 18 Accord: Stephenson v. Binford, 287 U.S. contractual obligation [***109] of the States, we turn to 251, 276 (1932); Manigault v. Springs, 199 U.S. the question whether that impairment violated the 473, 480 (1905). See Home Building & Loan Contract Clause. Assn. v. Blaisdell, 290 U.S., at 437-438. IV [***LEdHR11] [11][HN6] Although the Contract [***LEdHR14A] [14A]Yet private contracts are not Clause appears literally to proscribe "any" impairment, subject to unlimited modification under the police power. this Court observed in Blaisdell that "the prohibition is The Court in Blaisdell recognized that laws intended to not an absolute one and is not to be read with literal regulate existing contractual relationships must serve a exactness like a mathematical formula." 290 U.S., at legitimate public purpose. 290 U.S., at 444-445.A State 428.Thus, a finding that there has been a technical could not "adopt as its policy the repudiation of debts or impairment is merely a preliminary step in resolving the the [**1518] destruction of contracts or the denial of more difficult question whether that impairment is means to enforce them." Id., at 439. Legislation adjusting permitted under the Constitution. In the instant case, as the rights and responsibilities of contracting parties must in Blaisdell, we must attempt to reconcile the strictures of be upon reasonable conditions [***110] and of a the Contract Clause with the "essential attributes of character appropriate to the public purpose justifying its sovereign power," id., at 435, necessarily reserved by the adoption. Id., at 445-447.19 As is customary in reviewing States to safeguard the welfare of their citizens. Id., at economic and social [*23] regulation, however, courts 434-440. properly defer to legislative judgment as to the necessity and reasonableness of a particular measure. East New [***LEdHR12] [12]The trial court concluded that repeal York Savings Bank v. Hahn, 326 U.S. 230 (1945). of the 1962 covenant was a valid exercise of New Jersey's police power because repeal served important 19 [***LEdHR14A] [14B] public interests in mass transportation, energy conservation, and environmental protection. 134 N.J. Blaisdell suggested further limitations that Super., at 194-195, 338 A. 2d, at 873.Yet the Contract have since been subsumed in the overall Clause limits otherwise legitimate exercises of state determination of reasonableness. The legislation legislative authority, and the existence of an important sustained in Blaisdell was adopted pursuant to a public interest is not always sufficient to overcome that declared emergency in the State and strictly limitation. "Undoubtedly, whatever is reserved of state limited in duration. Subsequent decisions struck power must be consistent with the fair intent of the down state laws that were not so limited. W.B. constitutional limitation of that power." Blaisdell, 290 Worthen Co. v. Thomas, 292 U.S. 426, 432-434 U.S., at 439. Moreover, the [*22] scope of the State's (1934) (relief not limited as to "time, amount, reserved power depends on the nature of the contractual circumstances, or need"); Treigle v. Acme relationship with which the challenged law conflicts. Homestead Assn., 297 U.S. 189, 195 (1936) (no emergency or temporary measure). Later [***LEdHR13] [13]The States must possess broad decisions abandoned these limitations as absolute requirements. Veix v. Sixth Ward Building & Page 17 431 U.S. 1, *23; 97 S. Ct. 1505, **1518; 52 L. Ed. 2d 92, ***LEdHR14A; 1977 U.S. LEXIS 1 Loan Assn., 310 U.S., 32, 39-40 (1940) spending powers. 21 [***111] Such formalistic (emergency need not be declared and relief distinctions perhaps cannot be dispositive, but they measure need not be temporary); East New York contain an important element of truth. Whatever the Savings Bank v. Hahn, 326 U.S. 230 (1945) propriety of a State's binding itself to a [**1519] future (approving 10th extension of one-year mortgage course of conduct in other contexts, the power to enter moratorium). Undoubtedly the existence of an into effective financial contracts cannot be questioned. emergency and the limited duration of a relief Any financial obligation could be regarded in theory as a measure are factors to be assessed in determining relinquishment of the State's spending power, since the reasonableness of an impairment, but they money spent to repay debts is not available for other cannot be regarded as essential in every case. purposes. Similarly, the taxing power may have to be exercised if debts are to be repaid. Notwithstanding these effects, the Court has regularly held that the States are bound by their debt contracts. 22 [***LEdHR15] [15]When a State impairs the obligation of its own contract, the reserved-powers 21 In New Jersey v. Wilson, 7 Caranch 164 doctrine has a different basis. The initial inquiry (1812), the Court held that a State could properly concerns the ability of the State to enter into an grant a permanent tax exemption and that the agreement that limits its power to act in the future. As Contract Clause prohibited any impairment of early as Fletcher v. Peck, the Court considered the such an agreement. This holding has never been argument that "one legislature cannot abridge the powers repudiated, although tax exemption contracts of a succeeding legislature." 6 Cranch, at 135. It is often generally have not received a sympathetic stated that "the legislature cannot bargain away the police construction. See B. Wright, The Contract Clause power of a State." Stone v. Mississippi, 101 U.S. 814, of the Constitution 179-194 (1938). 817 (1880). 20 This doctrine requires a determination of the State's power to create irrevocable contract rights in By contrast, the doctrine that a State cannot the first place, rather than an inquiry into the purpose or contract away the power of eminent domain has reasonableness of the subsequent impairment. In short, been established since West River Bridge Co. v. the Contract Clause does not require a State to adhere to a Dix, 6 How. 507 (1848). See Contributors to contract that surrenders an essential attribute of its Pennsylvania Hospital v. Philadelphia, 245 U.S., sovereignty. at 23-24. The doctrine that a State cannot be bound to a contract forbidding the exercise of its 20 Stone v. Mississippi sustained the State's police power is almost as old. See n. 20, supra. revocation of a 25-year charter to operate a lottery. Other cases similarly have held that a State is without power to enter into binding 22 State laws authorizing the impairment of contracts not to exercise its police power in the municipal bond contracts have been held future. E. g., Pierce Oil Corp.v. City of Hope, unconstitutional. W.B. Worthen Co. v. 248 U.S. 498, 501 (1919); Atlantic Coast Line R. Kavanaugh, 295 U.S. 56 (1935); Louisiana v. Co. v. Goldsboro, 232 U.S. 548, 558 (1914); Pilsbury, 105 U.S. 278 (1882). Similarly, a tax on Douglas v. Kentucky, 168 U.S. 488, 502-505 municipal bonds was held unconstitutional (1897). See Home Building & Loan Assn. v. because its effect was to reduce the contractual Blaisdell, 290 U.S., at 436-437. rate of interest. Murray v. Charleston, 96 U.S. [***LEdHR16] [16]In deciding whether a State's 432, 443-446 (1878). contract was invalid ab initio under the reserved-powers A number of cases have held that a State may doctrine, earlier decisions relied on distinctions among not authorize a municipality to borrow money and the various powers of the State. Thus, the [*24] police then restrict its taxing power so that the debt power and the power of eminent domain were among cannot be repaid. Louisiana ex rel. Hubert v. New those that could not be "contracted away," but the State Orleans, 215 U.S. 170, 175-178 (1909); Wolff v. could bind itself in the future exercise of the taxing and New Orleans, 103 U.S. 358, 365-368 (1881); Von Page 18 431 U.S. 1, *24; 97 S. Ct. 1505, **1519; 52 L. Ed. 2d 92, ***111; 1977 U.S. LEXIS 1 Hoffman v. City of Quincy, 4 Wall., at 554-555. an impairment may be constitutional if it is reasonable See Fisk v. Jefferson Police Jury, 116 U.S. 131 and necessary to serve an important public purpose. In (1885) (contract for payment of public officer). applying [*26] this standard, however, complete deference to a legislative assessment of reasonableness See also Wood v. Lovett, 313 U.S. 362 and necessity is not appropriate because the State's (1941); Indiana ex rel. Anderson v. Brand, 303 self-interest is at stake. A governmental entity can U.S. 95 (1938). always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its [***LEdHR17A] [17A]The instant case involves a financial obligations whenever it wanted to spend the financial obligation and thus as a threshold matter may money for what it regarded as an important public not be said automatically to fall [*25] within the purpose, the Contract Clause would provide no protection reserved powers that cannot be contracted away. 23 Not at all. 25 every security provision, however, is necessarily financial. For example, a revenue bond might be secured 24 See El Paso v. Simmons, 379 U.S. 497 by the State's promise to continue operating the facility in (1965); Faitoute Iron & Steel Co. v. City of question; yet such a promise surely could not validly be Asbury Park, 316 U.S. 502 (1942); Louisiana v. construed to bind the State never to close the facility for New Orleans, 102 U.S. 203 (1880). health or safety reasons. The security provision at issue here, however, is different: The States promised that revenues and reserves securing the bonds would not be depleted by the Port Authority's operation of 25 For similar reasons, a dual standard of review deficit-producing passenger railroads beyond the level of was applied under the Fifth Amendment to federal "permitted deficits." Such a promise is purely financial legislation abrogating contractual gold clauses. and thus not necessarily a compromise of the State's "There is a clear distinction between the power of reserved powers. the Congress to control or interdict the contracts of private parties when they interfere with the 23 [***LEdHR17A] [17B] exercise of its constitutional authority, and the power of the Congress to alter or repudiate the "The truth is, States and cities, when they substance of its own engagements when it has borrow money and contract to repay it with borrowed money under the authority which the interest, are not acting as sovereignties. They Constitution confers." Perry v. United States, 294 come down to the level of ordinary individuals. U.S. 330, 350-351 (1935). Cf. Norman v. Their contracts have the same meaning as that of Baltimore & O.R. Co., 294 U.S. 240, 304-305 similar contracts between private persons. Hence, (1935). See also Lynch v. United States, 292 U.S. instead of there being in the undertaking of a State 571, 580 (1934) (need for money is no excuse for or city to pay, a reservation of a sovereign right to repudiating contractual obligations); Note, The withhold payment, the contract should be Constitutionality of the New York Municipal regarded as an assurance that such a right will not Wage Freeze and Debt Moratorium: Resurrection be exercised. A promise to pay, with a reserved of the Contract Clause, 125 U. Pa. L. Rev. 167, right to deny or change the effect of the promise, 188-191 (1976). is an absurdity." Murray v. Charleston, 96 U.S., at 445. [**1520] The trial court recognized to an extent the special status of a State's financial obligations when it held that total repudiation, presumably for even a worthwhile public purpose, would be unconstitutional. [***LEdHR18] [18]Of course, to say that the financial But the trial court regarded the protection of the Contract restrictions of the 1962 covenant were valid when Clause as available only in such an extreme case: "The adopted does not finally resolve this case. The Contract states' inherent power to protect the public welfare may Clause is not an absolute bar to subsequent modification be validly exercised under the Contract Clause even if it of a [***112] State's own financial obligations. 24 As impairs a contractual obligation so long as it does not with laws impairing the obligations of private contracts, destroy it." 134 N.J. Super., at 190, 338 A. 2d, at Page 19 431 U.S. 1, *26; 97 S. Ct. 1505, **1520; 52 L. Ed. 2d 92, ***112; 1977 U.S. LEXIS 1 870-871. state court conducted a hearing and found that the municipality could not otherwise pay off its creditors and [***LEdHR19] [19]The trial court's "total destruction" that the plan was in the best interest of all creditors. Id., test is based on what we think is a misreading of W.B. at 504. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935).26 In the first place, the impairment held [*27] unconstitutional in [*28] Under the specific composition plan at issue Kavanaugh was one that affected the value of a security in Faitoute, the holders of revenue bonds received new provision, and certainly not every bond would have been securities bearing lower interest rates and later maturity worthless. More importantly, Mr. Justice Cardozo dates. This Court, however, rejected the dissenting needed only to state an "outermost limits" test in the bondholders' Contract Clause objections. The reason was Court's opinion, id., at 60, because the impairment was so that the old bonds represented only theoretical rights; as a egregious. [***113] He expressly recognized that the practical matter the city could not raise its taxes enough actual line between permissible and impermissible to pay off its creditors under the old contract terms. The impairments could well be drawn more narrowly. Thus composition plan enabled the city to meet its financial the trial court was not correct when it drew the negative obligations more effectively. "The necessity compelled inference that any impairment less oppressive than the [**1521] by unexpected financial conditions to modify one in Kavanaugh was necessarily constitutional. The an original arrangement for discharging a city's debt is extent of impairment is certainly a relevant factor in implied in every such obligation for the very reason that determining its reasonableness. But we cannot sustain the thereby the obligation is discharged, not impaired." Id., at repeal of the 1962 covenant simply because the 511. Thus, the Court found that the composition plan was bondholders' rights were not totally destroyed. adopted with the purpose and effect of protecting the creditors, as evidenced by their more than 85% approval. 26 In Kavanaugh, the State changed its statutory Indeed, the market value of the bonds increased sharply procedure for enforcing certain municipal as a result of the plan's adoption. Id., at 513. assessments against property owners. The holders of bonds for which the assessments were pledged It is clear that the instant case involves a much more as security were found to have contract rights in serious impairment than occurred in Faitoute. No one has the previous statutory scheme. Without suggested here that the States acted for the purpose of classifying the enforcement statutes as substantive benefiting the bondholders, and there is no serious or remedial, the Court held the change contention that the value of the bonds was enhanced by unconstitutional because it "[took] from the repeal of the 1962 covenant. Appellees recognized that it mortgage the quality of an acceptable investment would have been impracticable to obtain consent of the for a rational investor." 295 U.S., at 60. In the bondholders for such a change in the 1962 covenant, instant case the State has repudiated an express Brief for Appellees 97-98, even though only 60% promise rather than one implied from the statutory approval would have been adequate. See n. 10, supra. scheme in effect at the time of the contract. Thus, We therefore conclude that repeal of the 1962 covenant the instant case may be regarded as a more serious cannot be sustained on the basis of this Court's prior abrogation of the bondholders' expectations than decisions in Faitoute and other municipal bond cases. occurred in Kavanaugh. See n. 17, supra. V The only time in this century that alteration of a municipal bond contract has been sustained by this Court [***LEdHR1A] [1C] [***LEdHR20] [20] was in Faitoute Iron & Steel Co. v. City of Asbury Park, [***LEdHR21A] [21A]Mass transportation, energy 316 U.S. 502 (1942). That case involved the New Jersey conservation, and environmental [***114] protection Municipal Finance Act, which provided that a bankrupt are goals that are important and of legitimate public local government could be placed in receivership by a concern. Appellees contend that these goals are so [*29] state agency. A plan for the composition of creditors' important that any harm to bondholders from repeal of claims was required to be approved by the agency, the the 1962 covenant is greatly outweighed by the public municipality, and 85% in amount of the creditors. The benefit. We do not accept this invitation to engage in a plan would be binding on nonconsenting creditors after a utilitarian comparison of public benefit and private loss. Page 20 431 U.S. 1, *29; 97 S. Ct. 1505, **1521; 52 L. Ed. 2d 92, ***114; 1977 U.S. LEXIS 1 Contrary to Mr. Justice Black's fear, expressed in sole is a matter for legislative discretion. But a State is not dissent in El Paso v. Simmons, 379 U.S., at 517, the completely free to consider impairing the obligations Court has not "balanced away" the limitation on state [*31] of its own contracts on a par with other policy action imposed by the Contract Clause. Thus a State alternatives. Similarly, a State is not free to impose a cannot refuse to meet its legitimate financial obligations drastic impairment when an evident and more moderate simply because it would prefer to spend the money to course would serve its purposes equally well. In El Paso promote the public good rather than the private welfare of v. Simmons, supra, the imposition of a five-year statute its creditors. We can only sustain the repeal of the 1962 of limitations on what was previously a perpetual right of covenant if that impairment was both reasonable and redemption was regarded by this Court as "quite clearly necessary to serve the admittedly important purposes necessary" to achieve the State's vital interest in the claimed by the State. 27 orderly administration of its school lands program. 379 U.S., at 515-516. In the instant case the State has failed to 27 [***LEdHR21A] [21B] demonstrate that repeal of the 1962 covenant was similarly necessary. The dissent suggests, post, at 41-44, that such careful scrutiny is unwarranted in this case 28 If in fact the States sought to divert only new because the harm to bondholders is relatively revenues to subsidize mass transit, then the small. For the same reason, however, contractual covenant could have been amended to exclude the obligations of this magnitude need not impose additional bridge and tunnel tolls from the barriers to changes in public policy. The States revenue use limitation that was imposed. Such a remain free to exercise their powers of eminent change would not have reduced the covenant to a domain to abrogate such contractual rights, upon nullity because it would have continued to prevent payment of just compensation. See n. 16, supra. the diminution of revenues and reserves that historically secured the bonds. And even if the The more specific justification offered for the plan contemplated use of current revenues and repeal of the 1962 covenant was the States' plan for reserves, the formula for computing "permitted encouraging users of private automobiles to shift to deficits" perhaps could have been modified public transportation. The States intended to discourage without totally abandoning an objective limitation private automobile use by raising bridge and tunnel tolls on the Port Authority's involvement in deficit and to use the extra revenue from those tolls to subsidize mass transit. Finally, the procedures for obtaining improved commuter railroad service. Appellees contend bondholder approval could have been modified so that repeal of the 1962 covenant was necessary to that such consent would present a feasible means implement this plan because the new mass transit of undertaking new projects. See n. 10, supra. facilities could not possibly be self-supporting and the covenant's "permitted deficits" level had already been Of course, we express no opinion as to exceeded. We reject this justification because the repeal whether any of these lesser impairments would be was neither necessary to achievement of the plan nor constitutional. reasonable in light of the circumstances. [***LEdHR22] [22]The determination of necessity can be considered on two levels. First, it cannot be said 29 Transportation control strategies are available that total repeal of the covenant [*30] was essential; a that do not require direct application of revenues less drastic modification would have permitted the from bridge and tunnel tolls to subsidize mass contemplated plan without entirely removing the transit. In calling for air pollution abatement covenant's limitations on the use of Port Authority measures in New Jersey, the Administrator of the revenues and reserves to subsidize commuter railroads. 28 Environmental Protection Agency encouraged Second, without [**1522] modifying the covenant at all, "close examination" of such measures as, inter the States could have adopted alternative means of alia, "State taxes to encourage VMT [vehicle achieving their twin goals of discouraging automobile use miles traveled] reductions while raising revenues and improving [***115] mass transit. 29 Appellees to benefit mass transit" and realignment of toll contend, however, that choosing among these alternatives structures by "elimination of commuter discounts" Page 21 431 U.S. 1, *31; 97 S. Ct. 1505, **1522; 52 L. Ed. 2d 92, ***115; 1977 U.S. LEXIS 1 and "possibly an increase in tolls during peak Port Authority into greater involvement in deficit mass commuting times to encourage carpools." 38 Fed. transit. Reg. 31389 (1973). Thus, the States could discourage automobile use through taxes on [**1523] During the 12-year period between gasoline or parking, for example, and use the adoption of the covenant and its repeal, public perception revenues to subsidize mass transit projects so they of the importance of mass transit undoubtedly grew would be "self-supporting" within the meaning of because of increased general concern with environmental the covenant. Bridge and tunnel tolls could be protection and energy conservation. But these concerns increased for commuters and decreased at other were not unknown in 1962, and the subsequent changes times, so that there would be no excess revenue were of degree and not of kind. We cannot say that these for purposes of the General Bridge Act of 1946, changes caused the covenant to have a substantially 33 U.S.C. § 526. different impact in 1974 than when it was adopted in 1962. And we cannot conclude that the repeal was We also cannot conclude that repeal of the covenant reasonable in the light of changed circumstances. was reasonable in light of the surrounding circumstances. In this regard a comparison with El Paso v. Simmons, We therefore hold that the Contract Clause of the supra, again is instructive. There a 19th century statute United States Constitution prohibits the retroactive repeal had effects that were unforeseen and unintended by the of the 1962 covenant. The judgment of the Supreme legislature when originally adopted. As a result Court of New Jersey is reversed. speculators were placed in a position to obtain windfall It is so ordered. benefits. The Court held that adoption of a statute of limitation was a reasonable means to "restrict a party to MR. JUSTICE STEWART took no part in the those gains reasonably to be expected from the contract" decision of this case. when it was adopted. 379 U.S., at 515. 30 MR. JUSTICE POWELL took no part in the 30 This Court previously has regarded the consideration or decision of this case. elimination of unforeseen windfall benefits as a reasonable basis for sustaining changes in CONCUR BY: BURGER statutory deficiency judgment procedures. These changes were adopted by several States when CONCUR unexpected reductions in property values during the Depression permitted some mortgagees to recover far more than their legitimate entitlement. MR. CHIEF JUSTICE BURGER, concurring. See Gelfert v. National City Bank, 313 U.S. 221, 233-235 (1941); Honeyman v. Jacobs, 306 U.S. In my view, to repeal the 1962 covenant without 539, 542-543 (1939); Richmond Mortgage & running afoul of the constitutional prohibition against the Loan Corp. v. Wachovia Bank & Trust Co., 300 impairment of contracts, the State must demonstrate that U.S. 124, 130-131 (1937). the impairment was essential to the achievement of an important state purpose. Furthermore, the State must By contrast, in the instant case the need for mass show that it did not know and could not have known the transportation in the New York metropolitan area was not impact of the contract on that state interest at the time a new development, and the likelihood that publicly that the contract was made. So reading the Court's owned commuter railroads would produce substantial opinion, I join it. deficits was well known. As early as 1922, over a half century ago, there were pressures to involve the Port =P1100*33 For emphasis, I note that the Court Authority in mass transit. It was with [*32] full pointedly does not hold that, on the facts of this case, any knowledge of these concerns that the 1962 covenant was particular "less drastic modification" would pass adopted. Indeed, the covenant was specifically intended constitutional muster, ante, at 30, and n. 28. to protect the pledged revenues and reserves against the possibility that such concerns [***116] would lead the DISSENT BY: BRENNAN Page 22 431 U.S. 1, *32; 97 S. Ct. 1505, **1523; 52 L. Ed. 2d 92, ***116; 1977 U.S. LEXIS 1 DISSENT conclusion that the State acted unreasonably in seeking to relieve its citizens from the strictures of this earlier MR. JUSTICE BRENNAN, with whom MR. legislative policy. JUSTICE WHITE and MR. JUSTICE MARSHALL join, dissenting. A Decisions of this Court for at least a century have In an era when problems of municipal planning construed the Contract Clause largely to be powerless in increasingly demand regional rather than local solutions, binding a State to contracts limiting the authority of the Port Authority provides the New York-New Jersey successor legislatures to enact laws in furtherance of the community with a readymade, efficient regional entity health, safety, and similar collective interests of the encompassing some 1,500 square miles surrounding the polity. In short, those decisions established the principle Statute of Liberty. As the Court notes, from the outset that lawful exercises of a State's police powers stand public officials of both New York and New Jersey were paramount to private rights held under contract. Today's well aware of the Authority's heavy dependence on decision, in invalidating the New Jersey Legislature's public financing. Consequently, beginning in the decade 1974 repeal of its predecessor's 1962 covenant, rejects prior to the enactment of the 1962 covenant, the this previous understanding and remolds the Contract Authority's general reserve bonds, its primary vehicle of Clause into a potent instrument for overseeing important public finance, have featured two rigid security devices policy determinations of the state legislature. At the designed to safeguard the investment of bondholders. same time, by creating a constitutional safe haven for First, pursuant to a so-called "1.3 test," the Authority has property rights embodied in a contract, the decision been disabled from issuing new consolidated bonds substantially distorts modern constitutional jurisprudence unless the best one-year net revenues derived from all of governing regulation of private economic interests. I the Authority's facilities at least equal 130% of the might understand, though I could not accept, this revival prospective debt service for the calendar year during of the Contract Clause were it [***117] in accordance which the debt service for all outstanding and proposed with some coherent and constructive view of public bonds would be at a maximum. Second, according to a policy. But elevation of the Clause to the status of procedure known as a "section 7 certification," [*35] the regulator of the municipal bond market at the heavy Authority may not issue bonds to finance additional price of frustration of sound legislative policymaking is facilities unless it "shall certify" that the issue "will not, as demonstrably unwise as it is unnecessary. The during the ensuing ten years or during the longest term of justification for today's decision, therefore, remains a any such bonds proposed to be issued..., whichever shall mystery to me, and I respectfully dissent. be longer,... materially impair the sound credit standing of the Authority...." App. 811a-812a. I The 1962 covenant existed alongside these security The Court holds that New Jersey's repeal of the 1962 provisions. Viewed in simplest terms, the covenant covenant constitutes an unreasonable invasion of contract served to preclude Authority investment and participation rights and hence an impairment of contract. The in transportation programs by shifting the financial focal formulation of [*34] the legal standard by which the point from the creditworthiness of the Authority's Court would test asserted impairments of contracts is, to activities as a whole to the solvency [***118] of each me, both unprecedented and most troubling. But because proposed new transit project. Whereas the 1.3 and the Constitution primarily is "'intended to preserve section 7 tests permit expanded involvement in mass practical and substantial rights, not to maintain theories,'" transportation provided that the enormous Faitoute Iron & Steel Co. v. City of Asbury Park, 316 revenue-generating potential of the Authority's bridges U.S. 502, 514 (1942), it is necessary to sketch the factual and tunnels aggregately suffice to secure the investments background of this dispute before discussing the reasons of creditors, the covenant effectively foreclosed for my concern. In my [**1524] view, the Court's participation in any new project that w as not individually casual consideration both of the substantial public "self-supporting." 1 Both parties to this litigation are in policies that prompted New Jersey's repeal of the 1962 apparent agreement that few functional mass transit covenant, and of the relatively inconsequential burdens systems are capable of satisfying this requirement. that resulted for the Authority's creditors, belies its Page 23 431 U.S. 1, *35; 97 S. Ct. 1505, **1524; 52 L. Ed. 2d 92, ***118; 1977 U.S. LEXIS 1 1 The covenant does enable the Authority to Allocation Act, 15 U.S.C.§ 751(a)(3) (1970 ed., Supp. finance passenger railroad facilities to a level of V), which signaled "a national energy crisis which is a "permitted deficits," defined as one-tenth of the [***119] threat to the public health, safety, and welfare," General Reserve Fund or 1% of the total bonded and sought to stimulate [*37] further initiatives toward indebtedness. While the Court notes in passing the development of public transportation and similar that this provision "permitted, and perhaps even programs. See ante, at 14. contemplated, additional Port Authority involvement in deficit rail mass transit," ante, at 2 The 1962 covenant does not merely bind the 11, the formula restricts the Authority to a small Authority's hands for the decades of the 1960's percentage of the fund, even though aggregate and 1970's. Rather, the covenant will preclude reserves and revenues may far exceed expenses the deployment of the Authority's toll revenues to and creditor claims. In any event, the parties have public transit needs until all the bonds previously stipulated that as a practical matter the Authority issued under the covenant have been retired. has been unable to expand its involvement in Appellant trust company advises that the covenant rapid transit by reliance on this alternative thus continues "as a practical matter until the year formula. App. 692a. 2007," Brief for Appellant 24, even if now repealed prospectively as suggested ante, at 18 n. Whether the 1962 New Jersey Legislature acted 15. wisely in accepting this new restriction is, for me, quite irrelevant. What is important is that the passage of the It was in response to these societal demands that the years conclusively demonstrated that this effective barrier New Jersey and New York Legislatures repealed the to the development [*36] of rapid transit in the port 1962 covenant. The trial court found: S region squarely conflicts with the legitimate needs of the "In April 1970 Governors Cahill and Rockefeller New York metropolitan community, and will persist in announced a joint program to increase the Port doing so into the next century. 2 In the [**1525] Urban Authority's role in mass transportation by building a rail Mass Transportation Assistance Act of 1970, 49 U.S.C. link to John F. Kennedy International Airport and § 1601a, Congress found that "within urban areas... the extending PATH [a commuter rail line under Authority ability of all citizens to move quickly and at a reasonable control] to Newark International Airport and other parts cost [has become] an urgent national problem." of New Jersey." 134 N.J. Super. 124, 168-169, 338 A. 2d Concurrently, the Clean Air Act, as amended, 42 U.S.C. 833, 858 (1975).I § 1857 et seq., advocated the curtailment of air pollution through the development of transportation-control But, the court found, this expansion "was not strategies that place heavy emphasis on rapid transit economically feasible under the terms of the 1962 alternatives to the automobile. For northern New Jersey covenant." Id., at 170, 338 A. 2d, at 859. Consequently, in particular, with ambient air-quality levels among the the States repealed the covenant. On signing the New worst in the Nation, the Clean Air Act has led to new York legislation, Governor Rockefeller stated: S regulations premised on the policy: S "Passed with overwhelming bipartisan support in "The development of large-scale mass transit both houses of the Legislature, the bill removes the facilities and the expansion and modification of existing absolute statutory prohibition against the use of the mass transit facilities is essential to any effort to reduce revenues of the Port of New York Authority for railroad automotive pollution through reductions in vehicle use. purposes. That statutory covenant, together with the The planning, acquisition, and operation of a mass transit provision of the bi-state compact creating the Authority system is, and should remain, a regional or State that neither State will construct competing facilities responsibility. Many improvements are being planned in within the Port District, could forever preclude the two mass transit facilities in the State that will make it states from undertaking vitally needed mass possible for more people to use mass transit instead of transportation projects. In removing the present automobiles." 38 Fed. Reg. 31389 (1973).I restriction, the bill would not jeopardize the security of Port Authority bondholders or their rights to maintain Finally, the Court itself cites the Emergency Petroleum that security." Quoted ibid.I Page 24 431 U.S. 1, *37; 97 S. Ct. 1505, **1525; 52 L. Ed. 2d 92, ***119; 1977 U.S. LEXIS 1 and from longstanding provisions in federal law that In following suit, New Jersey also expressly grounded its require the existence of "reasonable and just" expenses -- action upon the necessity of overturning "'the restrictions which may include diversion to mass transit subsidies -- imposed by the covenant [that] effectively preclude as a precondition to any increase in interstate bridge tolls. sufficient port authority participation in the development 7 The Court's various [*40] alternative proposals, while of a public transportation system in the port district.'" Id., perhaps interesting speculations, [***121] simply are at 172, 338 [*38] A. 2d, at 860. Approximately one year not responsive to New York's and New [**1527] later, on April 10, 1975, the Port Authority announced an Jersey's real environmental and traffic problems, 8 and, in increase in bridge and tunnel tolls amounting to $ 40 any event, intrude the Court deeply into complex and million, the resulting revenue designed to assist in the localized policy matters that are for the States' financing of passenger transportation facilities without legislatures and not the judiciary to resolve. jeopardizing the reserve fund set aside for the Authority's creditors. 3 See, e. g., infra, at 59, and n. 17. The Court's consideration of this factual background is, I believe, most unsatisfactory. The Court never 4 See ante, at 30 n. 28. I am puzzled whether the explicitly takes issue with the core of New Jersey's Court really intends these alternatives to be taken defense of the repeal: that the State was faced with seriously in view of the footnote's closing [**1526] serious and growing environmental, energy, reminder that even these "lesser impairments" and transportation problems, and the covenant worked at also may be found to be unconstitutional. If the cross-purposes with efforts at remedying these concerns. Court, in fact, means that New Jersey and New Indeed, the Court candidly concedes that the State's York could remedy any Contract Clause defects purposes in effectuating the 1974 repeal were "admittedly merely by modifying their repeal of the 1962 important." Ante, at 29. Instead, the Court's analysis covenant so as to limit transit subsidization solely focuses upon related, but peripheral, matters. to future toll increases -- the policy that is being For example, several hypothetical alternative followed by the States in actual practice -- then methods are proposed whereby New Jersey might hope to today's decision would be rendered into a secure funding for public transportation, and these are temporary formalism. made the basis [***120] for a holding that repeal of the 5 Cf. Friends of the Earth v. Carey, 552 F. 2d 25 covenant was not "necessary." Ante, at 29-31. Setting (CA2 1977); Friends of the Earth v. Carey, 535 F. aside the propriety of this surprising legal standard, 3 the 2d 165 (CA2 1976); Friends of the Earth v. EPA, Court's effort at fashioning its own legislative program 499 F. 2d 1118 (CA2 1974). for New York and New Jersey is notably unsuccessful. In fact, except for those proffered alternatives which also 6 Because cars entering or leaving Manhattan amount to a repeal or substantial modification of the 1962 must pass over bridges or through tunnels, the covenant, 4 none of the Court's suggestions is compatible regulation of tolls offers an unusually convenient [*39] with the basic antipollution and and effective method of discouraging automobile transportation-control strategies that are crucial to usage in addition to promising a highly lucrative metropolitan New York. As the Court itself accurately revenue base. recognizes, the environmental and transportation program for the New York area rests upon a two-step campaign: "The States inten[d] [1] to discourage private automobile use by raising bridge and tunnel tolls and [2] to use the 7 Thus, if toll funds cannot be diverted to rapid extra revenue from those tolls to subsidize improved transit needs, any increase in bridge revenues commuter railroad service." Ante, at 29. This necessarily would produce an expansion of the co-ordinated two-step strategy has not been arbitrarily or Authority's general reserve fund well beyond that casually created, but is dictated by contemporaneous necessary or contemplated for the protection of federal enactments such as the Clean Air Act, 5 and stems bondholders. Faced with such a mere both from New York City's unique geographic situation 6 accumulation of capital, the Federal Highway Page 25 431 U.S. 1, *40; 97 S. Ct. 1505, **1527; 52 L. Ed. 2d 92, ***121; 1977 U.S. LEXIS 1 Administrator, acting under § 503 of the General 1962 and 1974 summoned major urban centers like New Bridge Act of 1946, 33 U.S.C. § 526, evidently York and New Jersey to action in the environmental, would be obligated to disallow any toll increases energy, and transportation fields. In short, on this record, as not "reasonable and just" under the Act. See I can neither understand nor accept the Court's generally Delaware River Port Authority v. characterization of New Jersey's action as unreasonable. Tiemann, 531 F. 2d 699 (CA3 1976). The United States Department of Transportation, however, 9 Indeed, the Court's single-minded emphasis on has stated that "in some areas (New York, the existence of changed circumstances leads it to Philadelphia, San Francisco), bridge toll revenues embrace a rather perverse constellation of values provide significant support for transit capital in which New Jersey's desire to care for the and/or operating costs, thereby providing transit health, environmental, and energy needs of its service improvements which promote decreased citizenry is relegated to lesser importance than the dependence on automobile travel." App. desire of Texas in El Paso v. Simmons, 379 U.S. 726a-727a. The Department has recommended 497 (1965), to deny windfall economic gains to that a diversion of funds to serve rapid transit purchasers of school land from the State. Ante, at needs should qualify as "reasonable and just," 31. I, of course, do not dispute the importance of and, therefore, would be capable of supporting a Texas' stake in Simmons. But surely any general increase in toll revenues. Ibid. This is in reasonable ordering of values and social stark contrast with the Court's suggested objectives would compel the conclusion that a alternative policies outlined ante, at 30 n. 29, State's concern for its citizens' health and general which would permit no general increase in bridge welfare is far more deserving of this Court's tolls and no coordination of the bridge toll and recognition. transit subsidization strategies that are central to B the antipollution effort in metropolitan New York, and, therefore, until today, have been considered If the Court's treatment of New Jersey's legitimate secondary and inadequate to serve the policy interests is inadequate, its consideration of the community's needs. countervailing injury ostensibly suffered by the appellant is barely discernible at all. For the Court apparently holds that a mere "technical impairment" of contract 8 See, e. g., n. 7, supra. In short, all the suffices to subject New Jersey's repealer to serious alternatives that the Court leaves to the States, judicial scrutiny and invalidation under the Contract ante, at 30 n. 29, deny access to the Authority's Clause. Ante, at 21. The Court's modest statement of the tolls, even though they represent a potentially economic injury that today attracts its judicial lucrative revenue source which can be tapped intervention is, however, understandable. For fairly read, without injury to the bondholders. See Part B, the record before us makes plain that the repeal of the infra. 1962 covenant has occasioned only the most minimal damage on the part of the Authority's bondholders. Equally unconvincing is the Court's contention that repeal of the 1962 covenant was unreasonable because Obviously, the heart of the obligation to the the environmental and energy concerns that prompted bondholders -- and the interests ostensibly safeguarded such action "were not unknown in 1962, and the by the 1962 covenant -- is the periodic payment of subsequent changes were of degree and not of kind." interest and the repayment of principal when due. The Ante, at 32. Nowhere are we told why a state policy, no Court does not, and indeed cannot, contend that either matter how responsive to the general welfare of its New Jersey or the Authority has called into question the citizens, can be reasonable only if it confronts issues that validity of these underlying obligations. No creditor previously were absolutely unforeseen. 9 Indeed, [*41] complains that public authorities have defaulted on a this arbitrary perspective seems peculiarly inappropriate coupon payment or failed to redeem a bond that has in a case like this where at least three new and matured. In fact, the Court does not [***122] even offer independent congressional enactments between the years any reason whatever for fearing that, as a result of the covenant's repeal, the securities in appellant's portfolio Page 26 431 U.S. 1, *41; 97 S. Ct. 1505, **1527; 52 L. Ed. 2d 92, ***122; 1977 U.S. LEXIS 1 are jeopardized. Such a contention cannot be made in the 11 Indeed, one of the anomalous aspects of this face of the finding of the trial judge, who, in referring to suit is the Court's willingness to invalidate an Act the increasingly lucrative financial [*42] position of the of the State of New Jersey, and indirectly of New Authority at the date of the convenant's repeal in York, while apparently recognizing that if this comparison to 1962, concluded: S were an action by creditors for damages, or an action to fix "just compensation," the trial court's "Suffice it to say that between 1962 and 1974 the findings raise serious doubt that any compensable security afforded bondholders had been substantially monetary loss would be found. Ante, at 19. By augmented by a vast increase in Authority revenues and sidestepping the damages question, ibid., and by reserves, and the Authority's financial ability to absorb mandating reinstatement of the covenant, the greater deficits, from whatever source and without any Court manages to burden the Port Authority with significant impairment of bondholder security, [**1528] an unwanted contract, while relieving the was correspondingly increased." 134 N.J. Super., at creditor-appellant of the need to establish any 194-195, 338 A. 2d, at 873. 10I tangible economic injury arising from the covenant's repeal. This suggests that any 10 The court found: "between 1961 and 1973 the protection afforded bondholders today may well net revenues of the Authority increased from $ prove to be purely illusory. Even after the 68,000,000 to $ 137,000,000, and over that period mandate issues, New Jersey, we are told, may the Authority had available to it $ 582,732,000 in again condemn or repeal the covenant and offer excess of its debt service requirements.... just compensation to its creditors. See ante, at 29 Through 1974, the corresponding figures are $ n. 27. However, in light of the trial court's factual 161,283,000 and $ 649,750,000, respectively." conclusions, this promise of compensation will 134 N.J. Super., at 195 n. 43, 338 A. 2d, at 873 n. entitle bondholders to little or no financial 43. Thus, both prior to and following the repeal of recovery. the covenant, the Authority's revenues and earned surplus continued their unhampered and Secondly, repeal of the covenant is said to have overwhelmingly impressive growth. canceled an important [***123] security provision enjoyed by the creditors. Ante, at 19. Of course, there is By simply ignoring this unchallenged finding no question that appellant prefers the retention to the concerning the Authority's overall financial posture, the removal of the covenant, but surely this alone cannot be Court is able to argue that the repeal of the 1962 covenant an acceptable basis for the Court's wooden application of impaired the Authority's bonds in two particular respects. the Contract Clause or for its conclusion that the repeal First, it is suggested that repeal of the covenant may have unfairly diminished bondholder security. By placing adversely affected the secondary market for the reliance on this superficial allegation of economic injury, securities. Ante, at 19. The Court, however, the Court again is able simply to disregard the trial court's acknowledges that appellant has adduced only ambiguous contrary finding that appellant's complaint of insecurity is evidence to support this contention, and that the actual without factual merit: S price position of Authority bonds was, at most, only temporarily affected by the repeal. Ibid. 11 In fact, the "The claim that bondholder security has been trial [*43] court also explicitly rejected the ultimate materially impaired or destroyed by the repeal is simply significance of this alleged injury: S not supported by the record. The pledge of the Authority's net revenues and reserves remains intact; the "The bottom line of plaintiff's proofs on this issue is Authority will still be barred from the issuance of any simply that the evidence fails to demonstrate that the new consolidated bonds unless the 1.3 test required by secondary market price of Authority bonds was adversely the CBR is met, and the Authority will continue to be affected by the repeal of the covenant,except for a prohibited from the [*44] issuance of any consolidated short-term fall-off in price, the effect of which has now bonds or other bonds secured by a pledge of the general been dissipated insofar as it can be related to the reserve fund without the certification required by section enactment of the repeal." 134 N.J. Super., at 181-182, 7 of the series resolutions, to wit, that in the opinion of 338 A. 2d, at 866 (emphasis supplied).I the Authority the estimated expenditures in connection Page 27 431 U.S. 1, *44; 97 S. Ct. 1505, **1528; 52 L. Ed. 2d 92, ***123; 1977 U.S. LEXIS 1 with any additional facility for which such bonds are to Framers of our Constitution conceived of the Contract be issued would not, for the ensuing ten years, impair the Clause primarily as protection for economic trans-actions sound credit standing of the Authority, the investment entered into by purely private parties, rather than status of its consolidated bonds, or the Authority's obligations involving the State itself. See G. Gunther, obligations to its consolidated bondholders." 134 N.J. Constitutional Law 604 (1975); B. Schwartz, A Super., at 196, [**1529] 338 A. 2d, at 874 (emphasis Commentary On the Constitution of the United States, pt. supplied). 12I 2, The Rights of Property 274 (1965); B. Wright, The Contract Clause of the Constitution 15-16 (1938). 13 The 12 The fundamental soundness of the Authority's Framers fully recognized that nothing would so bonds is reflected in the ratings received from the jeopardize the legitimacy of a system of government that principal financial surveys, Moody's and Standard relies upon the ebbs and flows of politics to "clean out the & Poor's, following repeal of the covenant. The rascals" than the possibility that those same rascals might trial court found: "The bonds carried the same perpetuate their policies simply by locking them into ["A"] rating prior to the enactment of the binding contracts. covenant, after it was enacted, after it was prospectively repealed, and after the [retroactive] 13 One scholar for example, after undertaking repeal act of 1974." 134 N.J. Super., at 179, 338 extensive research into the history of the A. 2d, at 864. Constitutional Convention, concluded that there is no evidence that the Constitution's Framers In brief, only by disregarding the detailed factual perceived of the Contract Clause as applicable to findings of the trial court in a systematic fashion is the public agreements. "[I]t is evident that all of them Court today able to maintain that repeal of the 1962 discussed the clause only in relation to private covenant was anything but a minimal interference with contracts, i. e., contracts between individuals." B. the realistic economic interests of the bondholders. The Wright, The Contract Clause of the Constitution record in this case fairly establishes that we are presented 15 (1938). Moreover, "[a] careful search has with a relatively inconsequential infringement of contract failed to unearth any other statements even rights in the pursuit of substantial and important public suggesting that the contract clause was intended ends. Yet, this meager record is seized upon by the Court to apply to other than private contracts." Id., at 16. as the vehicle for resuscitation of long discarded Contract Indeed, Professor Wright found that only two Clause doctrine -- a step out of line with both the history antifederalists, neither of whom was a member of of Contract Clause jurisprudence and with constitutional the Convention, ever suggested that the Clause doctrine generally in its attempt to delineate the reach of would support "a broader meaning" encompassing the lawmaking power of state legislatures in the face of public contracts, but "their interpretations were adverse claims by property owners. denied by members of the Convention, and the denials were not challenged." Ibid. II Following an early opinion of the Court, however, The Court today dusts off the Contract Clause and that [*46] took the first step of applying the Contract thereby undermines the bipartisan policies of two States Clause to public undertakings, Fletcher v. Peck, 6 Cranch that manifestly [*45] seek to further the legitimate needs 87 (1910), later decisions attempted to define the reach of of their citizens. The Court's analysis, I submit, the Clause consistently with the demands of our fundamentally misconceives the nature of the Contract governing processes. The central principle developed by Clause guarantee. these decisions, beginning at least a century ago, has been that Contract Clause challenges such as that raised by One of the fundamental premises [***124] of our appellant are to be resolved by according unusual popular democracy is that each generation of deference to the lawmaking authority of state and local representatives can and will remain responsive to the governments. Especially when the State acts in needs and desires of those whom they represent. Crucial furtherance of the variety of broad social interests that to this end is the assurance that new legislators will not came clustered together under the rubric of "police automatically be bound by the policies and undertakings [**1530] powers," see E. Freund, The Police Power of earlier days. In accordance with this philosophy, the Page 28 431 U.S. 1, *46; 97 S. Ct. 1505, **1530; 52 L. Ed. 2d 92, ***124; 1977 U.S. LEXIS 1 (1904) -- in particular, matters of health, safety, and the 14 Parallel doctrines worked to the same end of preservation of natural resources -- the decisions of this freeing the States from contractual duties Court pursued a course of steady return to the intention of allegedly imposed by earlier legislators. For the Constitution's Framers by closely circumscribing the example, it has long been held that in applying the scope of the Contract Clause. Contract Clause to government contracts, every ambiguity and gap is to be strictly construed in This theme of judicial self-restraint and its behalf of the State. "[I]n grants by the public, underlying premise that a State always retains the nothing passes by implication." Charles River sovereign authority to legislate in behalf of its people was Bridge v. Warren Bridge, 11 Pet. 420, 546 (1837). commonly expressed by the doctrine that the Contract "Every reasonable doubt is to be resolved Clause will not even recognize efforts of a State to enter adversely [to the private party claiming under the into contracts limiting the authority of succeeding contract]. Nothing is to be taken as conceded but legislators to enact laws in behalf of the health, safety, what is given in unmistakable terms, or by an and similar collective interests of the policy 14 -- implication equally clear. The affirmative must [***125] in [*47] short, that that State's police power is be shown. Silence is negation, and doubt is fatal inalienable by contract. For example, in Fertilizing Co. to the claim. This doctrine is vital to the public v. Hyde Park, 97 U.S. 659 (1978), the Illinois General welfare." Fertilizing Co. v. Hyde Park, 97 U.S. Assembly granted to a fertilizer company an 1867 659, 666 (1878). corporate charter to run for 50 years. The corporation thereafter invested in a factory and depot on land which it Along these lines, it is noteworthy that the owned within the area designated by the charter. Five state law of New Jersey itself raises serious years later, the village authorities of Hyde Park adopted doubts concerning the reasonableness of an ordinance that rendered the company's charter appellant's reliance on the covenant for permanent valueless [*48] by prohibiting the transportation of offal protection from later laws enacted by the state within the village and forbidding the operation of a legislature. In a case involving an alleged fertilizer factory within the village confines. This Court impairment of a township's municipal bonds, nonetheless rejected the contention that the new Hourigan v.. North Bergen Township, 113 N.J.L. ordinance offended the Contract Clause: S 143, 149, 172 A. 193, 196 (1934), the State's highest court declared: "It is a well established "We cannot doubt that the police power of the State doctrine that the interdiction of statutes impairing was applicable and adequate to give an effectual remedy the obligation of contracts does not prevent the [to the nuisance]. That power belonged to the States state from exercising such powers as are vested in when the Federal Constitution was adopted. They did not it for the promotion of the common weal, or are surrender it, and they all have it now.... necessary for the general good of the public, though contracts entered into between individuals ..... may thereby be affected.This power, which in its various ramifications is known as the police "... [**1531] Pure air and the comfortable power, is an exercise of the sovereign right of the enjoyment of property are as much rights belonging to government to protect the lives, health, morals, [the village residents] as the right of possession and comfort and general welfare of the people, and is occupancy.... paramount to any rights under contracts between ..... individuals. While this power is subject to limitations in certain cases, there is wide "The [company's] charter was a sufficient license discretion on the part of the legislature in until revoked; but we cannot regard it as a contract determining what is and what is not necessary -- a [***126] guaranteeing, in the locality originally selected, discretion which courts ordinarily will not exemption for fifty years from the exercise of the police interfere with." In my view, therefore, appellant power of the State, however serious the nuisance might should be held to have purchased the Authority's become in the future...." Id., at 667, 669, 670.I bonds subject to the knowledge that under New Jersey law the State's obligation was conditionally Page 29 431 U.S. 1, *48; 97 S. Ct. 1505, **1531; 52 L. Ed. 2d 92, ***126; 1977 U.S. LEXIS 1 undertaken subject to reasonable future legislative fee land for use as rights-of-way and similar action. transportation activities. The Court recognized that the charter was a binding contract, and that the company, in The record raises similiar doubts and reliance on the agreement, had acquired land which it ambiguities. Thus, State Senator Farley, who enjoys as "complete and unqualified" owner. Id., at 556, chaired the committee that inquired into the status 558. Yet, the Court brushed aside a constitutional of the Authority's bonds prior to enactment of the challenge to subsequent ordinances that greatly covenant, noted: "[W]e well appreciate that... we circumscribed the railroad's activities on its own land: S could not impair any obligation such as contracts of bond issues. Likewise, you [Commissioner "For it is settled that neither the 'contract' clause nor Clancy of the Port Authority] as a lawyer know the 'due process' clause has the effect of overriding the that one legislature cannot bind the other power of the State to establish all regulations that are involving policy five, ten, or twenty years hence." reasonably necessary to secure the health, safety, good App. 89a (emphasis supplied). It may well be that order, comfort, or general welfare of the community; that appellant subjectively believed that the covenant this power can neither be abdicated nor bargained away, was unimpeachable under state law. But given and is inalienable even by express grant; and that all the doubts and hesitancies contained in the record, contract and property rights are held subject to its fair the principles established in earlier cases exercise." Id., at 558.I extending back to John Marshall should require that such "doubt is fatal to [appellant's] claim." In perfect conformity with these earlier cases that Fertilizing Co., supra, at 666. recognized the States' broad authority to legislate for the welfare of their citizens, New Jersey and New York Two years later, this principle of the Contract sought to repeal the 1962 covenant in furtherance of Clause's subservience to the States' broad lawmaking "admittedly important" interests, ante, at 29, in powers was reasserted in another context. In 1867, the environmental protection, clean air, and safe and efficient Mississippi Legislature entered into a contract with a [***127] transportation facilities. The States' policy of company whereby the latter was chartered to operate a deploying excess tolls for the maintenance and expansion lottery within the State "in consideration of a stipulated [*50] of rapid transit was not oppressively or sum in cash...." The next year the State adopted a capriciously chosen; rather, it squarely complies with the constitutional provision abolishing lotteries. The Court commands embodied by Congress in several once again unhesitantly dismissed a challenge to this contemporaneous national laws. Supra, at 36-37. By provision grounded on the Contract Clause, Stone v.. invalidating the 1974 New Jersey repeal -- and, by Mississippi, 101 U.S. 814, 817-818 (1880): S necessity, like action by New York -- the Court regrettably departs from the virtually unbroken line of our "'Irrevocable grants of property and franchises may cases that remained true to the principle that all private be made if they do not impair the supreme authority to rights of property, even if acquired through contract with make laws for the right government of the State; but no the State, are subordinated to reasonable exercises of the legislature can curtail the power of its successors to make States' lawmaking powers in the areas of health ( [*49] such laws as they may deem proper in matters of Fertilizing Co. v. Hyde Park, 97 U.S. 659 [**1532] police'.... No one dnies... that [this legislative power] (1878); Butchers' Union Co. v. Crescent City Co., 111 extends to all matters affecting the public health or the U.S. 746 (1884)); environmental protection ( Hudson public morals."I Water Co. v. McCarter, 209 U.S. 349 (1908); Manigault v. Springs, 199 U.S. 473 (1905); cf. Henderson Co. v. Later cases continued to read the Contract Clause as Thompson, 300 U.S. 258, 267 (1937); Illinois Central R. qualified by the States' powers to legislate for the Co. v. Illinois, 146 U.S. 387, 452-453 (1892)); and betterment of their citizens, while further expanding the transportation ( New Orleans Pub. Serv. v. New Orleans, range of permissible police powers. For example, in 281 U.S. 682 (1930); Erie R. Co.v. Public Util. Comm'rs, Atlantic Coast Line R. Co. v. Goldsboro, 232 U.S. 548 254 U.S. 394 (1921); Denver & R.G.R. Co. v. Denver, (1914), the State chartered and contracted with the 250 U.S. 241 (1919); Atlantic Coast Line R. Co. v. plaintiff railway company to operate rail lines within the Goldsboro, supra; Northern Pac. R. Co. v. Duluth, 208 State. Pursuant to this contract, the railroad acquired in Page 30 431 U.S. 1, *50; 97 S. Ct. 1505, **1532; 52 L. Ed. 2d 92, ***127; 1977 U.S. LEXIS 1 U.S. 583 (1908); Chicago, B. & Q.R. Co. v. Nebraska ex State to adhere to a contract that surrenders an rel. Omaha, 170 U.S. 57 (1898); New York & N.E.R. Co. essential attribute of its sovereignty," ante, at 23, v. Bristol, 151 U.S. 556 (1894)). In its disregard of these but in applying this principle, the Court finds that teachings, the Court treats New Jersey's social and the States' "taxing and spending powers," unlike economic policies with lesser sensitivity than have the power of eminent domain, lie outside this rule, former Members of this Court who stressed the protection ante, at 24. Before today, one might well have of contract and property rights. Even Mr. Justice Butler supposed that the States' authority to tax, spend recognized that the Contract Clause does not interfere money, and generally make basic financial with state legislative efforts in behalf of its citizens' decisions is among the most important of their welfare unless such actions S governmental powers. Indeed, only last Term, this Court announced that a State's decision to pay "are... clearly unreasonable and arbitrary.... [And in its employees less than the minimum wage -- a applying this standard] [u]ndoubtedly the city, acting as decision of far less importance to the citizens the arm of the State, has a wide discretion in determining generally than efforts to derive funding for what precautions in the public interest are necessary or improving the facilities that directly and vitally appropriate under the circumstances." New Orleans Pub. affect their health and safety -- is immune from Serv., supra, at 686.I federal regulation under the Commerce Clause, an authority previously thought to be virtually [*51] Thus, with at best a passing nod to the long plenary in nature. The Court there reasoned that history of judicial deference to state lawmaking in the the minimum-wage decision falls within the face of challenges under the Contract Clause, see ante, at sovereign powers of "States qua States." National 23 n. 20, the Court today imposes severe substantive League of Cities v. Usery, 426 U.S. 833, 847 restraints on New Jersey's attempt to free itself from a (1976).One may rightfully feel unease that the contractual provision that it deems inconsistent with the Court is in the process of developing a concept of broader interests of its citizens. Today's decision cannot state sovereignty that is marked neither by be harmonized with our earlier cases by the simple consistency nor intuitive appeal. expedient of labeling the covenant "purely financial," ante, at 25, rather than a forfeiture of "an essential In any event, in addition to resting on a most attribute of [New Jersey's] sovereignty," ante, at 23. As dubious conception of sovereignty, the Court's either an analytical or practical matter, this distinction is effort to demonstrate that the States are free to illusory. It rests upon an analytical foundation that has contract away their taxing and spending powers -- long been discarded [***128] as unhelpful. 15 And as a and hence free "to enter into effective financial [*52] [**1533] purely practical matter, an interference contracts" notwithstanding later exercises of the with state policy is no less intrusive because a contract police power -- must fail because it is untenable. prohibits the State from resorting to the most realistic and While it is true that New Jersey v. Wilson, 7 effective financial method of preserving its citizens' Cranch 164 (1812) (Contract Clause precludes a legitimate interests in healthy and safe transportation legislature from repudiating a grant of tax systems rather than directly proscribing the States from exemption) has never explicitly been overruled, exercising their police powers in this area. The day has subsequent cases have almost uniformly avoided long since passed when analysis under the Contract adherence to either its reasoning or holding. See, Clause usefully can turn on such formalistic differences. e. g., New York ex rel. Clyde v. Gilchrist, 262 Cf. Home Bldg. & Loan Assn. v. Blaisdell, 290 U.S. U.S. 94 (1923); Seton Hall College v. South 398, 438 (1934). Orange, 242 U.S. 100 (1916); Rochester R. Co. v. Rochester, 205 U.S. 236 (1907); Wisconsin & 15 Among other difficulties, the M.R. Co. v. Powers, 191 U.S. 379 (1903); question-begging attempt to categorize inviolable Morgan v. Louisiana, 93 U.S. 217 (1876). These legislation powers vis-a-vis the Contract Clause cases appreciate, as today's decision does not, that depends upon a conception of state sovereignty the operative consideration for constitutional that is both simplistic and unpersuasive. We are purposes is not whether a contract can or cannot told that the Contract Clause "does not require a be branded as "financial." Rather, in adjudging Page 31 431 U.S. 1, *52; 97 S. Ct. 1505, **1533; 52 L. Ed. 2d 92, ***128; 1977 U.S. LEXIS 1 the constitutionality of "an exercise of the unduly harsh contracts entered into by earlier legislators: sovereign authority of the State," Seton Hall 16 Such "an impairment may [***130] be constitutional College, supra, at 106 -- be it financial or [*54] if it is reasonable and necessary to serve an otherwise -- the Contract Clause tolerates important public purpose." [**1534] Ante, at 25. Not reasonable legislative Acts in the service of the only is this apparently spontaneous formulation virtually broader interests of the society generally. assured of frustrating the understanding of court and litigant alike, 17 but it [*55] is wholly out of step with Nor is the Court's reading of earlier constitutional the modern attempts of this Court to define the reach of doctrine aided by cases where the Contract Clause was the Contract Clause when a State's own contractual held to forestall state efforts intentionally to withhold obligations are placed in issue. from creditors the unpaid interest on, Von Hoffman v. City of Quincy, 4 Wall. 535 (1867), or principal of, 16 The Court makes clear that it contemplates Louisiana ex rel. Hubertv. New Orleans, 215 U.S. 170 stricter judicial review under the Contract Clause (1909); Wolff v. New Orleans, 103 U.S. 358 (1881), when the government's own obligations are in outstanding bonded indebtedness. Beyond dispute, the issue, but points to no case in support of this Contract Clause has come to prohibit a State from multiheaded view of the scope of the Clause. See embarking on a policy motivated by a simple desire to ante, at 25-26. As noted previously, see n. 13, escape its financial obligations or to injure others through supra, this position finds no support in the "the repudiation of debts or the destruction of [***129] historical rationale for inclusion of the Contract contracts or the denial of means to enforce them." Home Clause in the Constitution. And it is clear that the Bldg. & Loan Assn. v. Blaisdell, supra, at 439. Nor will Court's citation to Perry v. United States, 294 U.S. the Constitution permit [*53] a State recklessly to 330 (1935), see ante, at 26 n. 25, offers no support pursue its legitimate policies involving matters of health, for its rewriting of history. In that case, one of the safety, and the like with "studied indifference to the Gold Clause Cases, Perry challenged the interests of the mortgagee or to his appropriate constitutionality of a congressional enactment protection...." W.B. Worthen Co. v. Kavanaugh, 295 U.S. which authorized the redemption of outstanding 56, 60 (1935). In this regard, the Court merely creates its United States gold bonds by payment of legal own straw man when it characterizes the choice facing it tender currency rather than "'by the payment of today either as adopting its new, expansive view of the 10,000 gold dollars each containing 25.8 grains of scope of the Contract Clause, or holding that the Clause gold, .9 fine,'" 294 U.S., at 347, the value of the "would provide no protection at all." Ante, at 26. The dollar in gold when the bonds were acquired.Perry Constitution properly prohibits New Jersey and all States complained that inflation had devalued the worth from disadvantaging their creditors without reasonable of legal tender with respect to gold and, therefore, justification or in a spirit of oppression, and New Jersey claimed financial injury by the conversion. The claims no such prerogatives. But if a State, as here, Government defended its actions on the ground manifestly acts in furtherance of its citizens' general that the gold clause obstructed Congress' express welfare, and its choice of policy, even though infringing power to "regulate the Value" of money, Art. I, § contract rights, is not "plainly unreasonable and 8, and, accordingly, argued that Congress was free arbitrary," Denver & R.G.R. Co. v. Denver, 250 U.S., at to repudiate the gold standard under that power. 244, our inquiry should end: S Although Perry ultimately was denied recovery, the Court found that the authority to "regulate the "The question is... whether the legislation is Value" of money, while permitting Congress "to addressed to a legitimate end and the measures taken are control or interdict the contracts of private reasonable and appropriate to that end." Home Bldg. & parties" with regard to the legal exchange rate, Loan Assn. v. Blaisdell, supra, at 438.I 294 U.S., at 350, did not include the power to repudiate the Government's own obligations, The Court, however, stands the Contract Clause which were governed by entirely different completely on its head, see supra, at 45, and both constitutional provisions: E. g., Congress may formulates and strictly applies a novel standard for "borrow Money on the credit of the United reviewing a State's attempt to relieve its citizens from States," Art. I, § 8, cl. 2, and "The validity of the Page 32 431 U.S. 1, *55; 97 S. Ct. 1505, **1534; 52 L. Ed. 2d 92, ***130; 1977 U.S. LEXIS 1 public debt of the United States... shall not be meanings in these terms. "Necessary" appears to questioned," Amdt. 14, § 4. Thus the differential comport with some notion of a less restrictive standard in Perry emerged from the collision of alternative. As applied by the Court in this competing grants of power to the Federal instance, however, the less restrictive alternative Government, and did not purport to suggest that bears no relationship to previous uses of that the Contract Clause -- or its federal counterpart, analytical tool when economic and social matters the Fifth Amendment -- standing alone would were involved. Thus, the Court does not actually produce different standards for reviewing inquire whether "the government can achieve the governmental interference with public and private purposes of the challenged regulation equally contractual obligations. effectively by one or more narrower regulations." Struve, The Less-Restrictive-Alternative Principle and Economic Due Process, 80 Harv. L. Rev. 1463 (1967). Rather, the Court concludes that an 17 The Court's newly announed standard of impairment of contract was not "necessary" review, like all such formulations, can merely because the Court apparently is able to hope to suggest the direction that a court's inquiry hypothesize other means of achieving some or all should take, and the relative weight to be afforded of the State's objectives, even though these a constitutional right. But particular words like alternatives have long been deemed as secondary "reasonable" and "necessary" also are fused with in importance, nn. 7, 8, supra, or arguably are special meaning, for judges have long experience unconstitutional, ante, at 30 n. 28. Under this in applying such standards to constitutional approach, few, if any, Contract Clause cases in contexts. Reasonableness generally has signified history that have deferred to state policymaking the most relaxed regime of judicial inquiry. See, have been correctly decided. See infra, at 59. e. g., Dandridge v. Williams, 397 U.S. 471, 485 (1970) ("If the classification has some 'reasonable The "reasonableness" test does no better. No basis,' it does not offend the Constitution"). longer does it mean that this Court will defer to Contrariwise, the element of necessity the "reasonable judgments" of the authorized traditionally has played a key role in the most policymakers. Knebel v. Hein, 429 U.S. 288, 297 penetrating mode of constitutional review. See e. (1977). Instead, the Court appears to ask whether g., Shapiro v. Thompson, 394 U.S. 618, 634 changed circumstances took the state legislature (1969) (a classification which burdens a by surprise, ante, at 31-32. Again, I find no basis fundamental constitutional right must be in this Court's prior cases for adopting such a "necessary to promote a compelling governmental constrictive view of that constitutional test. See interest"). The Court's new test, therefore, infra, at 59-60. represents a most unusual hybrid which manages to merge the two polar extremes of judicial [**1535] Mr. Justice Cardozo's opinion in W.B. intervention, see generally Gunther, Foreword: In Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935), is the Search of Evolving Doctrine on A Changing prime exposition of the [*56] modern view. As a relief Court: A Model for a Newer Equal Protection, 86 measure for financially depressed local governments, Harv. L. Rev. 1, 8 (1972), into one synthesis. Arkansas enacted a statute that greatly diminished the Plainly, courts are apt to face considerable remedies available to creditors under their bonds. This confusion in wielding such a schizophrenic new resulted in a remedial scheme whereby creditors were instrument. And well they might, for until today "without an effective remedy" for a minimum of 6 1/2 one would have fairly thought that as a matter of years, during which time the government's obligation to common sense as well as doctrine, state policies [***131] pay principal or interest was suspended. Id., at that are "necessary to serve an important public 61. The Court invalidated the alteration in remedies. It purpose." ante, at 25, a fortiori would be did so, however, only after concluding that the challenged "reasonable." state law cut recklessly and excessively into the value of the creditors' bonds: "[W]ith studied indifference to the The Court, however, seems to discover new interests of the mortgagee or to his appropriate protection Page 33 431 U.S. 1, *56; 97 S. Ct. 1505, **1535; 52 L. Ed. 2d 92, ***131; 1977 U.S. LEXIS 1 [the State has] taken from the mortgage the quality of an Jersey possessed lesser authority in the public interest to acceptable investment for a rational investor." Id., at 60. amend its own contracts than to alter private "So viewed [the State's action is] seen to be an oppressive undertakings, the Court made clear [***132] that the and unnecessary destruction of nearly all the incidents State's powers are more expansive S that give attractiveness and value to collateral security." Id., at 62. "[w]here... the respective parties are not private persons... but are persons or corporations whose rights In the present case, the trial court expressly applied and powers were created for public purposes, by the Kavanaugh standard to New Jersey's repeal of the legislative acts, and where the subject-matter of the covenant, and properly found appellant's claim to be contract is one which affects the safety and welfare of the wanting in all material respects: In a detailed and public." Id., at 514 n. 2, quoting Chicago, B. & Q. R. Co. persuasive discussion, the court concluded that neither v. Nebraska, 170 U.S., at 72.I New Jersey nor New York repealed the covenant with the intention of damaging their creditors' financial position. [**1536] In my view, the fact that New Jersey's Rather, the States acted out of "vital interest[s]," for repeal of the 1962 covenant satisfies the constitutional "[t]he passage of time and events between 1962 and 1974 standards defined in Kavanaugh and Faitoute should, as satisfied the Legislatures of the two states that the public the state courts concluded, terminate this litigation. But interest which the Port Authority was intended to serve even were I to agree that the test [*58] in Kavanaugh could not be met within the terms of the covenant." 134 remains open to further refinement, that, I repeat, would N.J. Super., at 194, 338 A. 2d, at 873. And the creditors' hardly justify the Court's attempt to deploy the Contract corresponding injury did not even remotely reach that Clause as an apparently unyielding instrument for proscribed in Kavanaugh: Not only have Authority bonds policing the policies of New Jersey and New York. For remained "an 'acceptable investment,'" but "[t]he claim such an interpretation plainly is at odds with the that bondholder security has been materially impaired or principles articulated in Kavanaugh and Faitoute, and destroyed by the repeal is simply not supported by the subsequently reconfirmed by El Paso v. Simmons, 379 record." Id., at 196, 338 A. 2d, at 874. U.S. 497 (1965). The Court there considered a provision of Texas law that abolished an unlimited redemption The Court, as I read today's opinion, does not hold period for landowners whose land had been defaulted to that [*57] the trial court erred in its application of the the State for nonpayment of interest, substituting a 5-year facts of this case to Mr. Justice Cardozo's formulation. reinstatement period in its place. Unlike appellant here, Instead, it manages to take refuge in the fact that Simmons at least could claim to have suffered tangible Kavanaugh left open the possibility that the test it economic injury by virtue of the State's modification of enunciated may merely represent the "'outermost limits'" his land-sale contract; indeed, as a result of that of state authority. Ante, at 27. This, I submit, is a "impairment" he permanently lost property to the State. slender thread upon which to hang a belated revival of the And, of course, Texas' "self-interest [was] at stake," ante, Contract Clause some 40 years later. And, in any event, at 26, since it alone was the beneficiary of Simmons' whatever opening remained after Kavanaugh was surely curtailed right of reinstatement. Yet, properly applying closed by Mr. Justice Frankfurter in Faitoute Iron & Steel the teachings of Blaisdell, Kavanaugh, and Faitoute, the Co. v. Asbury Park, 316 U.S. 502 (1942). Speaking for a Court had little difficulty in sustaining the measure as a unanimous Court, id., at 515, he employed the precise means of removing clouds on title arising from pending constitutional standard established by Mr. Justice reinstatement rights, 379 U.S., at 508-509 (citations Cardozo seven years earlier, and upheld under the omitted): S Contract Clause a New Jersey plan to reorganize the outstanding debt obligations held by creditors of Asbury "The Blaisdell opinion, which amounted to a Park. The Court thereby authorized an impairment of comprehensive restatement of the principles underlying creditors' financial interests that was far more substantial the application of the Contract Clause, makes it quite than that involved here: In fact, the reorganization plan clear that '[n]ot only is the constitutional provision both extended the maturity date of the city's bonds by qualified by the measure of control which the State some 30 years and reduced the relevant coupon rate. Yet, retains over remedial processes, but the State also rather than suggesting, as does the Court today, that New continues to possess authority to safeguard the vital Page 34 431 U.S. 1, *58; 97 S. Ct. 1505, **1536; 52 L. Ed. 2d 92, ***132; 1977 U.S. LEXIS 1 interests of its people. It does not matter that legislation either debtor or creditor that a municipality's financial appropriate to that end "has the result of modifying or condition might falter as in Faitoute Iron & Steel Co. v. abrogating contracts already in effect."...' 'Once we are in City of Asbury Park, supra; indeed, the foreseeability of this domain of the reserve power of a State we must that very risk inheres in the process of selecting an respect the "wide discretion on the part of the legislature appropriate coupon rate. Yet, in all of these instances this in determining what is and what is not necessary."'" I Court did not construe the Contract Clause to prevent the [*59] It need hardly be said that today's decision is States from confronting their real problems if and when markedly out of step with this deferential philosophy. their legislators came to believe that such action was The Court's willingness to uphold an impairment of warranted. It is not our province to contest the contract -- no matter how "technical" the injury -- only on "reasonable judgments" of the duly authorized a showing of "necessity" ante, at 29-31, is particularly decisionmakers. Knebel v. Hein, supra, at 297. distressing, for this Court always will be able to devise abstract alternatives to the concrete [***133] action Thus, as I had occasion to remark only last Term, the actually taken by a State. For example, in virtually every Court again offers a constitutional analysis that rests upon decided Contract Clause case, the government could have "abstraction[s] without substance," National League of exercised the Court's "lesser alternative" of resorting to Cities v. Usery, 426 U.S. 833, 860 (1976) (dissenting its powers of taxation as a substitute for modifying overly opinion). Given that this is the first case in some 40 restrictive contracts. Ante, at 30 n. 29. Nothing, at least years in which this Court has seen fit to invalidate purely on the level of abstraction and conjecture engaged in by economic and social legislation on the strength of the the Court today, prevented the appropriation of monies Contract Clause, one may only hope that it will prove a by Illinois to buy back or modify the corporate charter of rare phenomenon, turning on the Court's particularized the polluting fertilizer company in Fertilizing Co. v. appraisal of the facts before it. But there also is reason Hyde Park, 97 U.S. 659 (1878); or by New Jersey to for broader concern. It is worth remembering that there ensure the financial solvency of Asbury Park bonds, is nothing sacrosanct about a contract. All property Faitoute Iron & Steel Co. v. City of Asbury Park, supra; [***134] rights, no less than a contract, are rooted in or by Texas to purchase the unlimited redemption rights certain "expectations" about the sanctity of one's right of involved in El Paso v. Simmons, supra. Yet, in all these ownership. Compare ante, at 19-21, n. 17, with J. cases, modifications of state contracts were Bentham, Theory of Legislation c. 8 (1911 ed.). And countenanced, and this Court did not feel compelled or other constitutional doctrines are akin to the Contract qualified to instruct the state legislatures how best to Clause in directing their protections to the property pursue their business. In brief, these cases recognized interests of private parties. Hence the command of the that when economic matters are concerned, "the Fifth Amendment that "private property [shall not] be availability of alternatives does not render the taken for public use, without just compensation" also [decisionmaker's] choice invalid." Knebel v. Hein, 429 "remains a part of our written Constitution." Ante, at 16. U.S. 288, 294 (1977). State legislation "may not be held And during the heyday of economic due process unconstitutional simply because a court finds it associated with Lochner v. New [*61] York, 198 U.S. unnecessary, in whole or in part." Whalen v. Roe, 429 45 (1905), and similar cases long since discarded, see U.S. 589, 597 (1977). Whalen v. Roe, supra, at 597, this Court treated "the liberty of contract" under the Due Process Clause as By the same token, if unforeseeability is the key to a virtually indistinguishable from the Contract Clause. G. "reasonable" decision, as the Court now contends, ante, at Gunther Constitutional Law, 603-604 (1975); Hale, The 32, almost [**1537] all prior cases again must be Supreme Court and the Contract Clause: III, 57 Harv. L. repudiated. Surely the legislators of Illinois could not Rev. 852, 890-891 (1944). In more recent times, convincingly have claimed surprise because a fertilizer however, the Court wisely has come to embrace a company polluted the air and transported fertilizer to its coherent, unified interpretation of all such constitutional factory, Fertilizing Co. v. Hyde [*60] Park, supra. Nor provisions, and has granted wide latitude to "a valid was it unforeseeable to Mississippi that a corporation exercise of [the States'] police powers," Goldblatt v. which was expressly chartered to operate a lottery, in Hempstead, 369 U.S. 590, 592 (1962), even if it results in fact, did so, Stone v. Mississippi, 101 U.S. 814 (1880). severe violations of property rights. See Pittsburgh v. And, of course, it was "not unknown," ante, at 32, to Alco Parking Corp., 417 U.S. 369 (1974); Sproles v. Page 35 431 U.S. 1, *61; 97 S. Ct. 1505, **1537; 52 L. Ed. 2d 92, ***134; 1977 U.S. LEXIS 1 Binford, 286 U.S. 374, 388-389 (1932); Miller v. to some $ 300 million, is not powerless in Schoene, 276 U.S. 272, 279-280 (1928); cf. Williamson protecting its interests either before the state v. Lee Optical Co., 348 U.S. 483, 488 (1955). If today's legislature or in the economic marketplace. case signals a return to substantive constitutional review Indeed, a myriad of sophisticated investors, of States' policies, and a new resolve to protect property investment banks, and market analysts regularly owners whose interest or circumstances may happen to oversee the operation of the bond market and the appeal to Members of this Court, then more than the affairs of municipalities which appear in search of citizens of New Jersey and New York will be the losers. credit. Accordingly, any city or State that enters the marketplace is well aware that, should it treat III its creditors abusively, the market is apt to exact "justice" that is quicker and surer than anything I would not want to be read as suggesting that the that this Court can hope to offer. In brief, States should blithely proceed down the path of appellant is the paradigm of a litigant who is repudiating their obligations, financial or otherwise. neither "discrete" nor "insular" in appealing for Their credibility in the credit market obviously is highly this Court's time or protection. dependent on exercising their vast lawmaking [**1538] powers with self-restraint and discipline, and I, for one, have little doubt that few, if any, jurisdictions would choose to use their authority "so foolish[ly] as to kill a REFERENCES goose that lays golden eggs for them," Erie R. Co. v. 16 Am Jur 2d, Constitutional Law 459 Public Util. Comm'rs, 254 U.S., at 410. But in the final analysis, there is no reason to doubt that appellant's USCS, Constitution, Article I, Section 10, Clause 1 financial welfare is being adequately policed by the political processes and the [*62] bond marketplace US L Ed Digest, Constitutional Law 216 itself. 18 The role to be played by the [***135] ALR Digests, Constitutional Law 171 Constitution is at most a limited one. Supra, at 52-53. For this Court should have learned long ago that the L Ed Index to Annos, Impairment of Contract Constitution -- be it through the Contract or Due Process Obligations Clause -- can actively intrude into such economic and policy matters only if my Brethren are prepared to bear ALR Quick Index, Impairment of Contract Obligations enormous institutional and social costs. Because I consider the potential dangers of such judicial Federal Quick Index, Impairment of Contract Obligations interference to be intolerable, I dissent. Annotation References: 18 And, of course, there is every reason to expect that appellant, with combined trust and What constitutes bill of attainder under the Federal fiduciary holdings of Authority bonds amounting Constitution. 90 L Ed 1267, 4 L Ed 2d 2155. Page 1 VALENCIA ENERGY COMPANY, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee. Supreme Court No. CV-96-0666-PR SUPREME COURT OF ARIZONA 191 Ariz. 565; 959 P.2d 1256; 1998 Ariz. LEXIS 43; 270 Ariz. Adv. Rep. 3 May 19, 1998, Filed PRIOR HISTORY: [***1] Court of Appeals No. 1 Appellee issued a notice of deficiency assessment. The CA-TX 94-0015. Arizona Tax Court No. TX 93-00277. lower court granted summary judgment to appellee, Appeal from the Tax Court of the State of Arizona. The which was affirmed by the lower appellate court. On Honorable William J. Schafer, III, Judge. 178 Ariz. 251, appeal, the court reversed and remanded the case. It held 872 P.2d 206 (Tax 1994). Opinion of the Court of that the doctrine of equitable estoppel against appellee in Appeals, Division One. 189 Ariz. 79, 938 P.2d 474 (App. tax cases was not precluded by the Ariz. Const. art. IX, § 1996). 1 or art. III. Appellant could establish the affirmative defense of estoppel against appellee by proving that DISPOSITION: Appeal from the Tax Court of the appellee's conduct was inconsistent with the position later State of Arizona REVERSED AND REMANDED. assumed, that appellant relied and had a right to rely on Opinion of the Court of Appeals, Division One appellee's conduct, and that appellant therefore sustained AFFIRMED IN PART, VACATED IN PART. damage that would make it unjust to allow appellee to maintain the later-taken position. CASE SUMMARY: OUTCOME: The court vacated the opinion of the lower appellate court which affirmed the summary judgment PROCEDURAL POSTURE: Appellant taxpayer sought awarded by the lower court to appellee state revenue review of the order of the Court of Appeals (Arizona) department on its notice of deficiency assessment against which affirmed the lower court's grant of summary appellant taxpayer. The court reversed the lower court's judgment in favor of appellee state department of revenue summary judgment. Appellant was not precluded from on a notice of deficiency for transaction privilege taxes establishing the affirmative defense of equitable estoppel on transportation activities. Appellant contended that against appellee. The case was remanded. appellee was estopped from assessing back taxes because its agent had advised appellant that revenue from that CORE TERMS: estoppel, transportation, taxation, activity was not taxable. estopped, equitable estoppel, advice..., coal, incorrect, taxing, detriment, certificate, unauthorized act, summary OVERVIEW: Appellant taxpayer obtained from an judgment, sovereign immunity, contracting, convention, agent of appellee state revenue department a letter stating exemption, handling, separation of powers, estopping, that appellant's transportation charges were not subject to corpus, tax commission, power to tax, power of taxation, tax. In reliance on that advice, appellant did not charge or unauthorized, surrendered, contracted, suspended, owed, collect transaction privilege taxes on that activity. Page 2 191 Ariz. 565, *; 959 P.2d 1256, **; 1998 Ariz. LEXIS 43, ***1; 270 Ariz. Adv. Rep. 3 general rule OPINION BY: STANLEY [***2] G. FELDMAN LexisNexis(R) Headnotes OPINION [**1259] [*568] En Banc OPINION Tax Law > State & Local Taxes > Administration & Proceedings > General Overview FELDMAN, Justice [HN1] Ariz. Const. art. IX, § 1 is not an absolute ban to estopping the Department of Revenue from collecting P1 The Arizona Department of Revenue revenue from a single taxpayer for a single event. ("Department") audited Valencia Energy Company ("Valencia") and assessed a deficiency. The court of appeals affirmed the grant of summary judgment against Tax Law > State & Local Taxes > Administration & Valencia. We granted review to determine whether the Proceedings > General Overview Department can be estopped from collecting back taxes [HN2] Neither Ariz. Const. art. III nor Ariz. Const. art. owed because a Department agent advised Valencia in IX, § 1 prohibits equitable estoppel against the writing that the activity now levied on was not subject to Department of Revenue. tax. We have jurisdiction pursuant to Ariz. Const. art. VI, § 5(3) and A.R.S. § 12-102. Civil Procedure > Pleading & Practice > Defenses, FACTS AND PROCEDURAL HISTORY Demurrers & Objections > Affirmative Defenses > General Overview P2 We view the facts in the light most favorable to [HN3] The three elements of equitable estoppel are the party against whom summary judgment was granted. traditionally stated as: (1) the party to be estopped Martinez v. Woodmar IV Condominiums Homeowners commits acts inconsistent with a position it later adopts, Ass'n, Inc., 189 Ariz. 206, 211, 941 P.2d 218, 223 (1997). (2) reliance by the other party, and (3) injury to the latter resulting from the former's repudiation of its prior P3 Tucson Electric Power Company ("TEP") built conduct. and owns a coal-fired electric plant in Springerville, Arizona, operated by Alamito Company ("Alamito"). 1 COUNSEL: Ulrich Kessler & Anger P.C., Phoenix, By: On October 4, 1984, Valencia, a wholly owned Paul G. Ulrich, David L. Abney, of counsel -and- Hartley subsidiary of TEP, contracted to supply Alamito's coal E. Newkirk, Tucson, -and- Walker Ellsworth P.L.C., requirements for the Springerville plant. The agreement Phoenix, By: Francis Migray, -and- Newmark Irvine, set the price per ton of coal, payable monthly and subject P.A., Phoenix, By: Stephen C. Newmark, Attorneys for to renegotiation [***3] as needed. 2 Valencia began Valencia Energy Company. performance, buying the coal in New Mexico, transporting [**1260] [*569] it to Springerville, and Grant Woods, Arizona Attorney General, Phoenix, By: then preparing it for burning by Alamito. James M. Susa, Patrick Irvine, Attorneys for Arizona Department of Revenue. 1 After 1989, Alamito Company became Century Power Company. Quarles & Brady, Phoenix, By: Michael G. Galloway, 2 Section 7 of the agreement provides: Jeffrey A. Sandquist, Attorneys for Amicus Curiae General Motors Corporation. The circumstances attendant to the providing of Coal... are subject JUDGES: STANLEY G. FELDMAN, Justice. to variation, including, but not CONCURRING: THOMAS A. ZLAKET, Chief Justice, limited to, the amount of capital CHARLES E. JONES, Vice Chief Justice, FREDERICK equipment which must be provided J. MARTONE, Justice, JAMES MOELLER, Justice by Valencia, the cost and size of (Retired). inventories necessary to assure Page 3 191 Ariz. 565, *569; 959 P.2d 1256, **1260; 1998 Ariz. LEXIS 43, ***3; 270 Ariz. Adv. Rep. 3 reliable coal supply, the costs handling and transportation activities were subject to the incurred or to be incurred by tax. Valencia Energy Co. v. Arizona Dep't of Revenue, various coal and transportation 189 Ariz. 79, 938 P.2d 474 (App. 1996). On the estoppel arrangements entered into by issue, the court held that Ariz. Const. art. IX, § 1, Crane Valencia and the recovery of Co. v. Arizona State Tax Comm'n, 63 Ariz. 426, 163 P.2d interest expense by Valencia. 656 (1945), and Duhame v. State Tax Comm'n, 65 Ariz. 268, 179 P.2d 252 (1947), prevent the Department from being equitably estopped by its incorrect representations P4 Prior to beginning performance, Valencia that no tax was applicable. Id. at 84, 938 P.2d at 479 questioned "the status of the business for Arizona tax (citing PCS, Inc. v. Arizona Dep't of Revenue, 186 Ariz. purposes." Valencia's representatives met with 539, 925 P.2d 680 (App. 1995)). We granted Valencia's Department officials on December 17, 1985, to ascertain petition for review on the estoppel issue only. what taxes would be due on Valencia's operations. Valencia thereafter corresponded with Mr. Deemer, a [***6] DISCUSSION Department tax analyst. [***4] As a tax analyst, Deemer regularly rendered written advice to taxpayers after such A. Equitable estoppel against the Department advice was first cleared with his supervisor. Deemer P8 This case requires us to decide whether and to issued three letters to Valencia. The third letter, dated what extent a taxpayer may assert equitable estoppel January 31, 1986, stated that Valencia's transportation against the Department. The Department first argues that charges were not subject to tax. In reliance on the article IX, section 1 of the Arizona Constitution, which Department's advice, Valencia did not charge or collect provides that the "power of taxation shall never be transaction privilege taxes from Alamito on the surrendered, suspended, or contracted away," absolutely transportation receipts at issue. bars estopping the government from collecting taxes P5 The Department conducted a transaction privilege owed. Valencia and amicus argue that article IX, section tax audit of Valencia for the period November 1985 1 is inapplicable here because its purpose is only to through March 1990. Although there were no pertinent, restrict the Legislature from contracting away its power substantive changes in the Arizona statutes or to tax. Department rules during the audit period, the Department 1. Article IX, section 1 and Crane Co. v. Arizona concluded that the transportation charges were subject to State Tax Commission the transaction privilege tax. In May 1990, the Department issued a Notice of Deficiency Assessment to P9 Crane was the genesis of our construction of Valencia claiming underpayment of almost $ 5 million, article IX, section 1 as it relates to estopping the state plus interest. taxing authority. The tax commission had adopted a rule excepting from taxation certain items sold to contractors. P6 After an adverse administrative decision to its The commission later repealed the rule, audited the challenge to the assessment, Valencia appealed to the taxpayer, and assessed back taxes owed on completed superior court. In a published opinion, the judge presiding transactions. We recognized that the taxpayer could no in the tax division of the superior court granted summary longer pass the cost of the tax to its buyers but judgment in favor of the Department [***5] and denied nonetheless upheld the tax and rejected the taxpayer's Valencia's motion for summary judgment, upholding the claim of [***7] estoppel: assessment of back taxes and interest. Valencia Energy Co. v. Arizona Dep't of Revenue, 178 Ariz. 251, 872 P.2d The general rule is that the state will not 206 (Tax 1994). be estopped in the collection of its P7 Valencia raised numerous issues on appeal, revenues by an unauthorized act of its including whether the Department was estopped from officers. In the matter of collecting assessing back taxes because a Department agent advised revenues, the state is acting in its that revenue from coal transportation and handling was governmental or sovereign [**1261] not taxable. The court of appeals found for the [*570] capacity, and ordinarily there can Department on all issues, holding that Valencia's coal be no estoppel. Were this not the rule the Page 4 191 Ariz. 565, *570; 959 P.2d 1256, **1261; 1998 Ariz. LEXIS 43, ***7; 270 Ariz. Adv. Rep. 3 taxing officials could waive most of the Revenue, 189 Ariz. 86, 938 P.2d 481 (App. 1996). 3 state's revenue. The Constitution, Art. 9, Sec. 1, provides that the power of taxation 3 See also State ex rel. Arizona Dep't of (which must of necessity include Revenue v. Driggs, 189 Ariz. 74, 938 P.2d 469 collection) "shall never be surrendered, (App. 1996); PCS, Inc. v. Arizona Dep't of suspended, or contracted away." To hold Revenue, 186 Ariz. 539, 925 P.2d 680 (App. that the commission by regulation may 1995); Arizona Dep't of Revenue v. M. Greenberg waive taxes which the law required to be Const., 182 Ariz. 397, 897 P.2d 699 (App. 1995); imposed would be violative of this Knoell Bros. Const., Inc. v. State of Arizona, 132 provision. Ariz. 169, 644 P.2d 905 (App. 1982). The regulation of the tax commission, [***9] upon which appellant bases its plea of P11 In a different context, however, we held that the estoppel, was wholly unauthorized. The corporation commission could be estopped to deny the tax commission cannot by any rule or validity of a certificate of convenience and necessity regulation exempt a taxpayer from the improperly issued fifty years earlier. In reaching that payment of a tax unless such authority has conclusion, we disapproved of the "no estoppel against been specifically granted to it by the the sovereign" rule, stating: legislature. Here no such authority exists. Whatever the basis for these exceptions 63 Ariz. at 441, 163 P.2d at 662 (emphasis added) to the general rule [of no estoppel], it (citations omitted). would appear that where the application of P10 Two years later, in Duhame, we disapproved estoppel will not affect the exercise by the Crane's substantive holding that the sales to contractors state of its governmental powers and [***8] were subject to the sales tax. With little sovereignty, or bind it by unauthorized discussion and relying on Crane, we again declined to acts of its officers and employees, estoppel apply equitable estoppel against the state taxing will, when justice dictates, be applied to authorities. the state. It is true that during the time plaintiff Freightways, Inc. v. Arizona Corp. Comm'n, 129 Ariz. was engaged in the contracting here in 245, 248, 630 P.2d 541, 544 (1981). question he might have passed this tax on P12 Following Freightways, the court of appeals to the government had he not been misled, distinguished Crane and Duhame to find the Department by an improper interpretation of the Act estopped because of prior incorrect representations about by the Commission, into believing no tax procedural requisites for claiming income tax deductions. was due. Still, it is the settled law of the If not for the procedural errors the taxpayer committed by land and of this jurisdiction that as following the Department's instructions, it was clearly taxation is a governmental function, there entitled to the deductions as a matter of substantive law can be no estoppel against a government and legislative intent. Tucson [***10] Electric Power or governmental agency with reference to Co. v. Arizona Dep't of Revenue, 174 Ariz. 507, 851 P.2d the enforcement of taxes. Were this not the 132 (App. 1992). The court reasoned: rule the taxing officials could waive most of the state's revenue. Therefore there is The taxpayer in this case, however, no merit to plaintiff's claim of estoppel in presents a very different situation. Here, this case. the taxpayer is not relying upon estoppel to avoid the application of a taxing statute 65 Ariz. at 281, 179 P.2d at 260. Our court of appeals to the activities contemplated by the has rigidly adhered to the letter of Crane and Duhame. statute.... It is undisputed in the record See, e.g., General Motors Corp. v. Arizona Dep't of presented to this court that, from a factual Page 5 191 Ariz. 565, *570; 959 P.2d 1256, **1261; 1998 Ariz. LEXIS 43, ***10; 270 Ariz. Adv. Rep. 3 standpoint, the taxpayer clearly was enforcement of this act, to entitled to claim the benefits of that formulate rules and regulations, accelerated amortization. and prescribe the forms and procedure necessary to the efficient In advancing its estoppel argument, enforcement thereof. the taxpayer seeks to enforce, rather than avoid, the basic intent of the statute. [***12] P14 In sum, Arizona law governing Id. at 515, 851 P.2d at 140 (footnotes omitted). estoppel against the Department under the Crane rule is Moreover, the court clarified the scope of the quite restrictive--the Department may not be estopped Crane/Duhame prohibition on estoppel [**1262] [*571] based on its erroneous advice unless doing so results in in tax cases in light of Freightways' acknowledgment that substantive compliance with the tax statutes. Under this the government could be estopped under some regime, the court of appeals was correct to reject circumstances. The court observed: Valencia's claim of equitable estoppel based on the The central principle underlying past Department's prior erroneous advice. Valencia and Arizona decisions is that the sovereign amicus argue, however, we should find those cases power of the state to impose taxes is incorrectly decided. It is to that argument we now turn. vested in the legislature, and the state taxing authorities may not, by their words 2. Whether article IX, section 1 was correctly applied or conduct, waive the collection of taxes P15 We begin by noting that Crane and Duhame imposed by a valid legislative [***11] were decided in an era when the government could do no enactment. wrong. The rigid rule forbidding estoppel against the government was a logical corollary to the previous Id. (emphasis added). notions of sovereign immunity. See John F. Conway, P13 But the basic assumption on which Crane and its Note, Equitable Estoppel of the Federal Government: An progeny were decided is questionable. Crane stated that Application of the Proprietary Function Exception to the estoppel was impermissible when based on the Traditional Rule, 55 FORDHAM L.REV. 707, 709 "unauthorized acts" of the taxing authority. 63 Ariz. at (1987) (citing 2 K. DAVIS, ADMINISTRATIVE LAW 441, 163 P.2d at 662. Thus the case appears to recognize TREATISE § 17.01, at 492 (1958) ("The theory that the the possibility of estoppel based on authorized acts but government cannot be estopped is no doubt a part of the ignores the fact that the action taken by the officials in broad doctrine of sovereign [***13] immunity. In the Crane was actually well within their authority. In Crane, early days of the American Republic, the government the transaction in question was exempt from taxation was liable neither for breach of contract nor for torts of under a tax commission rule. In adopting the rule, the its agents. Sovereign immunity from contract and tort commission exercised authority granted by statute. 4 liability naturally carried with it sovereign immunity Given that the commission's procedural action was from equitable estoppel.")). clearly authorized, the substantive determination that no P16 Significant changes have since occurred with tax was due could be deemed unauthorized only because respect to the sovereign immunity doctrine and, it was wrong. Thus, under Crane an unauthorized act concomitantly, in our view of equitable estoppel against means any Department decision or action later found to the government. See Stone v. Arizona Highway Comm'n, be incorrect under the tax statutes. 93 Ariz. 384, 392, 381 P.2d 107, 112 (1963) (sovereign 4 Ariz. Code § 73-1333 (1939) provided: immunity doctrine abolished); see also Freightways, 129 Ariz. at 247-48, 630 P.2d at 543-44. This case provides Immediately upon this act the court with its first opportunity to examine how the becoming effective, the tax abolition of sovereign immunity affects the issue of commission is hereby authorized equitable estoppel against the Department. and directed as a preliminary P17 Unlike numerous cases in which equitable matter to the application and estoppel has been asserted against various other Page 6 191 Ariz. 565, *571; 959 P.2d 1256, **1262; 1998 Ariz. LEXIS 43, ***13; 270 Ariz. Adv. Rep. 3 government agencies, 5 taxation is governed by a specific corporations. The desire to constitutional provision. The parties draw clear battle encourage certain industries, lines: [**1263] [*572] the Department contends that particularly railroads, led some of article IX, section 1 is an absolute ban to any interference the early legislatures to include in with the state's taxation and collection activities. Valencia the incorporating act a grunt of argues that, [***14] properly understood, the provision partial or total tax immunity. is irrelevant to the issue before us. Subsequent regret of the generosity of these earlier legislatures led to 5 See, e.g., Carondelet Health Serv. v. Arizona the inclusion in the Constitution of Health Care Cost Containment Sys. Admin., 187 1876, this provision.... Ariz. 467, 930 P.2d 544 (App. 1996); Rivera v. City of Phoenix, 186 Ariz. 600, 925 P.2d 741 (App. 1996); Carlson v. Arizona Dep't of Econ. Sec., 184 Ariz. 4, 906 P.2d 61 (App. 1995); [***16] P19 The Dartmouth College case Outdoor Sys., Inc. v. Arizona Dep't of Transp., subsequently established that the Contract Clause 171 Ariz. 263, 830 P.2d 475 (App. 1992). prevents a state from altering or amending terms in a private corporation's charter, unless the state's power to amend was reserved in the charter itself or in some P18 Article IX, section 1 is best understood in the general or special law to which it was originally subject. context of the problem it addresses. In the early Trustees of Dartmouth College v. Woodward, 17 U.S. (4 nineteenth century, state legislatures frequently included Wheat.) 518, 4 L. Ed. 629 (1819). The Supreme Court tax exemptions in the charters of private corporations; 6 applied this principle to protect perpetual tax exemptions litigation ensued over the power of subsequent granted in corporate charters. See Home of the Friendless, legislatures to eliminate the exemptions. See, e.g., Home 75 U.S. (8 Wall.) 430, 19 L. Ed. 495; Washington Univ., of the Friendless v. Rouse, 75 U.S. (8 Wall.) 430, 19 L. 75 U.S. (8 Wall.) 439, 19 L. Ed. 498; Piqua Branch Bank, Ed. 495 (1869); Washington Univ. v. Rouse, 75 U.S. (8 57 U.S. (16 How.) 369, 14 L. Ed. 977. The Court later Wall.) 439, 19 L. Ed. 498 (1869); Rector of Christ acknowledged, however, that grants in a corporate charter Church v. Philadelphia County, 65 U.S. (24 How.) 300, would not be protected by the Contract Clause if a state's 16 [***15] L. Ed. 602 (1860); Piqua Branch of State constitution prohibited the state from granting permanent Bank of Ohio v. Knoop, 57 U.S. (16 How.) 369, 14 L. tax exemptions. Home of the Friendless, 75 U.S. at 438. Ed. 977 (1853); New Jersey v. Wilson, 11 U.S. (7 Accordingly, many states adopted such prohibitions in Cranch) 164, 3 L. Ed. 303 (1812). The United States their constitutions. See Stewart E. Sterk & Elizabeth E. Supreme Court held as early as 1812 that a state Goldman, Controlling Legislative Shortsightedness; The legislature's repeal of tax exemptions contracted by the Effectiveness of Constitutional Debt Limitations, 1991 state violate the Contract Clause of article I, section 10 of WIS. L. REV. [***17] 1301, 1319 (1991) ("Once the the United States Constitution. See, e.g., Wilson, 11 U.S. scope of Contract Clause doctrine became apparent, a (7 Cranch) 164, 3 L. Ed. 303. number of states adopted constitutional provisions that prohibited legislatures from contracting away taxing 6 See, e.g., Tex. Const. art. VIII, § 4 (Vernon's power."). ann. ed.) (West 1993), which provides that the "power to tax corporations and corporate property P20 Concern for inordinate corporate influence in shall not be surrendered or suspended by act of state affairs was particularly acute in Arizona. Professor the Legislature, by any contract or grant to which John D. Leshy, the most prominent historian of the the State shall be a party." As the "Interpretive Arizona Constitution, described the concerns of Senator Commentary" explains: Beveridge, one of Arizona's most respected statesmen during the territorial period: Prior to 1874 when the first general incorporation statute was He [Beveridge] complained bitterly that passed in Texas, the sole means of the businessmen and rich among the incorporation was through special statehood proponents wanted nothing legislative acts creating private Page 7 191 Ariz. 565, *572; 959 P.2d 1256, **1263; 1998 Ariz. LEXIS 43, ***17; 270 Ariz. Adv. Rep. 3 except continued escape from taxation, corporate property shall not be charging that the "mining corporations of surrendered or suspended by any contract Arizona have taken out... over $ or grant to which the state shall be a party. 400,000,000 of mineral wealth; and they have paid the Territory nothing in the way On November 16, the Committee on Public Debt, of taxes." Revenue and Taxation recommended an amended Proposition No. 106, which ultimately became article IX Leshy then concluded: of the constitution. See id at 405. The revised section on Concern about giant corporations the power of taxation, now article IX, section 1, evading taxation had been repeatedly commanded that the "power of taxation shall never be rehearsed in the territorial legislature to surrendered, suspended, or contracted away." (Emphasis little avail, demonstrating the railroad and added.) mining companies' strong grip on the political process. Small wonder that both 7 Article IV, section 23 also evinces the framers' contemporary reformers and historians serious concern with undue corporate influence in agreed that the large corporations politics: "reigned... virtually [***18] untrammeled" in territorial days. It shall not be lawful for any person holding public office in this John D. Leshy, The Making of the Arizona Constitution, state to accept or use a pass or to 20 ARIZ. ST. L.J. 1, 11-12 (1988). purchase transportation from any railroad or other corporation, other [**1264] [*573] P21 An examination of article than as such transportation may be IX's evolution through the 1910 Constitutional purchased by the general public.... Convention confirms that the drafters of our constitution were concerned about legislative capitulation to special Commenting on this provision, Professor Leshy interests. 7 Article IX, section 1 was submitted at the observed that it "reflects the framers' convention as Substitute Proposition No. 106 and preoccupation with potential governmental ultimately replaced numerous provisions relating to corruption by corporations, a realistic concern finance and taxation. One of these provisions was given the political dominance, exercised by means Proposition No. 11, "A Proposition Relative to fair and foul, of large railroad and mining Exemption from Taxation," which demonstrated the corporations during the territorial period." JOHN specific concern with grants of tax immunity to D. LESHY, THE ARIZONA STATE corporations: CONSTITUTION: A REFERENCE GUIDE 123 (1993). That none of the property of any private corporation shall ever be exempted from [***20] P22 Almost forty years ago, we reviewed taxation by the State or by any political the framers' intent with respect to Proposition No. 106 subdivision of the State, except property and article IX, section 1. In determining whether the used solely for charitable, religious, or clause prohibited the City of Phoenix from committing other eleemosynary purpose and not for the proceeds of a fuel tax to repay road repair bonds, profit. Justice Struckmeyer thoroughly examined the Minutes of the Constitutional Convention, noted that the provision On November 16, 1910, Proposition No. 11 was deemed was inserted in our constitution to address the Dartmouth incorporated into Proposition No. 106 and was therefore College problem, and concluded: abandoned. See THE RECORDS OF THE ARIZONA CONSTITUTIONAL CONVENTION OF 1910, at 406 Thus, it becomes apparent that the first (John S. Goff ed.). Section 4 of Proposition [***19] No. sentence of Substitute Proposition No. 106 provided: 106, now Art. IX, § 1, was adopted for the The power to tax corporations and purpose of restricting the legislature's right Page 8 191 Ariz. 565, *573; 959 P.2d 1256, **1264; 1998 Ariz. LEXIS 43, ***20; 270 Ariz. Adv. Rep. 3 to alienate the power to tax anything and challenge under article III of the Arizona Constitution, all persons. The prohibition is against the arguing that "enforcement of estoppel in tax cases irrepealable grant of immunity from deprives the legislature of the power to make the law and taxation. ... the judiciary the power to interpret it." Following the demise of the state-can-do-no-wrong doctrine, the Therefore, we are of the opinion that no-estoppel-against-the-government rule has been most the first sentence of Art. IX, § 1 is a commonly justified on separation of powers principles. 10 prohibition against the surrender or Article IX aside, our cases have long recognized the relinquishment of the right to impose a limitations imposed by article III on exercising judicial tax. power in tax matters. See, e.g., Tanque Verde Enter. v. City of Tucson, 142 Ariz. 536, 691 P.2d 302 (1984) (the Switzer v. City of Phoenix, 86 Ariz. 121, 127-28, 341 judiciary would usurp legislative function by striking P.2d 427, 431 (1959). 8 down even excessive revenue-raising taxes). While Freightways [***23] held that estoppel may lie against 8 Because we believe all of Justice the government, we have yet to consider the effect of Struckmeyer's discussion is worth reading, we separation of powers in such a case. have reprinted it in the Appendix. 10 Frederick S. Kuhlman, Comment, [***21] P23 From the foregoing we conclude that Governmental Estoppel: The Search for the purpose of article IX, section 1 was to void grants of Constitutional Limits, 25 LOY. L.A. L. REV. tax immunity that would otherwise become permanent 229, 229 (1991) ("Separation of powers has under article I, section 10 of the federal constitution as emerged as the linchpin on which the government interpreted in the Dartmouth College case. Accordingly, estoppel debate turns."); Deborah Walrath, Note, this provision of our state constitution prohibits the Estopping the Federal Government: Still Waiting Legislature and state agencies from alienating the for the Right Case, 53 GEO. WASH. L. REV. Legislature's fundamental power to tax. 191, 192 (1985) ("Estoppel traditionally does not lie against the government. This distinction arose P24 This understanding of the purpose of article IX, largely as a corollary to the doctrine of sovereign section 1 casts a different light on the Department's immunity that 'the King can do no wrong.' ... As claim. The Department maintains that article IX, section Congress has passed legislation waiving 1 restrains all branches of government, not just the sovereign immunity and allowing the government Legislature, and its purpose is to prevent any waiver of to be sued in limited circumstances, the power of taxes due. The foregoing discussion illustrates that the this traditional rationale has diminished. One Department is correct on the first assertion but [**1265] justification frequently invoked to support [*574] wrong on the second. Article IX, section 1 governmental exemptions from equitable estoppel restrains all branches of government, but only as to relinquishment of the Legislature's fundamental power to is the separation of powers doctrine."). tax. An estoppel from collecting revenue from a single taxpayer for a single event is not the kind of permanent P26 "Nowhere in the [***24] United States is this capitulation with which the framers were concerned. We system of structured liberty [separation of powers] more therefore hold that [HN1] article IX, section 1 is not an explicitly and firmly expressed than in Arizona." absolute ban to [***22] estopping the Department. 9 Mecham v. Gordon, 156 Ariz. 297, 300, 751 P.2d 957, 960 (1988). Article III of our constitution provides: 9 The Legislature seems to have reached the same conclusion. In A.R.S. § 42-139.21(C), The powers of the government of the effective September 21, 1991, the Legislature State of Arizona shall be divided into three effectively overruled Crane and Duhame. separate departments, the Legislative, the Executive, and the Judicial; and, except as 3. Separation of powers provided in this Constitution, such P25 The Department raises a separation of powers departments shall be separate and distinct, Page 9 191 Ariz. 565, *574; 959 P.2d 1256, **1265; 1998 Ariz. LEXIS 43, ***24; 270 Ariz. Adv. Rep. 3 and no one of such departments shall unauthorized as to violate separation of powers. exercise the powers properly belonging to either of the others. 11 A.R.S. § 42-104(A)(6) provides: P27 The Department presents several arguments. A. The department shall Estopping the Department, it contends, violates administer and enforce the separation of powers by (1) binding the Legislature and provisions of this title, title 43 and thus the state's taxing authority through the unauthorized other laws assigned to it and has all act of an executive branch officer, (2) effectively the powers and duties prescribed permitting an executive agent to legislate with respect to by law for such purposes. In all taxpayers who relied on the agent's statements, and (3) proceedings prescribed by law the precluding the judiciary from declaring the existing law. department may act on behalf of this state. In addition, the P28 On the first point, Valencia responds that department shall: because the Department is statutorily authorized to give tax advice, 11 and occasional erroneous advice is [***25] *** foreseeable and unavoidable, mistakes are impliedly if 6. Provide information and not explicitly authorized. While Crane seems to define advice within the scope of its unauthorized acts as any Department interpretation later duties subject to the laws on found to be incorrect under the tax statutes, this definition confidentiality of information and does not comport with more recent decisions. In departmental rules adopted Freightways, we found the corporation commission pursuant to such laws. estopped from denying the validity of a motor carrier certificate [**1266] [*575] issued without complying [***27] with statutory requirements because the commission had 12 Freightways submitted two applications for a recognized the validity of the certificate for over fifty certificate: one a renewal filed after a deadline years. 129 Ariz. at 248, 630 P.2d at 544. The Legislature imposed by commission rule, and the other an authorized the commission to issue certificates, but original application that, by statute, would have through deliberate error or oversight it issued required a hearing before being granted. Id. at Freightways' certificate contrary to the law's 246, 630 P.2d at 542. It is unclear which requirements. 12 We applied estoppel, concluding it application was acted upon in issuing the would not "affect the exercise by the state of its certificate, but it is irrelevant for our purposes governmental powers and sovereignty, or bind it by the because issuance of the certificate under either unauthorized acts of its officers or employees...." Id. at circumstance contravened statutory requirements. 248, 630 P.2d at 544 (emphasis added). Thus the See Tucson Warehouse & Transfer Co. v. Al's Freightways court found that the act of issuing a Transfer, Inc., 77 Ariz. 323, 327, 271 P.2d 477, certificate, something the commission was authorized to 479-80 (1954) ("The rule is that general rules and do by statute, did not become unauthorized simply regulations of an administrative board or because the act was performed [***26] erroneously. This commission prescribing methods of procedure changed definition of unauthorized was used and applied have the effect of law and are binding on the by the court of appeals in Tucson Electric Power, 174 Commission and must be followed by it so long Ariz. at 516 n.9, 851 P.2d at 141 n.9. 13 Even if incorrect, as they are in force and effect."). the acts of the Department in this case, like those of the 13 The court of appeals explained in a footnote: commission in Freightways and the Department in Tucson Electric Power, were within the general While the audit supervisor's parameters of the government agent's authority. Thus, the representations were Crane definition of unauthorized acts is not only patently "unauthorized" in the sense that illogical but has been effectively modified. We adopt and they were contrary to the apply the view taken in Freightways and Tucson Electric provisions of the statute as we have Power. The advice given Valencia was wrong but not so Page 10 191 Ariz. 565, *575; 959 P.2d 1256, **1266; 1998 Ariz. LEXIS 43, ***27; 270 Ariz. Adv. Rep. 3 interpreted it, there is no evidence Thus, the argument goes, the Department would that he was not acting within the effectively be exercising the powers properly belonging general parameters of his to the judiciary, in violation of article III of our authority. Therefore, under constitution. We do not find a separation of powers appropriate circumstances violation based on such an attenuated notion. Estoppel is otherwise supporting the a judicial doctrine. Its application by the courts can application of estoppel, his hardly be construed as placing judicial power in the representations would be binding hands of the executive [***30] branch. While estoppel on the state. protects the Department's prior incorrect interpretation of the law from further judicial review in a particular case, it Id. (emphasis added). does not give the Department the judicial power to interpret the law in any case before the court. Nor does it [***28] give the Department the authority to determine when, where, or in what situation estoppel should be P29 The Department next argues that estoppel in recognized. Judicial application of estoppel does nothing these circumstances effectively permits an executive more than preclude the Department from arguing the agency to change the law, which constitutes a usurpation substantive issue of law in the first place. The court of legislative power. This argument fails to recognize that remains the final arbiter of the law; it alone decides the the law and its execution are separate and distinct correct interpretation of the law and whether estoppel will spheres. See, e.g., Salt River Pima-Maricopa Indian nevertheless apply in a given case. Community v. Hull, 190 Ariz. 97, 104, 945 P.2d 818, 825 (1997) ("The Legislature, in the exercise of [its] P31 Thus, we conclude that [HN2] neither article III lawmaking power, establishes state policies and priorities nor article IX, section 1 of the constitution prohibits and, through the appropriation power, gives those equitable estoppel against the Department. We must then policies and priorities effect. Once the Legislature has consider whether circumstances exist in this case that acted, however, it becomes the duty of the Executive to could warrant the application of estoppel against the 'take care that the laws be faithfully executed.'") (citing Department. Rios v. Symington, 172 Ariz. 3, 12, 833 P.2d 20, 29 (1992)). The axiom that an administrative agency such as 4. Factual predicate for equitable estoppel against the the Department must execute the law as it is written does Department not lead to the result that the Department asserts here. Estopping the Department from assessing a tax does not P32 That the constitution does not prohibit estoppel work any change in the law but impacts only its against the Department does not necessarily mean that the execution. If the Department's absolutist interpretation Department will be estopped. Estoppel sounds in equity were true, then the constitution would be similarly [***31] and will therefore not apply to the detriment of violated whenever the Department exercises [***29] its the public interest. Spur Indus., Inc. v. Del E. Webb Dev. discretion to enter into closing agreements 14 or to abate Co., 108 Ariz. 178, 184, 494 P.2d 700, 706 (1972) ("the balances owed. 15 These provisions, like the operation of courts have long recognized a special responsibility to the estoppel against the Department, involve administration public when acting as a court of equity"). Accordingly, of the law not its creation. The legislative prerogative to we look carefully to the underlying considerations that tax was not impaired. traditionally have been advanced for and against the application of estoppel against the Department. 14 See A.R.S. § 42-139.06. 15 See A.R.S. § 42-104(B). P33 Even the cases applying estoppel against the government have recognized that "equitable estoppel... P30 We turn, then, to the contention that judicial generally may not be invoked against the sovereign." recognition that the Department is estopped from Freightways, 129 Ariz. at 246, 630 P.2d at 542. We said correcting its prior, erroneous interpretation of law the government may be estopped only when its "wrongful operates as a retroactive concession of judicial power, conduct threatens to work a serious injustice and ... the enabling the Department to make determinations public interest would not be unduly damaged...." Id. at [**1267] [*576] immunized from judicial revision. 248, 630 P.2d at 544. Despite our holding in Freightways, Page 11 191 Ariz. 565, *576; 959 P.2d 1256, **1267; 1998 Ariz. LEXIS 43, ***31; 270 Ariz. Adv. Rep. 3 however, estoppel has remained all but prohibited as it is so intended; (3) the latter must be ignorant of against the Department under the Crane/Duhame line of the true facts; and (4) he must rely on the former's cases. conduct to his injury." 129 Ariz. at 246, 630 P.2d at 542 (citing Hampton v. Paramount Pictures P34 We recognize the fundamental importance of the Corp., 279 F.2d 100, 104, (9th Cir. 1960)). We state's taxing power but believe the state's obligation to note that this four-prong test was not expressly treat its citizens justly is as essential to the existence of adopted in Freightways. More important, the test government [***32] as the Legislature's power to levy cited in Freightways is, in substance, no different taxes. See, e.g., Joint Anti-Fascist Refugee Comm. v. than the three-prong test traditionally applied in McGrath, 341 U.S. 123, 172 n.19, 71 S. Ct. 624, 649 Arizona. n.19, 95 L. Ed. 817 (1951) (Frankfurter, J., concurring) (quoting 5 THE WRITINGS AND SPEECHES OF [***34] P36 The first element requires affirmative DANIEL WEBSTER 163) ("In a government like ours, acts inconsistent with the position later relied on. entirely popular, care should be taken in every part of the Common sense tells us that the evidentiary burden in system, not only to do right, but to satisfy the community cases such as the present would require that the state's that right is done.")). Moreover, as our tax system relies action bear some considerable degree of formalism under primarily on the good faith of citizens to self report, it is the circumstances. An off-the-cuff opinion, for example, imperative that the system itself manifest fairness by will not suffice if the question presented requires a requiring that all citizens contribute their fair share. But it measure of research or deliberation. It is rare that is patently unjust to permit the erroneous advice of the satisfactory evidence of an absolute, unequivocal, and government to cause detriment beyond the tax itself. formal state action will be found unless it is in writing. In There is no justice, one might say, if the government can addition, the action must be taken by or have the approval punish its citizens for following its instructions. We of a person authorized to act in the area under therefore join the many states permitting equitable consideration. See Freightways, 129 Ariz. at 248, 630 estoppel against the government in tax matters. See, e.g., P.2d at 544. In general, the state may not be estopped due Michael A. Rosenhous, Annotation, Estoppel of State or to the casual acts, advice, or instructions issued by Local Government in Tax Matters, 21 A.L.R. 4th 573 nonsupervisory employees. 17 (collecting cases). We overrule Crane and Duhame and hold that equitable estoppel may lie against [***33] the 17 We note that an additional standard has been Department under certain limited circumstances. enunciated by our court of appeals. In Carlson v. Arizona Dep't of Econ. Sec., the court of appeals P35 [HN3] The three elements of equitable estoppel discussed the wrongful conduct element of an are traditionally stated as: (1) the party to be estopped estoppel claim against the government, finding commits acts inconsistent with a position it later adopts; that estoppel will lie against the state only if the (2) reliance by the other party; and (3) injury to the latter government's actions constitute "affirmative resulting from the former's repudiation [**1268] [*577] misconduct." 184 Ariz. 4, 6, 906 P.2d 61, 63 of its prior conduct. 16 See, e.g., Tucson Electric Power, (App. 1995). Carlson distinguished between mere 174 Ariz. at 516, 851 P.2d at 141. In light of the serious neglect or oversight and more egregious considerations implicated by the taxing power, we intentional or willful conduct. Id. at 8, 906 P.2d examine these elements as they apply to the Department at 65. The affirmative misconduct standard in this case. adopted in Carlson may conflict with Freightways. 16 The Department argues that Freightways promulgated a four-prong standard that governs [***35] P37 The second requirement demands both estoppel against the government. In Freightways, that the party claiming estoppel actually relied on the we cited a federal case holding that the elements state's act and that such reliance was reasonable under the of estoppel were "(1) The party to be estopped circumstances. Actual reliance means that the party must know the facts; (2) he must intend that his seeking estoppel has the burden to demonstrate that it conduct shall be acted on or must so act that the prospectively relied on the state action. That the reliance party asserting the estoppel has a right to believe be reasonable requires, among other things, that the party Page 12 191 Ariz. 565, *577; 959 P.2d 1256, **1268; 1998 Ariz. LEXIS 43, ***35; 270 Ariz. Adv. Rep. 3 seeking estoppel have acted in good faith by providing corpus, was by statute jointly and severally liable. 312 the state with correct information and neither knew nor F.2d 311, 318 (9th Cir. 1962). The United States Court of was put on notice that the state's position was erroneous. Appeals held that the IRS was estopped against the bank See Heltzel v. Mecham Pontiac, 152 Ariz. 58, 60, 730 but not against Schuster: P.2d 235, 237 (1986). In general, "reliance should be considered reasonable if 'a person sincerely desirous of We are unaware of any particular obeying the law would have accepted the information as detriment sustained by Schuster in reliance true, and would not have been put on notice to make on the Commissioner's mistake, for she further inquiries.'" Freightways, 129 Ariz. at 247, 630 did not materially change her position in P.2d at 543; see also Bohonus v. Amerco, 124 Ariz. 88, reliance on his earlier determination. But 90, 602 P.2d 469, 471 (1979) ("As a general rule, it is the Bank has been greatly prejudiced essential to the existence of an estoppel that the because of the Commissioner's mistake. representation be relied upon and that such reliance be After it was informed that the trust corpus justifiable. Reliance is not justified where knowledge to was not includable in the decedent's gross the contrary exists."); [***36] Suburban Pump & Water estate, it distributed the corpus [***38] to Co. v. Linville, 60 Ariz. 274, 283, 135 P.2d 210, 214 the beneficiary, and thus no longer retains (1943) (One who acts "with a careless indifference to the property which was the subject of the means of information reasonably at hand or ignores deficiency. Therefore, any liability of the highly suspicious circumstances which should warn him Bank would have to come out of its own of danger or loss cannot invoke the doctrine of pocket, not the corpus of the trust. This estoppel."). would be grossly unfair to the Bank, especially because it never enjoyed the use P38 The third requirement is that there be substantial of the corpus but merely acted in the detriment to the party resulting from a repudiation of capacity of a trustee. It is difficult to see prior representations. As asserted against the Department, what additional action the Bank might detriment requires a positional change not compelled by have taken to protect itself from liability, law. Thus, no detriment is incurred when the party's only faced with the beneficiary's demand for injury is that it must pay taxes legitimately owed under the corpus and the Commissioner's the correct interpretation of the law. Nor will liability for determination that it was not taxable. It is non-punitive interest on the tax legitimately due our conclusion that the Bank's equitable constitute detrimental reliance. State ex rel. Arizona interest is so compelling, and the loss Dep't of Revenue v. Driggs, 189 Ariz. 74, 938 P.2d 469 which it would sustain so unwarrantable, (App.1996). Non-punitive interest [**1269] [*578] is, as to justify the application of the estoppel after all, nothing more than compensation for the use of doctrine against the Commissioner. money. See, e.g., Dingle v. Prudential Prop. & Cas. Ins. Co., 85 N.Y.2d 657, 651 N.E.2d 883, 885, 628 N.Y.S.2d Id. Thus, a detriment must involve some collateral loss 15 (N.Y. 1995). The taxpayer had the benefit of using the other than payment of the tax due under the law as funds before paying the tax claim and, in the legal sense, property interpreted. We note that this is precisely the [***37] suffers no loss by reason of paying interest on type of detriment alleged in Crane and Duhame, 18 and the money it retained in its possession. had the law then recognized estoppel against the Department, the detriment may have been sufficient. P39 A federal decision is illustrative on the question of detriment. In Schuster v. Commissioner, the Internal 18 "It is true that during the time plaintiff was Revenue Service assessed a tax deficiency against engaged in the contracting here in question he Schuster, the surviving beneficiary, and the trustee bank, might have passed this tax on to the government claiming that it erred in an earlier audit determination that had he not been misled, by an improper the corpus of a trust was not a taxable part of the interpretation of the Act by the Commission, into decedent's estate. Schuster was thus liable for the tax that believing no tax was due." Duhame, 65 Ariz. at would have been due if the audit had been correctly 281, 179 P.2d at 260 (citing Crane). performed, and the bank, which had distributed the entire Page 13 191 Ariz. 565, *578; 959 P.2d 1256, **1269; 1998 Ariz. LEXIS 43, ***38; 270 Ariz. Adv. Rep. 3 [***39] P40 Finally, all these requirements are concept that the Commissioner might conditioned by the general rule that estoppel may apply always correct a legal mistake regardless against the state only when the public interest will not be of the injustice which will result. It is unduly damaged and when its application will not conceivable that a person might sustain substantially and adversely affect the exercise of such a profound and unconscionable governmental powers. Freightways, 129 Ariz. at 248, injury in reliance on the Commissioner's 630 P.2d at 544. This rule requires prudence in the action as to require, in accordance with application of estoppel, recognizing that the state's any sense of justice and fair [***41] play, solvency is of paramount importance and that equity will that the Commissioner not be allowed to not sacrifice the fundamental welfare of the whole inflict the injury. It is to be emphasized community to accomplish justice for the individual. See, that such situations must necessarily be e.g., Trull Nursing Home, Inc. v. Maine Dep't of Human rare, for the policy in favor of an efficient Serv., 461 A.2d 490, 499 (Me. 1983) ("Estoppel against collection of the public revenue outweighs the government should be 'carefully and sparingly the policy of the estoppel doctrine in its applied,' especially where application would have an usual and customary context. But as long adverse impact on the public fisc.") (citations omitted)). as the concept of estoppel retains any validity, it is conceivable that such P41 We believe the court's comments in Schuster are situations might arise. appropriate here: 312 F.2d at 317 (citations omitted). Such a situation We recognize the force of the arose in Schuster, and Valencia claims it made a similar proposition that estoppel should be applied case here. against the Government with utmost caution and restraint, for it is not a happy B. Valencia's claim of equitable estoppel occasion when the Government's hands, performing duties in behalf of the public, P42 Valencia claims it advanced sufficient facts to are tied by the [***40] acts and conduct justify vacating the tax court's grant of summary of particular officials in their relations judgment in favor of the Department and to require that with particular individuals. Estoppel has its cross-motion for summary judgment be granted. been applied against the Commissioner in 1. Affirmative acts inconsistent with a claim later limited situations, but they have usually relied on arisen where [**1270] [*579] the Commissioner's act involved matters of a P43 The Department does not dispute that Deemer, purely administrative nature. Indeed the its tax analyst, stated in his January 31, 1986, letter to tendency against Government estoppel is Valencia that transportation charges were not subject to particularly strong where the official's tax. To Valencia, the letter could have appeared to be the conduct involves questions of essentially Department's official, unequivocal position on the legislative significance, as where he question. If Valencia is correct on its facts, the letter conveys a false impression of the laws of [***42] was sufficient at best to create a genuine issue the country. Obviously, Congress's that the state had acted and taken a position inconsistent legislative authority should not be readily with its later claim that the transaction was taxable. subordinated to the action of a wayward or unknowledgeable administrative official. 2. Action by a party reasonably relying on such Accordingly, the general proposition has conduct been that the estoppel doctrine is inapplicable to prevent the Commissioner P44 Valencia asserts that it reasonably relied on the from correcting a mistake of law. Department's statements that the coal transportation activities were not subject to the transaction privilege tax. But we regard this proposition as one of The Department concedes that relying on the general application, not as embracing the Department's statements, Valencia did not collect the tax Page 14 191 Ariz. 565, *579; 959 P.2d 1256, **1270; 1998 Ariz. LEXIS 43, ***42; 270 Ariz. Adv. Rep. 3 from its customer, 19 but it argues that Valencia's reliance whether the tax applied. They were finally advised the was not reasonable. The Department argues that transaction was not taxable. The fact that Valencia's Valencia, a sophisticated business enterprise, should have accountants questioned why receipts did not reflect a known that Deemer's advice was wrong, or at least greater amount of tax does not conclusively establish that suspect. The Department issued three letters to Valencia. Valencia should have known something was amiss The Department asserts that the first was patently because the accountants' inquiries occurred after Valencia incorrect, the second stated concepts Valencia should received Deemer's letter. We cannot say it was have recognized as patently erroneous, and the third, unreasonable as a matter of law for Valencia to disregard advising that no tax applied and written after Valencia the accountants' questions in light of the Department's provided additional information, stated the same stated position. Nor does the fact that the letters contained erroneous concepts as the second. 20 Department references to irrelevant concepts necessarily mean that [**1271] [*580] also argues that Valencia's the Department's position was patently incorrect. On the accountants, who worried that too little tax was being record before us, which contains none of Valencia's collected, should have put Valencia [***43] on notice communications with the Department, it is not clear why that Deemer's letter was incorrect. such references were made. It is clear that Valencia struggled [***45] to obtain the Department's position 19 While the Department expressly concedes and provided information to the Department for that that Valencia relied on Deemer's advice, the purpose. On the present record, there exists a genuine Department also points out in a footnote facts that question of fact whether the errors in the Department's indicate otherwise. The Department implies that letters gave Valencia information that made reliance because Valencia had already sold over $ 60 unreasonable. million of coal by January 31, 1986, Deemer's letter did not cause Valencia's reliance. These P46 Of course, Valencia's reliance would not have facts, if true, present a genuine issue on the been reasonable if the law clearly precluded its theory of question of whether Valencia actually relied. See nontaxability. Valencia is a sophisticated taxpayer, no Virginia v. Washington Gas Light Co., 221 Va. doubt advised by in-house and private counsel and 315, 269 S.E.2d 820, 826 (Va. 1980). accountants. We assume it approached the Department 20 The Department also argues that the third with considerable knowledge and understanding of the letter is facially incorrect because it states with law. Were it clear that the business operations in question respect to transportation of the coal that "'title were subject to tax, Valencia could not in good faith passes in New Mexico' -- which is clearly wrong assert reliance on an erroneous Department interpretation. because the sale of coal to Alamito occurs in In this connection, the Department asserts that the statute Arizona at the power plant.'" However, Valencia clearly imposes the tax, common sense confirms that responded in its motion papers that title to the result, and the case law is unequivocal. coal passed from the mine to Valencia in New Mexico, and therefore the letter was not facially P47 The statutes provide that a "transaction privilege incorrect. We only note here that the focal point tax" is imposed on "the volume of business transacted by of the inquiry is not whether the letter was facially persons on account of their business activities...." A.R.S. incorrect but whether the facts are such that the § 42-1306(A) & (C). The tax applies to "the business of party asserting estoppel could not have reasonably selling tangible personal property at retail." A.R.S. relied on them. [***46] § 42-1310.01(A) (Supp. 1995). The tax base for the sale of retail goods is "the gross proceeds of sales or gross income derived from the business." See Arizona [***44] P45 We cannot say as a matter of law that State Tax Comm'n v. Garrett Corp., 79 Ariz. 389, 390, Valencia acted with "careless indifference to means of 291 P.2d 208, 209 (1955). information reasonably at hand or ignored highly suspicious circumstances which should warn ... of danger P48 Valencia argues, however, that the coal or loss...." Suburban Pump & Water Co., 60 Ariz. at transportation and handling operations were nontaxable 284-85, 135 P.2d at 214. Valencia met with Department services separate and distinct from the taxable sales. officials and made three separate inquiries regarding "Services rendered in addition to selling tangible personal Page 15 191 Ariz. 565, *580; 959 P.2d 1256, **1271; 1998 Ariz. LEXIS 43, ***46; 270 Ariz. Adv. Rep. 3 property at retail" are not subject to the sales tax. A.R.S. therefore, we conclude that Valencia could have believed § 42-1310.01(A)(2). Therefore, the dispositive legal issue that it had taken sufficient measures to structure its was whether it was reasonable to think that Valencia's transaction, as confirmed by Deemer's letter. In hindsight, transportation and handling operations could be deemed Valencia's position was wrong, but we cannot say it was services separable from the sales for tax purposes. unreasonable as a matter of law. That question can be resolved only by the tax court. Where it can be readily ascertained without substantial difficulty which P51 The Department also argues that it is portion of the business is for non-taxable inappropriate to apply estoppel in this case because, professional services..., the amounts in while the Department's answer to Valencia's inquiries is relation to the company's total taxable clearly presented in Deemer's letters, the inquiries Arizona business are not inconsequential, themselves have yet to be disclosed. As the Department and those services cannot be said to be said in response to Valencia's petition for review, to incidental to the contracting business, the "simply read the 'answer' without knowing the 'question' professional services are not merged for is of dubious value." No doubt this is true, but for tax purposes into the taxable contracting summary judgment purposes, Valencia's factual business and are not subject to [***47] statements are [***49] sufficient to raise a genuine issue taxation. of material fact. We note, however, that the facts, though not Valencia's conclusions, may be germane and even State Tax Comm'n v. Holmes & Narver, Inc., 113 Ariz. necessary to prove Valencia acted in good faith when 165, 169, 548 P.2d 1162, 1166 (1976). dealing with the Department. Equitable estoppel will not apply in favor of a party that has misled or deceived the P49 Thus, to be considered separable, the activities government into making erroneous representations. As must be (1) easily ascertainable, (2) not inconsequential, Justice Holmes observed long ago, "Men must turn and (3) not incidental to the taxable activity. Valencia square corners when they deal with the Government." maintains that the transportation and handling charges Rock Island. Arkansas & Louisiana R. Co. v. United were accounted for separately, were substantial in that States, 254 U.S. 141, 143, 41 S. Ct. 55, 56, 65 L. Ed. 188 they comprised nearly one-half of the business, and were (1920). not incidental to the sales activities. It also argues that transportation [**1272] [*581] was both inseparable P52 Finally, the Department contends Valencia did from and interwoven with the principal business. not follow Deemer's advice, which assumed that the transportation, sales, and handling operations would be P50 We did not grant review of Valencia's challenge segregated in Valencia's records and invoices. The to the court of appeals' ruling on the substantive issue of Department contends there was no segregation, but whether the transportation and handling operations were Valencia argues the charges were segregated when the subject to tax. We therefore consider only whether invoices were read-in light of a tariff sheet. Again, a Valencia's position was reasonable in light of the genuine issue of material fact exists. circumstances. The court of appeals' opinion is instructive on this issue. The court acknowledged that 3. Injury to Valencia resulting from reliance on the "Valencia might have been able to avoid taxation of the state's conduct services by selling coal separately from the services." 189 P53 Valencia presented affidavits stating that the tax Ariz. at 83 n.5, 938 P.2d at 478 n.5. However, the court would have been passed on to the customer but for held that the transportation and handling charges [***48] reliance on the [***50] Department's advice. The were not separate from the sales, primarily because Department concedes that "Valencia did not collect the Valencia had not entered into separate sales and tax that it could have [from its customers] because it transportation contracts and had failed to separately bill relied upon the Department's advice...." Therefore, we for those charges. Id. at 83, 938 P.2d at 478. But as the only note here that the detriment incurred was substantial court of appeals' opinion indicates, it is possible to (about $ 5 million, not including interest) and exceeded structure a transaction in such a manner as to avoid the the mere payment of a tax owed in that Valencia lost the tax. Id. at 83 n.5, 938 P.2d at 478 n.5. On this record, opportunity for recoupment from its customer. Page 16 191 Ariz. 565, *581; 959 P.2d 1256, **1272; 1998 Ariz. LEXIS 43, ***50; 270 Ariz. Adv. Rep. 3 4. The public interest In discussing the background of article IX, [***52] section 1, Justice Struckmeyer said: P54 Finally, we observe that on this record estopping the Department does not threaten undue damage to the This proposition [Substitute Proposition public interest, nor will the application of estoppel No. 106] came before the Convention for substantially and adversely affect the exercise of discussion on Saturday morning, governmental powers. The state's solvency has not been November 19, 1910. At that time, the threatened by its inability to collect this particular tax Honorable George W.P. Hunt, who later liability, now eight years past due, from this single became the seven-time Governor of taxpayer. Moreover, in this case estoppel only applies Arizona, said: retroactively to the transactions completed by Valencia; it does not impair the state from exercising its authority In regard to that first prospectively. Thus, there is no substantial and adverse section. The Committee on effect on the state's taxing power. Taxation had a memorial gotten up by the Tax [**1273] [*582] CONCLUSION Association composed of men all over the United P55 We hold that recognition of the doctrine of States who have made this equitable estoppel against the Department of Revenue a study for years, and I [***51] in tax cases is not precluded by either article IX, have on my desk here § 1 or article III of the Arizona Constitution. Crane and letters from nearly every Duhame are accordingly overruled insofar as they hold to professor on economics in the contrary. A taxpayer may establish the affirmative all the universities of the defense of estoppel against the Department of Revenue country, from Harvard, in by proving the Department's conduct was inconsistent Massachusetts to Stanford, with a position later assumed, the taxpayer relied and had in California, and they are a right to rely on the Department's conduct, and the for anyone who wants to taxpayer therefore sustained damage that would make it look at these letters. They unjust to allow the Department to maintain the later-taken one and all believe this is position. the only way to put this in P56 On the record before us, we are unable to affirm the constitution, and if the or direct the grant of summary judgment to either party. members of the convention Therefore, the court of appeals' opinion is vacated insofar will allow me to read them as it conflicts with this opinion, the tax court's opinion is a letter from Washington, vacated, its judgment is reversed, and the case is which is a sample of the remanded to the tax court for further action consistent letters I have received, it with this opinion. will throw some light on the subject. It is from J.E. STANLEY G. FELDMAN, Justice Frost, President of the State Board of Tax CONCURRING: Commissioners of the State of Washington, at Olympia, THOMAS A. ZLAKET, Chief Justice Washington.... CHARLES E. JONES, Vice Chief Justice Dear Sir: I am just in receipt of a letter from the FREDERICK J. MARTONE, Justice Hon. Allen R. Foote, of JAMES MOELLER, Justice (Retired) Columbus, Ohio, President [***53] of the APPENDIX International Tax Page 17 191 Ariz. 565, *582; 959 P.2d 1256, **1273; 1998 Ariz. LEXIS 43, ***53; 270 Ariz. Adv. Rep. 3 Association, asking me to taxation," the Convention meant [***54] express to you my views on "the power to impose taxes." the subject of constitutional provisions relative to The complete text of the Memorial taxation. referred to in the statement by the Honorable George W.P. Hunt can be *** found in the [**1274] [*583] report of State and Local Taxation, 5th National The right to impose Conference of the National Tax taxes is a legislative power, Association held in Richmond, Virginia, inherent in organized September, 1911, pp. 451 through 457. A government. In the absence reading of the Memorial leads us to the of constitutional conclusion that the language contained in limitations, a legislature the first sentence of Art. IX, § 1 was may enact such tax laws as designed to leave legislators it sees fit, subject only to unencumbered in so far as their power to the restrictions contained in impose taxes. We note also from the report the constitution of the of the Third Conference of the same United States. Everything Association, p. 88, that one M.H. Carver over which the authority of of the Louisiana State Tax Commission is the state reaches may be the quoted as stating: subject of taxation, whether it be person, property, or There is little necessity occupation. for putting anything at all in the constitution about *** taxation, and some distinguished authorities There are certain hold that everything on the safeguards, however, that subject in a constitution is should be provided: First; dangerous. To meet the the legislature should be decision of the Supreme prohibited from contracting Court of the United States, away the right to tax though, in the Dartmouth anything or person College case [Trustees of whatsoever, or from Dartmouth College v. making any irrepealable grant of exemption. Woodward], 17 U.S. 518, 4 Wheat. 518, [4 L. Ed. 629], it is well to provide: "That the power of taxation shall never be suspended, From the content of the letter, it can be surrendered or contracted gleaned that since the legislature should be away...." prohibited from contracting away the right to tax, the Convention intent was to accomplish the converse; that is, that the legislature would have the right to tax [***55] 86 Ariz. at 126-27, 341 P.2d at 430-31 (footnote anything and all persons whatsoever. omitted). Viewed in this light, it would appear that by the use of the words "power of (""" Genera·! Acts of Specia I Application and SPECIAL ACTS ADOPTED BY THE SECOND LEGISLATURE OF FLORJ·DA UNDER THE CONSTITUTJO·N .~ ·AS REVISED 'IN l 968 .t .·.· ; ) At Its First Regular Session April 6 to June 4, 197:1 I •' ; and Special Session .i>-- (_) J~ '· June 9 to June 24, 1971. ".l ::· ' Volume II L! Published by Authority of Law Under the Direction of FLORIDA LEGISLATIVE PRINTING COMMITTEE TALLAHASSEE .J 1971 u EXHIBIT A ,. '= . LAWS OF FLORIDA CHAPTER 71-980 _r;-- .1 dis- a ke ef -teB- dolla}:s. Photographs .6:r microphotographs of any rut to i~ecords made in compliance ·with ·section 608.36; Flori;da Stat- . ·sua!1t .utes, .shall be acceptable.·and have the· same_ force and effect as :.~ the origin_als thereof.· Restoration shall be ef~eetive from the c-;~r or date of dissolution or cancellation of perniit. _. . i' with. (3) Should the name of the dissolved eexporatioE: entity ection have been lawfully approp1iatea by anothe~ -eorporation entity privi- - the app'licants shall be permitted to amend- the application by ion or adopting another name -and thereafter the €01-pora;f.;ien entity ttePeat shall continue under the .name so adopted-;-, pro'l)ided ho1»ever, '.xe·and the na:-rne of the dissolved ent-ity shall not b~ a.va.ilable fo?' use by llation another entity until after the pa.ssage of one (1) year from the .elit e:E date of. the final !ffi\4· ffi \ . . dissolution. · · /.Ce! •gether- ( 4.) Restored e-~·ationo entities shall ·be subject to the ~ ~ privilege tax fro~ the effective date of restora~ion . Section 7. Chapter · 608, Florida Statutes, is a"fllended by follars .. ~o-mpli-' adding a new section to read·: · eptable In ·such co..ses where the·:depwrtment of state ]J,a-8 cau.se.d to be :' . ,hereof. made copies of any records maintained by· it by miniatwre pho- ;: '.;~ion·· or tographic miarofi!Jming or Qther processes as· authorized by sec- tion· 15.-16, Flo1ida Statutes, the departrnent 9f state rnay de- str_oy the original of said documents! pursuant to ~VJ~ . . l stock oration ·Section 8. This act shall ta~e effect immediately upon be- ~- -L-1- staek coming law. .. . '""'ssolved :;. Approved by the Governor December 16,.1971. 'er 16; 1971. Filed in Office SeCJ.·etarJ: of State December 17, 1971. 52 1991 R.R.S. Neb. § 77-2901 1991 Nebraska Code Archive REVISED STATUTES OF NEBRASKA 1943 > CHAPTER 77 REVENUE AND TAXATION > ARTICLE 29 MULTISTATE TAX COMPACT 77-2901 to 77-2903. Repealed History Laws 1985, LB 344, § 9. REVISED STATUTES OF NEBRASKA 1943 EDWARD BEEBY W. Va. Code Ch. 11, Art. 10A Note Text Current through Acts of the 2015 Regular Session with effective dates February 13, 2015 or earlier. Michie’s ™ West Virginia Code > Chapter 11. Taxation. > Article 10A. West Virginia Office of Tax Appeals. Article 10A. West Virginia Office of Tax Appeals. Annotations Notes Editor’s notes. — Former article ten-a, concerning the multistate tax compact, was repealed by Acts 1985, c. 160. Effective dates. — Acts 2002, c. 303, provided that the act take effect June 6, 2002. Research References & Practice Aids Hierarchy Notes: W. Va. Code Ch. 11 Michie’s ™ West Virginia Code Copyright © 2015 Matthew Bender & Company, Inc., A member of the LexisNexis Group. All rights reserved. All rights reserved. EDWARD BEEBY 36 M.R.S. § 7101 Current with Legislation through the 2013 Second Regular Session of the 126th Legislature. The Second Regular Session convened January 8, 2014 and adjourned May 2, 2014. The general effective date is August 1, 2014 Maine Revised Statutes > TITLE 36. TAXATION > PART 10. INTERSTATE TAX COMPACTS > CHAPTER 920. MULTISTATE TAX COMPACT [REPEALED] §§ 7101 to 7103. Repealed. Laws 2005, c. 332, § 29 Maine Revised Statutes Annotated by LexisNexis® EDWARD BEEBY 2012 Cal SB 1015 Enacted, June 27, 2012 Reporter 2012 Cal ALS 37; 2012 Cal SB 1015; 2012 Cal Stats. ch. 37 DEERING’S CALIFORNIAADVANCE LEGISLATIVE SERVICE > 2012 REGULAR SESSION > CHAPTER 37 > (Senate Bill No. 1015) Notice Urgency legislation is effective immediately, Non-urgency legislation will become effective January 1, 2013 Added: Text highlighted in green Deleted: Red text with a strikethrough Digest Taxation: administration. (1) Existing law authorizes the state to issue a withholding order for taxes to collect a state tax liability, including any penalties, accrued interest, and costs, in accordance with certain procedures. Existing law defines ″state tax liability″ to mean an amount for which the state has a state tax lien created pursuant to specified provisions. This bill would expand the definition of ″state tax liability″ to also include any liability under the Personal Income Tax Law, the Corporation Tax Law, or specified franchise and income tax provisions that is due and payable and that is unpaid, as specified. (2) Existing laws require the Franchise Tax Board to administer specified taxes and collect those taxes from delinquent tax debtors and requires the Franchise Tax Board, in coordination with financial institutions doing business in this state, to operate a Financial Institution Record Match System utilizing automated data exchanges to the maximum extent feasible in order to allow the Franchise Tax Board to match its list of delinquent tax debtors, as defined, with the lists provided by the financial institutions. Existing law authorizes the Franchise Tax Board to disclose specified taxpayer information for purposes of data matching, and provides that the specified use of certain data is a misdemeanor. This bill would expand the definition of delinquent tax debtor to include a person liable for specified taxes, fees, surcharges, debts, penalties, interest, or other amounts required to be paid to the State Board of Equalization or paid or referred to the Employment Development Department, as provided. This bill would authorize the State Board of Equalization and the Employment Development Department to provide the Franchise Tax Board with information relating to delinquent tax debtors, would allow that information to be used in the collection of delinquent amounts under the Financial Institution Record Match System (FIRM), and would require the State Board of Equalization and the Employment Development Department to reimburse the Franchise Tax Board for its costs in the implementation and administration of FIRM. EDWARD BEEBY Page 2 of 8 2012 Cal SB 1015 By expanding the definition of an existing crime, this bill would impose a state-mandated local program. (3) Existing law has enacted the Multistate Tax Compact, which contains provisions regarding state tax laws, forms the Multistate Tax Commission, and requires the budget of the Multistate Tax Commission to be funded by party states. Existing law provides that, notwithstanding the provisions of the Multistate Tax Compact, including a provision that would allow a taxpayer to apportion its business income in accordance with a specified 3-factor formula, business income derived from or attributable to sources both within and without this state shall be apportioned between this state and other states and foreign countries in accordance with a specified 4-factor formula based on the property, payroll, and sales within and without this state, except that in the case of an apportioning trade or business that derives more than 50% of its gross business receipts from conducting one or more qualified business activities, as defined, business income is apportioned in accordance with a specified 3-factor formula. That law, for taxable years beginning on or after January 1, 2011, allows a taxpayer to apportion its income in accordance with a single sales factor formula, except as provided, pursuant to an irrevocable annual election, as specified. This bill would repeal all provisions related to the Multistate Tax Compact. This bill would find and declare that the doctrine of election provides that an election affecting the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply and once made is binding, and that the doctrine of election applies to any election that affects the computation of tax, as specified, which does not constitute a change in, but is declaratory of, existing law. This bill would also provide that the repeal of the Multistate Tax Compact in this bill shall not be construed to create any inference that a change in interpretation with respect to the compact or any reference to the compact prior to its repeal is implied by this bill. (4) This bill would appropriate $1,000 from the General Fund to the Franchise Tax Board for administrative costs. (5) The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement. This bill would provide that no reimbursement is required by this act for a specified reason. (6) This bill would declare that it is to take effect immediately as a bill providing for appropriations related to the Budget Bill. Appropriation: yes. Synopsis An act to amend Section 706.070 of the Code of Civil Procedure, and to amend Section 19266 of, and to repeal Part 18 (commencing with Section 38001) of Division 2 of, the Revenue and Taxation Code, relating to taxation, and making an appropriation therefor, to take effect immediately, bill related to the budget. EDWARD BEEBY Page 3 of 8 2012 Cal SB 1015 Text The people of the State of California do enact as follows: SECTION 1. Section 706.070 of the Code of Civil Procedure is amended to read: § 706.070. As used in this article: (a) ″State″ means the State of California and includes any officer, department, board, or agency thereof. (b) ″State tax liability″ means an amount for which the state has a state tax lien as defined in Section 7162 of the Government Code excluding a state tax lien created pursuant to the Fish and Game Code. (C) FOR PURPOSES OF AN EARNINGS WITHHOLDING ORDER FOR TAXES ISSUED BY THE FRANCHISE TAX BOARD, ″STATE TAX LIABILITY″ ALSO INCLUDES ANY LIABILITY UNDER PART 10 (COMMENCING WITH SECTION 17001), PART 10.2 (COMMENCING WITH SECTION 18401), OR PART 11 (COMMENCING WITH SECTION 23001) OF DIVISION 2 OF THE REVENUE AND TAXATION CODE THAT IS DUE AND PAYABLE WITHIN THE MEANING OF SUBDIVISION (B) OF SECTION 19221 OF THE REVENUE AND TAXATION CODE, AND UNPAID. THE AMENDMENTS TO THIS SECTION BY THE ACT ADDING THIS SUBDIVISION SHALL APPLY TO ANY AMOUNT THAT IS UNPAID ON OR AFTER THE EFFECTIVE DATE OF THAT ACT, OR ANY AMOUNT THAT FIRST BECOMES DUE AND PAYABLE, AND UNPAID, AFTER THE EFFECTIVE DATE OF THAT ACT. SEC. 2. Section 19266 of the Revenue and Taxation Code is amended to read: § 19266. (a) (1) The Franchise Tax Board, in coordination with financial institutions doing business in this state, shall operate a Financial Institution Record Match System utilizing automated data exchanges to the maximum extent feasible. (2) The Franchise Tax Board shall prescribe any rules and regulations that may be necessary or appropriate to implement this section. These rules and regulations shall include all of the following: (A) A structure by which financial institutions, or their designated data-processing agents, shall receive from the Franchise Tax Board the file or files of delinquent debtors that the institution shall match with its own list of accountholders to identify delinquent tax debtor accountholders at the institution. (B) An option by which financial institutions without the technical ability to process the data exchange, or without the ability to employ a third-party data processor to process the data exchange, may forward to the Franchise Tax Board a list of all accountholders and their social security numbers or other taxpayer identification numbers, so that the Franchise Tax Board shall match that list with the file or files EDWARD BEEBY Page 4 of 8 2012 Cal SB 1015 of delinquent tax debtors. (C) Authority for the Franchise Tax Board to exempt a financial institution from the requirements of this section if the Franchise Tax Board determines that the financial institution participation would not generate sufficient revenue to be cost effective for the Franchise Tax Board. (D) Authority for the Franchise Tax Board to temporarily suspend the requirements of this section for a financial institution if the financial institution provides the Franchise Tax Board with a written notice from its supervisory banking authority that it is determined to be undercapitalized, significantly undercapitalized, or critically undercapitalized as defined by FDIC Regulation 325.103(b)(3), (4), and (5) or NCUA Regulation 702.102. The notice provided pursuant to this subparagraph shall be subject to the protections of Section 19542. (b) The Financial Institution Record Match System shall not be subject to any limitation set forth in Chapter 20 (commencing with Section 7460) of Division 7 of Title 1 of the Government Code. However, any use of the information provided pursuant to this section for any purpose other than the collection of delinquent franchise or income tax or other debts referred to the Franchise Tax Board for collection, as imposed under Part 5 (commencing with Section 10701), Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001) AMOUNTS IDENTIFIED IN PARAGRAPHS (1), (2), AND (3) shall be a violation of Section 19542. (1) DELINQUENT AMOUNTS DUE THE BOARD, AS IMPOSED UNDER PART 1 (COMMENCING WITH SECTION 6001), PART 1.5 (COMMENCING WITH SECTION 7200), PART 1.6 (COMMENCING WITH SECTION 7251), PART 1.7 (COMMENCING WITH SECTION 7280), PART 3 (COMMENCING WITH SECTION 8601), PART 3.5 (COMMENCING WITH SECTION 9401), PART 6 (COMMENCING WITH SECTION 11201), PART 13 (COMMENCING WITH SECTION 30001), PART 14 (COMMENCING WITH SECTION 32001), PART 18.5 (COMMENCING WITH SECTION 38101), PART 19 (COMMENCING WITH SECTION 40001), PART 20 (COMMENCING WITH SECTION 41001), PART 22 (COMMENCING WITH SECTION 43001), PART 22.5 (COMMENCING WITH SECTION 44000), PART 23 (COMMENCING WITH SECTION 45001), PART 24 (COMMENCING WITH SECTION 46001), PART 26 (COMMENCING WITH SECTION 50101), PART 30 (COMMENCING WITH SECTION 55001), OR PART 31 (COMMENCING WITH SECTION 60001). (2) DELINQUENT AMOUNTS DUE THE EMPLOYMENT DEVELOPMENT DEPARTMENT, AS IMPOSED UNDER THE UNEMPLOYMENT INSURANCE CODE, OR OTHER DEBTS OR PENALTY ASSESSMENTS REFERRED TO THE EMPLOYMENT DEVELOPMENT DEPARTMENT FOR COLLECTION. (3) DELINQUENT FRANCHISE OR INCOME TAX OR OTHER DEBTS REFERRED TO THE FRANCHISE TAX BOARD FOR COLLECTION, AS IMPOSED UNDER PART 5 (COMMENCING WITH SECTION 10701), PART 10 (COMMENCING WITH SECTION 17001), PART 10.2 (COMMENCING WITH SECTION 18401), OR PART 11 (COMMENCING WITH SECTION 23001). EDWARD BEEBY Page 5 of 8 2012 Cal SB 1015 (c) (1) To effectuate the Financial Institution Record Match System, financial institutions subject to this section shall provide to the Franchise Tax Board on a quarterly basis the name, record address, and other addresses, social security number or other taxpayer identification number, and other identifying information for each delinquent tax debtor, as identified by the Franchise Tax Board by name and social security number or other taxpayer identification number, who maintains an account at the institution. (2) The first data file created by the Franchise Tax Board for purposes of matching tax debtor records to financial institution accountholder records shall be limited to 600,000 tax debtor records. The number of tax debtor records included in a subsequent data file created by the Franchise Tax Board may be increased by no more than 600,000 tax debtor records greater than the number of tax debtor records included in the immediately preceding data file until all eligible tax debtor records are included in the data match file. (d) Unless otherwise required by law, a financial institution furnishing a report or providing information to the Franchise Tax Board pursuant to this section shall not disclose to a depositor or an accountholder, or a codepositor or coaccountholder, that the name, address, social security number or other taxpayer identification number, or other identifying information of that delinquent tax debtor has been received from or furnished to the Franchise Tax Board. (e) A financial institution shall incur no obligation or liability to any person arising from any of the following: (1) Furnishing information to the Franchise Tax Board as required by this section. (2) Failing to disclose to a depositor or accountholder that the name, address, social security number or other taxpayer identification number, or other identifying information of that delinquent tax debtor was included in the data exchange with the Franchise Tax Board required by this section. (3) Any other action taken in good faith to comply with the requirements of this section. (f) The Franchise Tax Board may institute civil proceedings to enforce this section. (g) Any financial institution that willfully fails to comply with the rules and regulations promulgated by the Franchise Tax Board for the administration of delinquent tax collections, unless it is shown to the satisfaction of the Franchise Tax Board that the failure is due to reasonable cause, shall be assessed a penalty upon notice and demand of the Franchise Tax Board and collected in the same manner as tax. The penalty imposed under this section shall be in an amount equal to fifty dollars ($50) for each record not provided, but the total imposed on that financial institution for all such failures during any calendar year shall not exceed one hundred thousand dollars ($100,000). (h) For purposes of this section: (1) ″Account″ means a demand deposit account, share or share draft account, checking or negotiable withdrawal order account, savings account, time deposit account, or money market mutual fund account, regardless of whether the account bears interest. EDWARD BEEBY Page 6 of 8 2012 Cal SB 1015 (2) ″Financial institution″ means: (A) A depository institution, as defined in Section 1813(c) of Title 12 of the United States Code. (B) An institution-affiliated party, as defined in Section 1813(u) of Title 12 of the United States Code. (C) A federal credit union or state credit union, as defined in Section 1752 of Title 12 of the United States Code, including an institution-affiliated party of a credit union, as defined in Section 1786(r) of Title 12 of the United States Code. (D) A benefit association, insurance company, safe deposit company, money-market fund, or similar entity authorized to do business in this state. (3) ″Delinquent tax debtor″ means any OF THE FOLLOWING: (A) ANY PERSON LIABLE FOR ANY TAX, FEE, OR SURCHARGE AMOUNTS, AND ANY PENALTY, INTEREST, OR OTHER AMOUNTS REQUIRED TO BE PAID TO THE BOARD, WHERE THE LIABILITY REMAINS UNPAID AFTER 30 DAYS FROM DEMAND FOR PAYMENT BY THE BOARD, AND THE PERSON IS NOT MAKING CURRENT TIMELY INSTALLMENT PAYMENTS ON THE LIABILITY UNDER AN INSTALLMENT PAYMENT AGREEMENT AS PROVIDED BY LAW. (B) ANY PERSON LIABLE FOR ANY AMOUNTS REQUIRED TO BE PAID TO THE EMPLOYMENT DEVELOPMENT DEPARTMENT OR FOR ANY DEBTS OR PENALTY ASSESSMENTS REFERRED TO THE EMPLOYMENT DEVELOPMENT DEPARTMENT FOR COLLECTION AND THE PERSON IS NOT MAKING CURRENT TIMELY INSTALLMENT PAYMENTS ON THE LIABILITY UNDER AN APPROVED INSTALLMENT PAYMENT AGREEMENT AS PROVIDED BY LAW. (C) ANY person liable for any income or franchise tax or other debt referred to the Franchise Tax Board for collection as imposed under Part 5 (commencing with Section 10701), Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), or Part 11 (commencing with Section 23001), including tax, penalties, interest, and fees, where the tax or debt, including the amount, if any, referred to the Franchise Tax Board for collection remains unpaid after 30 days from demand for payment by the Franchise Tax Board, and the person is not making current timely installment payments on the liability under an agreement pursuant to Section 19006 19008 . (i) A financial institution shall be reimbursed by the Franchise Tax Board for actual costs incurred to implement the provisions of this section. Upon receipt of an invoice from the financial institution, cost reimbursement by the Franchise Tax Board shall be limited to the following: (1) For one-time startup costs of a financial institution, no more than two thousand five hundred dollars ($2,500). (2) For data matching costs of a financial institution, other than one-time startup costs, no more than two hundred fifty dollars ($250) per calendar quarter. (j) The first data exchange for purposes of matching tax debtor records to financial institution EDWARD BEEBY Page 7 of 8 2012 Cal SB 1015 accountholder records shall occur no earlier than April 1, 2012. (k) This section shall be operative 120 days after the effective date of the act adding this section and shall apply with respect to persons that are delinquent tax debtors on and after that date. (1) NOTWITHSTANDING ANY OTHER PROVISION OF LAW, ON OR AFTER JANUARY 1, 2013, AND ON A QUARTERLY BASIS THEREAFTER, THE BOARD AND THE EMPLOYMENT DEVELOPMENT DEPARTMENT SHALL, IN THE FORMAT AND MANNER SPECIFIED BY THE FRANCHISE TAX BOARD, PROVIDE THEIR RESPECTIVE DELINQUENT TAX DEBTOR INFORMATION TO THE FRANCHISE TAX BOARD FOR INCLUSION IN THE FINANCIAL INSTITUTIONS RECORDS MATCH SYSTEM. (2) THE FRANCHISE TAX BOARD SHALL INCLUDE THE DELINQUENT TAX DEBTOR INFORMATION PROVIDED BY THE BOARD AND THE EMPLOYMENT DEVELOPMENT DEPARTMENT IN ITS DATA FILE USED TO MATCH DELINQUENT TAX DEBTOR RECORDS TO FINANCIAL INSTITUTION ACCOUNTHOLDER RECORDS. (3) THE FRANCHISE TAX BOARD SHALL PROVIDE THE BOARD OR THE EMPLOYMENT DEVELOPMENT DEPARTMENT, AS APPLICABLE, WITH ANY MATCHED FINANCIAL INSTITUTION ACCOUNTHOLDER RECORD INFORMATION RESULTING FROM THE DELINQUENT TAX DEBTOR INFORMATION PROVIDED BY THE BOARD OR THE EMPLOYMENT DEVELOPMENT DEPARTMENT. (4) THE BOARD AND THE EMPLOYMENT DEVELOPMENT DEPARTMENT SHALL REIMBURSE THE FRANCHISE TAX BOARD FOR ANY COSTS INCURRED BY THE FRANCHISE TAX BOARD RELATED TO THE IMPLEMENTATION AND ADMINISTRATION OF THIS SECTION WITH RESPECT TO DELINQUENT TAX DEBTORS DESCRIBED IN SUBPARAGRAPH (A) OR (B), RESPECTIVELY, OF PARAGRAPH (3) OF SUBDIVISION (H). SEC. 3. Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code is repealed. SEC. 4. The Legislature finds and declares the following: (a) The doctrine of election (see generally Pacific Nat. Co. v. Welch (1938) 304 U.S. 191), provides that an election affecting the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply and once made is binding. (b) The doctrine of election described in subdivision (a) applies to any election that affects the computation of tax under Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of Division 2 of the Revenue and Taxation Code, unless otherwise provided. (c) Subdivision (b) does not constitute a change in, but is declaratory of, existing law. SEC. 5. The repeal of Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code in Section 3 of this act shall not be construed to create any inference that a change in EDWARD BEEBY Page 8 of 8 2012 Cal SB 1015 interpretation with respect to that part, or any reference to that part, prior to its repeal is implied by this act. SEC. 6. There is hereby appropriated one thousand dollars ($1,000) from the General Fund to the Franchise Tax Board for administrative costs. SEC. 7. No reimbursement is required by this act pursuant to Section 6 of Article XIII B of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code, or changes the definition of a crime within the meaning of Section 6 of Article XIII B of the California Constitution. SEC. 8. This act is a bill providing for appropriations related to the Budget Bill within the meaning of subdivision (e) of Section 12 of Article IV of the California Constitution, has been identified as related to the budget in the Budget Bill, and shall take effect immediately. History Approved by Governor June 27, 2012. Filed with Secretary of State June 27, 2012. DEERING’S CALIFORNIA ADVANCE LEGISLATIVE SERVICE Copyright © 2015 Matthew Bender & Company, Inc. a member of the LexisNexis Group. All rights reserved. EDWARD BEEBY Checkpoint Contents State & Local Tax Library State Legislation Prior Legislative Sessions 2013 Full Text of Prior Enacted Legislation Minnesota House 2013 MN H 6 - 2013 MN H 1444 2013 MN H 677, Adopted 2013 Minnesota House File No. 677, Minnesota First Regular Session of the Eighty-Eighth Legislative Session TITLE: Omnibus Tax Bill. Author: Lenczewski, Skoe Version: Adopted Version date: 20130523 Changes are annotated clearly to make it easy to review modifications. See the color scheme listed below. A. [D] Text Deleted [D] B. [A] Text Added [A] C. [V] Text Vetoed [V] Full Text TEXT: Minnesota Office of the Revisor of Statutes HF 677 4th Engrossment - 88th Legislature (2013 - 2014) Posted on 05/21/2013 02:49pm Bill Text Versions Engrossments Introduction Pdf Posted on 02/21/2013 1st Engrossment Pdf Posted on 04/18/2013 2nd Engrossment Pdf Posted on 04/20/2013 3rd Engrossment Pdf Posted on 04/24/2013 4th Engrossment Pdf Posted on 05/21/2013 Unofficial Engrossments 1st Unofficial Engrossment Pdf Posted on 04/30/2013 Conference Committee Reports LS88-CCR-HF0677 Pdf Posted on 05/19/2013 A bill for an act relating to financing and operation of state and local government; making changes to individual income, corporate franchise, property, sales and use, estate, mineral, tobacco, alcohol, special, local, and other taxes and tax-related provisions modifying the property tax refund; changing property tax aids and credits; modifying the Sustainable Forest Incentive Act; modifying education aids and levies; providing additional pension funding; modifying definitions and distributions for property taxes; providing for property tax exemptions; modifying the payment in lieu of tax provisions; modifying education aids and levies; modifying tobacco tax provisions; making changes to additions and subtractions from federal taxable income; providing for federal conformity; changing income tax rates for individuals, estates, and trusts; providing income tax credits; modifying estate tax provisions; providing for a state gift tax; expanding the sales tax base; modifying the duty to collect and remit sales taxes for certain sellers; imposing the sales tax on digital products and selected services; modifying the definition of sale and purchase; modifying provisions for the rental motor vehicle tax rate; providing for multiple points of use certificates; modifying sales tax exemptions; authorizing local sales taxes; authorizing economic development powers; modifying tax increment financing rules; providing authority, organization, powers, duties, and requiring a prevailing wage for development of a Destination Medical Center; authorizing state infrastructure aid; modifying the distribution of taconite production taxes; authorizing taconite production tax bonds for grants to school districts; modifying and providing provisions for public finance; providing funding for legislative office facilities; modifying the definition of market value for tax, debt, and other purposes; making conforming, policy, and technical changes to tax provisions; requiring studies and reports; appropriating money;amending Minnesota Statutes 2012, sections 13.792; 16A.46; 16A.727; 38.18; 40A.15, subdivision 2; 69.011, subdivision 1; 69.021, subdivisions 7, 8; 88.51, subdivision 3; 103B.102 , subdivision 3; 103B.245 , subdivision 3; 103B.251 , subdivision 8; 103B.335 ; 103B.3369 , subdivision 5; 103B.635 , subdivision 2; 103B.691 , subdivision 2; 103C.501 , subdivision 4; 103D.905 , subdivisions 2, 3, 8; 103F.405 , subdivision 1; 116J.8737 , subdivisions 1, 2, 8; 117.025 , subdivision 7; 118A.04 , subdivision 3; 118A.05 , subdivision 5; 123A.455 , subdivision 1; 126C.10 , subdivision 1, by adding a subdivision; 126C.13 , subdivision 4; 126C.17 ; 126C.48 , subdivision 8; 127A.48 , subdivision 1; 138.053 ; 144F.01 , subdivision 4; 162.07 , subdivisions 3, 4; 163.04 , subdivision 3; 163.06 , subdivision 6; 165.10 , subdivision 1; 168.012 , subdivision 9, by adding a subdivision; 216C.436 , subdivision 7; 237.52 , subdivision 3, by adding a subdivision; 270.077 ; 270.41 , subdivisions 3, 5, by adding a subdivision; 270.45 ; 270B.01 , subdivision 8; 270B.03 , subdivision 1; 270B.12 , subdivision 4; 270C.03 , subdivision 1; 270C.34 , subdivision 1; 270C.38 , subdivision 1; 270C.42 , subdivision 2; 270C.56 , subdivision 1; 271.06 , subdivision 2a, as added; 272.01 , subdivision 2; 272.02 , subdivisions 39, 97, by adding subdivisions; 272.03 , subdivision 9, by adding subdivisions; 273.032 ; 273.061 , subdivision 2; 273.0645 ; 273.11 , subdivision 1; 273.114 , subdivision 6; 273.117 ; 273.124 , subdivisions 3a, 13; 273.13 , subdivisions 21b, 23, 25; 273.1398 , subdivisions 3, 4; 273.19 , subdivision 1; 273.372 , subdivision 4; 273.39 ; 275.011 , subdivision 1; 275.077 , subdivision 2; 275.71 , subdivision 4; 276.04 , subdivision 2; 276A.01 , subdivisions 10, 12, 13, 15; 276A.06 , subdivision 10; 279.01 , subdivision 1, by adding a subdivision; 279.02 ; 279.06 , subdivision 1; 279.37 , subdivisions 1a, 2; 281.14 ; 281.17 ; 287.05 , by adding a subdivision; 287.08 ; 287.20 , by adding a subdivision; 287.23 , subdivision 1; 287.385 , subdivision 7; 289A.08 , subdivision 3; 289A.10 , subdivision 1, by adding a subdivision; 289A.12 , subdivision 14, by adding a subdivision; 289A.18 , by adding a subdivision; 289A.20 , subdivisions 3, 4, by adding a subdivision; 289A.26 , subdivisions 3, 4, 7, 9; 289A.55 , subdivision 9; 289A.60 , subdivision 4; 290.01 , subdivisions 19, as amended, 19b, 19c, 19d; 290.06 , subdivisions 2c, 2d, by adding a subdivision; 290.0677 , subdivision 2; 290.068 , subdivisions 3, 6a; 290.0681 , subdivisions 1, 3, 4, 5, 10; 290.091 , subdivisions 1, 2, 6; 290.0921 , subdivision 3; 290.0922 , subdivision 1; 290.095 , subdivision 2; 290.10 , subdivision 1; 290.17 , subdivision 4; 290.191 , subdivision 5; 290.21 , subdivision 4; 290.9705 , subdivision 1; 290A.03 , subdivision 3; 290A.04 , subdivisions 2, 2a, 4; 290B.04 , subdivision 2; 290C.02 , subdivision 6; 290C.03 ; 290C.055 ; 290C.07 ; 291.005 , subdivision 1; 291.03 , subdivisions 1, 8, 9, 10, 11, by adding a subdivision; 296A.01 , subdivisions 7, 8, 14, 19, 20, 23, 24, 26, by adding a subdivision; 296A.09 , subdivision 2; 296A.17 , subdivision 3; 296A.22 , subdivisions 1, 3; 297A.61 , subdivisions 3, 4, 10, 25, 38, 45, by adding subdivisions; 297A.64 , subdivision 1; 297A.66 , subdivision 3, by adding a subdivision; 297A.665 ; 297A.668 , by adding a subdivision; 297A.67 , subdivisions 7, 13, by adding a subdivision; 297A.68 , subdivisions 2, 5, 42, by adding a subdivision; 297A.70 , subdivisions 2, 4, 5, 7, 13, 14, by adding subdivisions; 297A.71 , by adding subdivisions; 297A.75 , subdivisions 1, 2, 3; 297A.82 , subdivision 4, by adding a subdivision; 297A.99 , subdivision 1; 297B.11 ; 297E.021 , subdivision 3; 297E.14 , subdivision 7; 297F.01 , subdivisions 3, 19, 23, by adding subdivisions; 297F.05 , subdivisions 1, 3, 4, by adding subdivisions; 297F.09 , subdivision 9; 297F.18 , subdivision 7; 297F.24 , subdivision 1; 297F.25 , subdivision 1; 297G.04 , subdivision 2; 297G.09 , subdivision 8; 297G.17 , subdivision 7; 297I.05 , subdivisions 7, 11, 12; 297I.30 , subdivisions 1, 2; 297I.80 , subdivision 1; 298.01 , subdivisions 3, 3b; 298.018 ; 298.17 ; 298.227 , as amended; 298.24 , subdivision 1; 298.28 , subdivisions 4, 6, 9c, 10; 325D.32 , subdivision 2; 325F.781 , subdivision 1; 349.166 , subdivision 1; 353G.08 , subdivision 2; 360.531 ; 360.66 ; 365.025 , subdivision 4; 366.095 , subdivision 1; 366.27 ; 368.01 , subdivision 23; 368.47 ; 370.01 ; 373.01 , subdivisions 1, 3; 373.40 , subdivisions 1, 2, 4; 375.167 , subdivision 1; 375.18 , subdivision 3; 375.555 ; 383A.80 , subdivision 4; 383B.152 ; 383B.245 ; 383B.73 , subdivision 1; 383B.80 , subdivision 4; 383D.41 , by adding a subdivision; 383E.20 ; 383E.23 ; 385.31 ; 394.36 , subdivision 1; 398A.04 , subdivision 8; 401.05 , subdivision 3; 403.02 , subdivision 21, by adding subdivisions; 403.06 , subdivision 1a; 403.11 , subdivision 1, by adding subdivisions; 410.32 ; 412.221 , subdivision 2; 412.301 ; 428A.02 , subdivision 1; 428A.101 ; 428A.21 ; 430.102 , subdivision 2; 447.10 ; 450.19 ; 450.25 ; 458A.10 ; 458A.31 , subdivision 1; 465.04 ; 469.033 , subdivision 6; 469.034 , subdivision 2; 469.053 , subdivisions 4, 4a, 6; 469.071 , subdivision 5; 469.107 , subdivision 1; 469.169 , by adding a subdivision; 469.176 , subdivisions 4c, 4g, 6; 469.177 , subdivisions 1a, 9, by adding subdivisions; 469.180 , subdivision 2; 469.187 ; 469.206 ; 469.319 , subdivision 4; 469.340 , subdivision 4; 471.24 ; 471.571 , subdivisions 1, 2; 471.73 ; 473.325 , subdivision 2; 473.39 , by adding a subdivision; 473.606 , subdivision 3; 473.629 ; 473.661 , subdivision 3; 473.667 , subdivision 9; 473.671 ; 473.711 , subdivision 2a; 473F.02 , subdivisions 12, 14, 15, 23; 473F.08 , subdivisions 3a, 10, by adding a subdivision; 474A.04 , subdivision 1a; 474A.062 ; 474A.091 , subdivision 3a; 475.521 , subdivisions 1, 2, 4; 475.53 , subdivisions 1, 3, 4; 475.58 , subdivisions 2, 3b; 475.73 , subdivision 1; 477A.011 , subdivisions 20, 30, 34, 42, by adding subdivisions; 477A.0124 , subdivision 2; 477A.013 , subdivisions 1, 8, 9, by adding a subdivision; 477A.015 ; 477A.03 , subdivisions 2a, 2b, by adding a subdivision; 477A.11 , subdivisions 3, 4, by adding subdivisions; 477A.12 , subdivisions 1, 2, 3; 477A.14 , subdivision 1, by adding a subdivision; 641.23 ; 641.24 ; 645.44 , by adding a subdivision; Laws 1971, chapter 773, section 1, subdivision 2, as amended; Laws 1988, chapter 645, section 3, as amended; Laws 1993, chapter 375, article 9, section 46, subdivisions 2, as amended, 5, as amended; Laws 1998, chapter 389, article 8, section 43, subdivisions 1, 3, as amended, 5, as amended; Laws 1999, chapter 243, article 6, section 11; Laws 2002, chapter 377, article 3, section 25, as amended; Laws 2005, First Special Session chapter 3, article 5, section 37, subdivisions 2, 4; Laws 2006, chapter 259, article 11, section 3, as amended; Laws 2008, chapter 366, article 5, sections 26; 33; 34, as amended; article 7, section 19, subdivision 3, as amended; Laws 2009, chapter 88, article 2, section 46, subdivisions 1, 3; Laws 2010, chapter 216, sections 11; 55; Laws 2010, chapter 389, article 1, section 12; article 5, section 6, subdivision 6; proposing coding for new law in Minnesota Statutes, chapters 116J; 116V; 124D; 136A; 270C; 287; 290A; 292; 403; 423A; 469; 477A; repealing Minnesota Statutes 2012, sections 16A.725; 97A.061; 256.9658 ; 272.69 ; 273.11 , subdivisions 1a, 22; 276A.01 , subdivision 11; 289A.60 , subdivision 31; 290.01 , subdivision 6b; 290.06 , subdivision 22a; 290.0921 , subdivision 7; 290.171 ; 290.173 ; 290.174 ; 297A.61 , subdivision 27; 297A.68 , subdivision 35; 473F.02 , subdivision 13; 477A.011 , subdivisions 2a, 19, 21, 29, 31, 32, 33, 36, 39, 40, 41; 477A.013 , subdivisions 11, 12; 477A.0133 ; 477A.0134 ; Laws 1973, chapter 567, section 7, as amended; Laws 2009, chapter 88, article 4, section 23, as amended. BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: ARTICLE 1 HOMESTEAD CREDIT REFUND AND RENTER PROPERTY TAX REFUND Section 1. AMEND Minnesota Statutes 2012, section 290A.03, subdivision 3 , is amended to read: Subd. 3. Income. (1) "Income" means the sum of the following: (a) federal adjusted gross income as defined in the Internal Revenue Code; and (b) the sum of the following amounts to the extent not included in clause (a): (i) all nontaxable income; (ii) the amount of a passive activity loss that is not disallowed as a result of section 469, paragraph (i) or (m) of the Internal Revenue Code and the amount of passive activity loss carryover allowed under section 469(b) of the Internal Revenue Code; (iii) an amount equal to the total of any discharge of qualified farm indebtedness of a solvent individual excluded from gross income under section 108(g) of the Internal Revenue Code; (iv) cash public assistance and relief; (v) any pension or annuity (including railroad retirement benefits, all payments received under the federal Social Security Act, Supplemental Security Income, and veterans benefits), which was not exclusively funded by the claimant or spouse, or which was funded exclusively by the claimant or spouse and which funding payments were excluded from federal adjusted gross income in the years when the payments were made; (vi) interest received from the federal or a state government or any instrumentality or political subdivision thereof; (vii) workers' compensation; (viii) nontaxable strike benefits; (ix) the gross amounts of payments received in the nature of disability income or sick pay as a result of accident, sickness, or other disability, whether funded through insurance or otherwise; (x) a lump-sum distribution under section 402(e)(3) of the Internal Revenue Code of 1986, as amended through December 31, 1995; (xi) contributions made by the claimant to an individual retirement account, including a qualified voluntary employee contribution; simplified employee pension plan; self-employed retirement plan; cash or deferred arrangement plan under section 401(k) of the Internal Revenue Code; or deferred compensation plan under section 457 of the Internal Revenue Code [A>, to the extent the sum of amounts exceeds the retirement base amount for the claimant and spouse to the extent not included in federal adjusted gross income, distributions received by the claimant or spouse from a traditional or Roth style retirement account or plan; (xiii) (xiii) (xiv) (xiv) (xv) (xv) (xvi) of deducted for required to be added to income under section 290.01, subdivision 19 a , clause (12); under section 222 of the Internal Revenue Code; and (xvi) (xvii) ; and . (xvii) unemployment compensation. to the extent included in federal adjusted gross income, amounts contributed by the claimant or spouse to a traditional or Roth style retirement account or plan, but not to exceed the retirement base amount reduced by the amount of contributions excluded from federal adjusted gross income, but not less than zero; (d) (d) (e) (e) (f) (f) (g) ; "retirement base amount" means the deductible amount for the taxable year for the claimant and spouse under section 219(b)(5)(A) of the Internal Revenue Code, adjusted for inflation as provided in section 219(b)(5)(D) of the Internal Revenue Code, without regard to whether the claimant or spouse claimed a deduction; and "traditional or Roth style retirement account or plan" means retirement plans under sections 401, 403, 408, 408A, and 457 of the Internal Revenue Code EFFECTIVE DATE. This section is effective beginning with refunds based on property taxes payable in 2014 and rent paid in 2013. ; homestead credit refund Household Income Percent of Income Percent Paid by Claimant Maximum State Refund $0 to 1,549 1.0 percent 15 percent $ 2,460 1,550 to 3,089 1.1 percent 15 percent $ 2,460 3,090 to 4,669 1.2 percent 15 percent $ 2,460 4,670 to 6,229 1.3 percent 20 percent $ 2,460 6,230 to 7,769 1.4 percent 20 percent $ 2,460 7,770 to 10,879 1.5 percent 20 percent $ 2,460 10,880 to 12,429 1.6 percent 20 percent $ 2,460 12,430 to 13,989 1.7 percent 20 percent $ 2,460 13,990 to 15,539 1.8 percent 20 percent $ 2,460 15,540 to 17,079 1.9 percent 25 percent $ 2,460 17,080 to 18,659 2.0 percent 25 percent $ 2,460 18,660 to 21,759 2.1 percent 25 percent $ 2,460 21,760 to 23,309 2.2 percent 30 percent $ 2,460 23,310 to 24,859 2.3 percent 30 percent $ 2,460 24,860 to 26,419 2.4 percent 30 percent $ 2,460 26,420 to 32,629 2.5 percent 35 percent $ 2,460 32,630 to 37,279 2.6 percent 35 percent $ 2,460 37,280 to 46,609 2.7 percent 35 percent $ 2,000 46,610 to 54,369 2.8 percent 35 percent $ 2,000 54,370 to 62,139 2.8 percent 40 percent $ 1,750 62,140 to 69,909 3.0 percent 40 percent $ 1,440 69,910 to 77,679 3.0 percent 40 percent $ 1,290 77,680 to 85,449 3.0 percent 40 percent $ 1,130 85,450 to 90,119 3.5 percent 45 percent $ 960 90,120 to 93,239 3.5 percent 45 percent $ 790 93,240 to 97,009 3.5 percent 50 percent $ 650 97,010 to 100,779 3.5 percent 50 percent $ 480 Household Income Percent of Income Percent Paid by Claimant Maximum State Refund $0 to 1,619 1.0 percent 15 percent $ 2,580 1,620 to 3,229 1.1 percent 15 percent $ 2,580 3,230 to 4,889 1.2 percent 15 percent $ 2,580 4,890 to 6,519 1.3 percent 20 percent $ 2,580 6,520 to 8,129 1.4 percent 20 percent $ 2,580 8,130 to 11,389 1.5 percent 20 percent $ 2,580 11,390 to 13,009 1.6 percent 20 percent $ 2,580 13,010 to 14,649 1.7 percent 20 percent $ 2,580 14,650 to 16,269 1.8 percent 20 percent $ 2,580 16,270 to 17,879 1.9 percent 25 percent $ 2,580 17,880 to 22,779 2.0 percent 25 percent $ 2,580 22,780 to 24,399 2.0 percent 30 percent $ 2,580 24,400 to 27,659 2.0 percent 30 percent $ 2,580 27,660 to 39,029 2.0 percent 35 percent $ 2,580 39,030 to 56,919 2.0 percent 35 percent $ 2,090 56,920 to 65,049 2.0 percent 40 percent $ 1,830 65,050 to 73,189 2.1 percent 40 percent $ 1,510 73,190 to 81,319 2.2 percent 40 percent $ 1,350 81,320 to 89,449 2.3 percent 40 percent $ 1,180 89,450 to 94,339 2.4 percent 45 percent $ 1,000 94,340 to 97,609 2.5 percent 45 percent $ 830 97,610 to 101,559 2.5 percent 50 percent $ 680 101,560 to 105,499 2.5 percent 50 percent $ 500 $100,780 $105,500 EFFECTIVE DATE. This section is effective for refund claims based on taxes payable in 2014 and thereafter. $0 to 3,589 1.0 percent 5 percent $ 1,190 3,590 to 4,779 1.0 percent 10 percent $ 1,190 4,780 to 5,969 1.1 percent 10 percent $ 1,190 5,970 to 8,369 1.2 percent 10 percent $ 1,190 8,370 to 10,759 1.3 percent 15 percent $ 1,190 10,760 to 11,949 1.4 percent 15 percent $ 1,190 11,950 to 13,139 1.4 percent 20 percent $ 1,190 13,140 to 15,539 1.5 percent 20 percent $ 1,190 15,540 to 16,729 1.6 percent 20 percent $ 1,190 16,730 to 17,919 1.7 percent 25 percent $ 1,190 17,920 to 20,319 1.8 percent 25 percent $ 1,190 20,320 to 21,509 1.9 percent 30 percent $ 1,190 21,510 to 22,699 2.0 percent 30 percent $ 1,190 22,700 to 23,899 2.2 percent 30 percent $ 1,190 23,900 to 25,089 2.4 percent 30 percent $ 1,190 25,090 to 26,289 2.6 percent 35 percent $ 1,190 26,290 to 27,489 2.7 percent 35 percent $ 1,190 27,490 to 28,679 2.8 percent 35 percent $ 1,190 28,680 to 29,869 2.9 percent 40 percent $ 1,190 29,870 to 31,079 3.0 percent 40 percent $ 1,190 31,080 to 32,269 3.1 percent 40 percent $ 1,190 32,270 to 33,459 3.2 percent 40 percent $ 1,190 33,460 to 34,649 3.3 percent 45 percent $ 1,080 34,650 to 35,849 3.4 percent 45 percent $ 960 35,850 to 37,049 3.5 percent 45 percent $ 830 37,050 to 38,239 3.5 percent 50 percent $ 720 38,240 to 39,439 3.5 percent 50 percent $ 600 38,440 to 40,629 3.5 percent 50 percent $ 360 40,630 to 41,819 3.5 percent 50 percent $ 120 $0 to 4,909 1.0 percent 5 percent $ 2,000 4,910 to 6,529 1.0 percent 10 percent $ 2,000 6,530 to 8,159 1.1 percent 10 percent $ 1,950 8,160 to 11,439 1.2 percent 10 percent $ 1,900 11,440 to 14,709 1.3 percent 15 percent $ 1,850 14,710 to 16,339 1.4 percent 15 percent $ 1,800 16,340 to 17,959 1.4 percent 20 percent $ 1,750 17,960 to 21,239 1.5 percent 20 percent $ 1,700 21,240 to 22,869 1.6 percent 20 percent $ 1,650 22,870 to 24,499 1.7 percent 25 percent $ 1,650 24,500 to 27,779 1.8 percent 25 percent $ 1,650 27,780 to 29,399 1.9 percent 30 percent $ 1,650 29,400 to 34,299 2.0 percent 30 percent $ 1,650 34,300 to 39,199 2.0 percent 35 percent $ 1,650 39,200 to 45,739 2.0 percent 40 percent $ 1,650 45,740 to 47,369 2.0 percent 45 percent $ 1,500 47,370 to 49,009 2.0 percent 45 percent $ 1,350 49,010 to 50,649 2.0 percent 45 percent $ 1,150 50,650 to 52,269 2.0 percent 50 percent $ 1,000 52,270 to 53,909 2.0 percent 50 percent $ 900 53,910 to 55,539 2.0 percent 50 percent $ 500 55,540 to 57,169 2.0 percent 50 percent $ 200 $41,820 $57,170 EFFECTIVE DATE. This section is effective for claims based on rent paid in 2013 and following years. 2011 2013 2000 2013 EFFECTIVE DATE. This section is effective for refund claims based on taxes payable in 2014 and rent paid in 2013 and following years. [290A.28 ] NOTIFICATION OF POTENTIAL ELIGIBILITY. Subdivision 1. Notification of eligibility. (a) By September 1, 2014, the commissioner shall notify, in writing or electronically, individual homeowners whom the commissioner determines may be eligible for a homestead credit refund under this chapter for that property taxes payable year as provided in this section. In determining whether to notify a homeowner, the commissioner shall consider the property tax information available to the commissioner under paragraph (b) for the homeowner and must estimate the homeowner's household income using the most recent income information available to the commissioner from filing under this chapter for the prior year, under chapter 290 for the current or prior year, and any other income information available to the commissioner. For each homeowner, the commissioner must estimate the homestead credit refund amount under the schedule in section 290A.04, subdivision 2 , using the homeowner's property tax amount and estimated household income. If the estimated homestead credit refund is at least $1,000, the commissioner must notify the homeowner of potential eligibility for the homestead credit refund. The notification must include information on how to file for the homestead credit refund. The notification requirement under this section does not apply to a homeowner who has already filed for the homestead credit refund for the current or prior year. (b) By May 15, 2014, each county auditor shall transmit to the commissioner of revenue the following information for each property classified as a residential or agricultural homestead under section 273.13, subdivision 22 or 23: (1) the property taxes payable; (2) the name and address of the owner; (3) the Social Security number or numbers of the owners; and (4) any other information the commissioner deems necessary or useful to carry out the provisions of this section. The information must be provided in the form and manner prescribed by the commissioner. Subd. 2. Reports. (a) By March 15, 2015, the commissioner must provide a written report to the chairs and ranking minority members of the legislative committees with jurisdiction over taxes, in compliance with sections 3.195 and 3.197. The report must provide information on the number and dollar amount of homeowner property tax refund claims based on taxes payable in 2014, including: (1) the number and dollar amount of claims projected for homestead credit refunds based on taxes payable in 2014 prior to enactment of the notification requirement in this section; (2) the number of notifications issued as provided in this section, including the number issued by county; (3) preliminary information on the number and dollar amount of claims for homestead credit refunds based on taxes payable in 2014; and (4) a description of any outreach efforts undertaken by the commissioner for homestead credit refunds based on taxes payable in 2014, in addition to the notification required in this section. (b) By February 1, 2016, the commissioner must provide a written report to the chairs and ranking minority members of the legislative committees with jurisdiction over taxes, in compliance with sections 3.195 and 3.197. The report must include the information required in paragraph (a) and must also include final information on the number and dollar amount of claims for homestead credit refunds based on taxes payable in 2014. EFFECTIVE DATE. This section is effective for refund claims based on property taxes payable in 2014. 2.3 1.9 2.3 1.9 EFFECTIVE DATE. This section is effective beginning with taxes payable in 2014. or land exceeding 60,000 acres that is subject to a single conservation easement funded under section 97A.056 or a comparable permanent easement conveyed to a governmental or nonprofit entity; (iv) any land that becomes subject to a conservation easement funded under section 97A.056 or a comparable permanent easement conveyed to a governmental or nonprofit entity after May 30, 2013; or (v) EFFECTIVE DATE. This section is effective for certifications and applications due in 2013 and thereafter. and motorized access on established and maintained roads and trails, unless the road or trail is temporarily closed for safety, natural resource, or road damage reasons EFFECTIVE DATE. This section is effective for calculations made in 2013 and thereafter. (a) (b) (c) : (1) ; or (2) at the request of the claimant after a reduction in payments due to changes in the payment formula under section 290C.07 EFFECTIVE DATE. This section is effective for calculations made in 2013 and thereafter. (a) (b) The annual payment for each Social Security number or state or federal business tax identification number must not exceed $100,000. EFFECTIVE DATE. This section is effective for calculations made in 2013 and thereafter. [423A.022 ] POLICE AND FIREFIGHTER RETIREMENT SUPPLEMENTAL STATE AID. Subdivision 1. Supplemental state aid. Annually, the commissioner of revenue shall allocate police and firefighter retirement supplemental state aid appropriated under subdivision 6 as provided in subdivision 2 and paid as provided in subdivision 4. Subd. 2. Allocation. Of the total amount appropriated as supplemental state aid: (1) 58.065 percent must be paid to the executive director of the Public Employees Retirement Association for deposit in the public employees police and fire retirement fund established by section 353.65, subdivision 1 ; (2) 35.484 percent must be paid to municipalities other than municipalities solely employing firefighters with retirement coverage provided by the public employees police and fire retirement plan which qualified to receive fire state aid in that calendar year, allocated in proportion to the most recent amount of fire state aid paid under section 69.021, subdivision 7 , for the municipality bears to the most recent total fire state aid for all municipalities other than the municipalities solely employing firefighters with retirement coverage provided by the public employees police and fire retirement plan paid undersection 69.021, subdivision 7 , with the allocated amount for fire departments participating in the voluntary statewide lump-sum volunteer firefighter retirement plan paid to the executive director of the Public Employees Retirement Association for deposit in the fund established by section 353G.02, subdivision 3 , and credited to the respective account and with the balance paid to the treasurer of each municipality for transmittal within 30 days of receipt to the treasurer of the applicable volunteer firefighter relief association for deposit in its special fund; and (3) 6.452 percent must be paid to the executive director of the Minnesota State Retirement System for deposit in the state patrol retirement fund. Subd. 3. Reporting; definitions. (a) On or before September 1, annually, the executive director of the Public Employees Retirement Association shall report to the commissioner of revenue the following: (1) the municipalities which employ firefighters with retirement coverage by the public employees police and fire retirement plan; (2) the number of firefighters with public employees police and fire retirement plan coverage employed by each municipality; (3) the fire departments covered by the voluntary statewide lump-sum volunteer firefighter retirement plan; and (4) any other information requested by the commissioner to administer the police and firefighter retirement supplemental state aid program. (b) For this subdivision, (i) the number of firefighters employed by a municipality who have public employees police and fire retirement plan coverage means the number of firefighters with public employees police and fire retirement plan coverage that were employed by the municipality for not less than 30 hours per week for a minimum of six months prior to December 31 preceding the date of the payment under this section and, if the person was employed for less than the full year, prorated to the number of full months employed; and (ii) the number of active police officers certified for police state aid receipt under section 69.011, subdivisions 2 and 2b, means, for each municipality, the number of police officers meeting the definition of peace officer in section 69.011, subdivision 1 , counted as provided and limited by section 69.011, subdivisions 2 and 2b. Subd. 4. Payments; conditions prerequisite. (a) The payments under this section must be made on October 1 each year, with interest at one percent for each month, or portion of a month, that the amount remains unpaid after October 1. Any necessary adjustments must be made to subsequent payments. (b) The provisions of sections 69.011 to 69.051 that prevent municipalities and relief associations from being eligible for, or receiving fire state aid under sections 69.011 to 69.051 until the applicable financial reporting requirements have been complied with, apply to the amounts payable to municipalities and relief associations under this section. Subd. 5. Aid termination. The aid program under this section ends on the December 1 next following the actuarial valuation date on which the assets of the retirement plan on a market value basis equals or exceeds 90 percent of the total actuarial accrued liabilities of the retirement plan as disclosed in an actuarial valuation prepared under section 356.215 and the Standards for Actuarial Work promulgated by the Legislative Commission on Pensions and Retirement, for the State Patrol retirement plan or the public employees police and fire retirement plan, whichever occurs last. Subd. 6. Appropriation. $15,500,000 is appropriated annually to the commissioner of revenue for this aid program. EFFECTIVE DATE. This section is effective beginning in the fiscal year beginning July 1, 2013. (a) Except as provided in paragraph (b), federal census by the United States Bureau of the Census For aids payable in 2014, "pre-1940 housing percentage" shall be based on 2010 housing data. (b) For the city of East Grand Forks only, "pre-1940 housing percentage" is equal to 100 times the 1990 federal census count of all housing units in the city built before 1940, divided by the most recent count by the United States Bureau of the Census of all housing units in the city. Housing units includes both occupied and vacant housing units as defined by the federal census. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 30a. Percent of housing built between 1940 and 1970. " Percent of housing built between 1940 and 1970" is equal to 100 times the most recent count by the United States Bureau of the Census of all housing units in the city built after 1939 but before 1970, divided by the total number of all housing units in the city. Housing units includes both occupied and vacant housing units as defined by the federal census. For aids payable in 2014, "percent of housing built between 1940 and 1970" shall be based on 2010 housing data. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. 2,50010,000 the greater of 285 or 1.15 times 5.0734098 4.59 19.141678 times the population decline percentage 0.622 times the percent of housing built between 1940 and 1970 2504.06334 times the road accidents factor 169.415times the jobs per capita 355.0547; minus (5) the metropolitan area factor; minus (6) 49.10638 times the household size the sparsity adjustment; plus (5) 307.664 (b) For a city with a population equal to or greater than 2,500 and less than 10,000, "city revenue need" is 1.15 times the sum of (1) 572.62 ; plus (2) 5.026 times the pre-1940 housing percentage; minus (3) 53.768 times household size; plus (4) 14.022 times peak population decline. (b) (c) (1) 2.387 times the pre-1940 housing percentage; plus (2) 2.67591 times the commercial industrial percentage; plus (3) 3.16042 times the population decline percentage; plus (4) 1.206 times the transformed population; minus (5) 62.772 410 plus 0.367 times the city's population over 100. The city revenue need under this paragraph shall not exceed 630 (c) (d) at least or more and a population in one of the most recently available five years that was less than 2,500, "city revenue need" is the sum of (1) its city revenue need calculated under paragraph (a) multiplied by its transition factor; plus (2) its city revenue need calculated under the formula in paragraph (b) multiplied by the difference between one and its transition factor. For purposes of this paragraph, a city's "transition factor" is equal to 0.2 multiplied by the number of years that the city's population estimate has been 2,500 or more. This provision only applies for aids payable in calendar years 2006 to 2008 to cities with a 2002 population of less than 2,500. It applies to any city for aids payable in 2009 and thereafter but less than 3,000, the "city revenue need" equals (1) the transition factor times the city's revenue need calculated in paragraph (b) plus (2) 630 times the difference between one and the transition factor. For a city with a population of at least 10,000 but less than 10,500, the "city revenue need" equals (1) the transition factor times the city's revenue need calculated in paragraph (a) plus (2) the city's revenue need calculated under the formula in paragraph (b) times the difference between one and the transition factor. For purposes of this paragraph "transition factor" is 0.2 percent times the amount that the city's population exceeds the minimum threshold in either of the first two sentences (d) (e) (e) (f) 2005 2015 (d) (e) 2003 2013 EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. City jobs base Jobs per capita (a) "City jobs base" for a city with a population of 5,000 or more is equal to the product of (1) $25.20, (2) the number of jobs per capita in the city, and (3) its population. For cities with a population less than 5,000, the city jobs base is equal to zero. For a city receiving aid under subdivision 36 , paragraph (k), its city jobs base is reduced by the lesser of 36 percent of the amount of aid received under that paragraph or $1,000,000. No city's city jobs base may exceed $4,725,000 under this paragraph. (b) For calendar year 2010 and subsequent years, the city jobs base for a city, as determined in paragraph (a), is multiplied by the ratio of the appropriation under section 477A.03, subdivision 2 a , for the year in which the aid is paid to the appropriation under that section for aids payable in 2009. (c) For purposes of this subdivision, as of May 1, 2008 November 1 of every odd-numbered year June 1, 2008 January 1, of every even-numbered year beginning with January 1, 2014 June 20, 2008 December 1 of every odd-numbered year July 15, 2008 January 1 of all even-numbered years For aids payable in 2014, "jobs per capita" shall be based on the annual number of employees and population for calendar year 2010 without additional review. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 44. Peak population decline. " Peak population decline" is equal to 100 times the difference between one and the ratio of the city's current population, to the highest city population reported in a federal census from the 1970 census or later. " Peak population decline" shall not be less than zero. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 45. Sparsity adjustment. For a city with a population of 10,000 or more, the sparsity adjustment is 100 for any city with an average population density less than 150 per square mile, according to the most recent federal census, and the sparsity adjustment is zero for all other cities. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. In 2002, no town is eligible for a distribution under this subdivision. In 2014 and thereafter, each town is eligible for a distribution under this subdivision equal to the product of (i) its agricultural property factor, (ii) its town area factor, (iii) its population factor, and (iv) 0.0045. As used in this subdivision, the following terms have the meanings given them: (1) "agricultural property factor" means the ratio of the adjusted net tax capacity of agricultural property located in a town, divided by the adjusted net tax capacity of all other property located in the town. The agricultural property factor cannot exceed eight; (2) "agricultural property" means property classified under section 273.13 , as homestead and nonhomestead agricultural property, rural vacant land, and noncommercial seasonal recreational property; (3) "town area factor" means the most recent estimate of total acreage, not to exceed 50,000 acres, located in the township available as of July 1 in the aid calculation year, estimated or established by: (i) the United States Bureau of the Census; (ii) the State Land Management Information Center; or (iii) the secretary of state; and (4) "population factor" means the square root of the towns' population. If the sum of the aids payable to all towns under this subdivision exceeds the limit under section 477A.03, subdivision 2 c, the distribution to each town must be reduced proportionately so that the total amount of aids distributed under this section does not exceed the limit in section 477A.03, subdivision 2 c. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. (a) For aids payable in 2014 only, the formula aid for a city is equal to the sum of (1) its 2013 certified aid and (2) the product of (i) the difference between its unmet need and its 2013 certified aid and (ii) the aid gap percentage. (b) For aids payable in 2015 and thereafter, city jobs base, (2) its small city aid base, and (3) the need increase percentage multiplied by the average of its unmet need for the most recently available two years formula aid in the previous year and (2) the product of (i) the difference between its unmet need and its certified aid in the previous year under subdivision 9, and (ii) the aid gap percentage need increase aid gap need increase aid gap except that the data used to compute "net levy" in subdivision 9 is the data most recently available at the time of the aid computation EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. 2013 2014 city aid base aid adjustment under subdivision 13 (b) For aids payable in 2013 and 2014 only, the total aid in the previous year for any city shall mean the amount of aid it was certified to receive for aids payable in 2012 under this section. For aids payable in 2015 and thereafter, the total aid in the previous year for any city means the amount of aid it was certified to receive under this section in the previous payable year. (c) For aids payable in 2010 and thereafter, the total aid for any city shall not exceed the sum of (1) ten percent of the city's net levy for the year prior to the aid distribution plus (2) its total aid in the previous year. For aids payable in 2009 and thereafter, the total aid for any city with a population of 2,500 or more may not be less than its total aid under this section in the previous year minus the lesser of $10 multiplied by its population, or ten percent of its net levy in the year prior to the aid distribution. (d) (b) For aids payable in 2014 only, the total aid for a city may not be less than the amount it was certified to receive in 2013. 2010 2015 with a population less than 2,500 its 2003 certified aid amount. For aids payable in 2009 only, the total aid for a city with a population less than 2,500 must not be less than what it received under this section in the previous year unless its total aid in calendar year 2008 was aid under section477A.011 , subdivision 36, paragraph (s), in which case its minimum aid is zero its net levy in the year prior to the aid distribution (e) A city's aid loss under this section may not exceed $300,000 in any year in which the total city aid appropriation under section 477A.03, subdivision 2 a , is equal or greater than the appropriation under that subdivision in the previous year, unless the city has an adjustment in its city net tax capacity under the process described in section 469.174, subdivision 28 . (f) If a city's net tax capacity used in calculating aid under this section has decreased in any year by more than 25 percent from its net tax capacity in the previous year due to property becoming tax-exempt Indian land, the city's maximum allowed aid increase under paragraph (c) shall be increased by an amount equal to (1) the city's tax rate in the year of the aid calculation, multiplied by (2) the amount of its net tax capacity decrease resulting from the property becoming tax exempt. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. Subd. 13. Certified aid adjustments. (a) A city that received an aid base increase under Minnesota Statutes 2012,section 477A.011, subdivision 36 , paragraph (e), shall have its total aid under subdivision 9 increased by an amount equal to $150,000 for aids payable in 2014 through 2018. (b) A city that received an aid base increase under section 477A.011, subdivision 36 , paragraph (r), shall have its total aid under subdivision 9 increased by an amount equal to $160,000 for aids payable in 2014 and thereafter. (c) A city that received a temporary aid increase under Minnesota Statutes 2012, section 477A.011, subdivision 36 , paragraph (o), shall have its total aid under subdivision 9 increased by an amount equal to $1,000,000 for aids payable in 2014 only. For aids payable in 2013 only, a city that is located in an area deemed a disaster area during the month of April 2013, as defined in section 12A.02, subdivision 5 , shall receive its December 26, 2013 payment with its July 20, 2013 payment. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. 2013 2014 and thereafter $426,438,012 $507,598,012. The total aid paid under section 477A.013, subdivision 9 , is $509,098,012 for aids payable in 2015. For aids payable in 2016 and thereafter, the total aid paid under section 477A.013, subdivision 9 , is $511,598,012 EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. 2013 2014 $80,795,000 $100,795,000 of this appropriation For calendar year 2004, the amount shall be in addition to the payments authorized under section 477A.0124, subdivision 1 . For calendar year 2005 and subsequent years, the amount shall be deducted from the appropriation under this paragraph. 2013 2014 $84,909,575 $104,909,575 commissioner of management and budget shall bill the shall transfer to the commissioner of management and budget $207,000 annually not to exceed $207,000 in fiscal year 2004 and thereafter and other local government activities commissioner of education shall bill the for the cost of preparation of local impact notes for school districts as required by section 3.987 , not to exceed $7,000 in fiscal year 2004 and thereafter shall transfer to the commissioner of education $7,000 annually for the cost of preparation of local impact notes for school districts as required by section 3.987 billed transferred deducted transferred for the preparation of local impact notes respectively EFFECTIVE DATE. This section is effective for aid payable in 2014 and thereafter. Subd. 2c. Towns. For aids payable in 2014, the total aids paid under section 477A.013, subdivision 1 , is limited to $10,000,000. For aids payable in 2015 and thereafter, the total aids paid under section 477A.013, subdivision 1 , is limited to the amount certified to be paid in the previous year. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. [477A.085 ] DEBT SERVICE AID; CITY OF MINNEAPOLIS. On or before November 1, 2016, and the first day of each November thereafter, the commissioner shall pay to the city of Minneapolis an amount equal to 40 percent of the city's otherwise required levy to pay its general obligation library referendum bonds for the following calendar year. The levy excludes any amount to pay bonds, other than refunding bonds, issued after May 1, 2013. An amount sufficient to pay the aid under this section is appropriated from the general fund to the commissioner of revenue. [477A.10 ] NATURAL RESOURCES LAND PAYMENTS IN LIEU; PURPOSE. The purposes of sections 477A.11 to 477A.14 are: (1) to compensate local units of government for the loss of tax base from state ownership of land and the need to provide services for state land; (2) to address the disproportionate impact of state land ownership on local units of government with a large proportion of state land; and (3) to address the need to manage state lands held in trust for the local taxing districts. any , other than wildlife management land, EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. other , other than acquired natural resource land or wildlife management land, EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 6. Military game refuge. " Military game refuge" means land owned in fee by another state agency for military purposes and designated as a state game refuge under section 97A.085. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 7. Transportation wetland. " Transportation wetland" means land administered by the Department of Transportation in which the state acquired, by purchase from a private owner, a fee title interest in over 500 acres of land within a county to replace wetland losses from transportation projects. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 8. Wildlife management land. " Wildlife management land" means land administered by the commissioner in which the state acquired, from a private owner by purchase, condemnation, or gift, a fee interest under the authority granted in chapter 94 or 97A for wildlife management purposes and actually used as a wildlife management area. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. (a) As an offset for expenses incurred by counties and towns in support of natural resources lands, , based on the acreage as of July 1 of each year prior to the payment year, for acquired natural resources land, $5.133, multiplied by the total number of acres of transportation wetland or, at the county's option, three-fourths of one percent of the appraised value of all acquired natural resources land in the county, whichever is greater; (3) three-fourths of one percent of the appraised value of all wildlife management land in the county; (4) 50 percent of the dollar amount as determined under clause (1), multiplied by the number of acres of military refuge land in the county; $1.283 (5) $1.50, in the county (3) $1.283 (6) $5.133, in the county and (4) 64.2 cents (7) $1.50, located each the as of July 1 of each year prior to the payment year. ; and (8) without regard to acreage, $300,000 for local assessments under section 84A.55, subdivision 9 . (b) The amount determined under paragraph (a), clause (1), is payable for land that is acquired from a private owner and owned by the Department of Transportation for the purpose of replacing wetland losses caused by transportation projects, but only if the county contains more than 500 acres of such land at the time the certification is made under subdivision 2. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Lands for which payments in lieu are made pursuant to section 97A.061, subdivision 3 , and Laws 1973, chapter 567, shall not be eligible for payments under this section. , wildlife management land, and military refuge land land transportation wetland described in subdivision 1, paragraph (b) in a county EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. for the first five years after acquisition until the next six-year appraisal required under this subdivision fivesix after the land is acquired All reappraisals shall be done in the same year as county assessors are required to assess exempt land under section 273.18 . EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. subdivision 2 or in section 97A.061, subdivision 5 subdivisions 2 and 3 , 51.3 cents for each acre of acquired natural resources land and each acre of land described in section 477A.12, subdivision 1 , paragraph (b), and 12.8 cents for each acre of other natural resources land and each acre of land utilization project land located within its boundaries ten percent of the amount received under section 477A.12, subdivision 1 , clauses (1), (2), and (5) to (7) EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. Subd. 3. Distribution for wildlife management lands and military refuge lands. (a) The county treasurer shall allocate the payment for wildlife management land and military game refuge land among the county, towns, and school districts on the same basis as if the payments were taxes on the land received in the year. Payment of a town's or a school district's allocation must be made by the county treasurer to the town or school district within 30 days of receipt of the payment to the county. The county's share of the payment shall be deposited in the county general revenue fund. (b) The county treasurer of a county with a population over 39,000, but less than 42,000, in the 1950 federal census shall allocate the payment only among the towns and school districts on the same basis as if the payments were taxes on the lands received in the current year. (c) If a town received a payment in calendar year 2006 or thereafter under this subdivision, and subsequently incorporated as a city, the city shall continue to receive any future year's allocations of wildlife land payments that would have been made to the town had it not incorporated, provided that the payments shall terminate if the governing body of the city passes an ordinance that prohibits hunting within the boundaries of the city. EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. $600,000 $1,200,000 $450,000$900,000 $80,000 $160,000 $70,000 $140,000 2008 2013 EFFECTIVE DATE. This section is effective for aids payable in calendar year 2013 and thereafter. INELIGIBILITY; SUSTAINABLE FOREST INCENTIVE PROGRAM. Lands that no longer qualify as forest land under Minnesota Statutes, section 290C.02, subdivision 6 , item (iii), are released from the covenant required under Minnesota Statutes, section 290C.04. EFFECTIVE DATE. This section is effective the day following final enactment. REENROLLMENT; SUSTAINABLE FOREST INCENTIVE PROGRAM. A person who elected to terminate participation in the sustainable forest incentive program, as provided in Laws 2011, First Special Session chapter 7, article 6, section 12, may reenroll lands for which the claimant terminated participation and be eligible for a payment in October 2013. A person must apply for reenrollment under this section within 60 days after the effective date of this section. EFFECTIVE DATE. This section is effective the day following final enactment. REPEALER. (a) AMEND Minnesota Statutes 2012, sections 477A.011 , subdivisions 2a , 19, 29, 31, 32, 33, 36, 39, 40, and 41;AMEND 477A.013 , subdivisions 11 and 12 ;REPEAL 477A.0133 ; andREPEAL 477A.0134 , are repealed.(b) REPEAL Minnesota Statutes 2012, section 97A.061 , and Laws 1973, chapter 567, section 7, as amended by Laws 1977, chapter 403, section 12, are repealed on July 1, 2013.EFFECTIVE DATE. This section is effective for aids payable in calendar year 2014 and thereafter. [124D.862 ] ACHIEVEMENT AND INTEGRATION REVENUE. Subdivision 1. Initial achievement and integration revenue. (a) An eligible district's initial achievement and integration revenue equals the sum of (1) $350 times the district's adjusted pupil units for that year times the ratio of the district's enrollment of protected students for the previous school year to total enrollment for the previous school year and (2) the greater of zero or 66 percent of the difference between the district's integration revenue for fiscal year 2013 and the district's integration revenue for fiscal year 2014 under clause (1). (b) In each year, 0.3 percent of each district's initial achievement and integration revenue is transferred to the department for the oversight and accountability activities required under this section and section 124D.861 . Subd. 2. Incentive revenue. An eligible school district's maximum incentive revenue equals $10 per adjusted pupil unit. In order to receive this revenue, a district must be implementing a voluntary plan to reduce racial and economic enrollment disparities through intradistrict and interdistrict activities that have been approved as a part of the district's achievement and integration plan. Subd. 3. Achievement and integration revenue. Achievement and integration revenue equals the sum of initial achievement and integration revenue and incentive revenue. Subd. 4. Achievement and integration aid. For fiscal year 2015 and later, a district's achievement and integration aid equals 70 percent of its achievement and integration revenue. Subd. 5. Achievement and integration levy. A district's achievement and integration levy equals its achievement and integration revenue times 30 percent. For Special School District No. 1, Minneapolis; Independent School District No. 625, St. Paul; and Independent School District No. 709, Duluth, 100 percent of the levy certified under this subdivision is shifted into the prior calendar year for purposes of sections 123B.75, subdivision 5 , and 127A.441 . Subd. 6. Revenue uses. (a) At least 80 percent of a district's achievement and integration revenue received under this section must be used for innovative and integrated learning environments, school enrollment choices, family engagement activities, and other approved programs providing direct services to students. (b) Up to 20 percent of the revenue may be used for professional development and staff development activities and placement services. (c) No more than ten percent of the total amount of revenue may be spent on administrative services. Subd. 7. Revenue reserved. Integration revenue received under this section must be reserved and used only for the programs authorized in subdivision 2. Subd. 8. Commissioner authority to withhold revenue. (a) The commissioner must review the results of each district's integration and achievement plan by August 1 at the end of the third year of implementing the plan and determine if the district met its goals. (b) If a district met its goals, it may submit a new three-year plan to the commissioner for review. (c) If a district has not met its goals, the commissioner must: (1) develop a district improvement plan and timeline, in consultation with the affected district, that identifies strategies and practices designed to meet the district's goals under this section and section 120B.11 ; and (2) use up to 20 percent of the district's integration revenue, until the district's goals are reached, to implement the improvement plan. EFFECTIVE DATE. This section is effective for revenue for fiscal year 2014 and later. Subdivision 5 is effective for taxes payable in 2014 only. (a) For fiscal years 2013 and 2014, training and experience revenue, (b) For fiscal year 2015 and later, the general education revenue for each district equals the sum of the district's basic revenue, extended time revenue, gifted and talented revenue, declining enrollment revenue, location equity revenue, small schools revenue, basic skills revenue, secondary sparsity revenue, elementary sparsity revenue, transportation sparsity revenue, total operating capital revenue, equity revenue, pension adjustment revenue, and transition revenue. Subd. 2d. Location equity revenue. (a) For a school district with any of its area located within the seven-county metropolitan area, location equity revenue equals $424 times the adjusted pupil units of the district for that school year. (b) For all other school districts with more than 2,000 pupils in adjusted average daily membership for the fiscal year ending in the year before the levy is certified, location equity revenue equals $212 times the adjusted pupil units of the district for that year. (c) A district's location equity levy equals its location equity revenue times the lesser of one or the ratio of its referendum market value per resident pupil unit to $510,000. The location equity revenue levy must be spread on referendum market value. (d) A district's location equity aid equals its location equity revenue less its location equity levy, times the ratio of the actual amount levied to the permitted levy. (e) A school district may elect not to participate in the location equity revenue program by a board vote taken prior to September 1 of the fiscal year before the fiscal year for which the decision not to participate becomes effective. The board resolution must state which fiscal years the district will not participate. A copy of the board resolution to not participate must be submitted to the commissioner. EFFECTIVE DATE. This section is effective for revenue for fiscal year 2015 and later. (a) 2007 2013 later 2014 only (b) For fiscal year 2015 and later, a district's general education aid equals: (1) general education revenue, excluding operating capital revenue, equity revenue, location equity revenue, and transition revenue, minus the student achievement levy, multiplied times the ratio of the actual amount of student achievement levy levied to the permitted student achievement levy; plus (2) equity aid under section 126C.10, subdivision 30 ; plus (3) transition aid under section 126C.10, subdivision 33 ; plus (4) shared time aid under section 126C.10, subdivision 7 ; plus (5) referendum aid under section 126C.17 , subdivisions 7 and 7a; (6) online learning aid under section 124D.096 ; plus (7) location equity aid according to section 126C.10, subdivision 2 d, paragraph (d). (a) For fiscal year 2003 and later, a district's initial referendum revenue allowance equals the sum of the allowance under section 126C.16, subdivision 2 , plus any additional allowance per resident marginal cost pupil unit authorized under subdivision 9 before May 1, 2001, for fiscal year 2002 and later, plus the referendum conversion allowance approved under subdivision 13, minus $415. For districts with more than one referendum authority, the reduction must be computed separately for each authority. The reduction must be applied first to the referendum conversion allowance and next to the authority with the earliest expiration date. A district's initial referendum revenue allowance may not be less than zero. (b) For fiscal year 2003, a district's referendum revenue allowance equals the initial referendum allowance plus any additional allowance per resident marginal cost pupil unit authorized under subdivision 9 between April 30, 2001, and December 30, 2001, for fiscal year 2003 and later. (c) For fiscal year 2004 and later, a district's referendum revenue allowance equals the sum of: (1) the product of (i) the ratio of the resident marginal cost pupil units the district would have counted for fiscal year 2004 under Minnesota Statutes 2002, section 126C.05 , to the district's resident marginal cost pupil units for fiscal year 2004, times (ii) the initial referendum allowance plus any additional allowance per resident marginal cost pupil unit authorized under subdivision 9 between April 30, 2001, and May 30, 2003, for fiscal year 2003 and later, plus (2) any additional allowance per resident marginal cost pupil unit authorized under subdivision 9 after May 30, 2003, for fiscal year 2005 and later. (a) A district's initial referendum allowance for fiscal year 2015 equals the result of the following calculations: (1) multiply the referendum allowance the district would have received for fiscal year 2015 under Minnesota Statutes 2012, section 126C.17, subdivision 1 , based on elections held before July 1, 2013, by the resident marginal cost pupil units the district would have counted for fiscal year 2015 under Minnesota Statutes 2012, section 126C.05 ; (2) add to the result of clause (1) the adjustment the district would have received under Minnesota Statutes 2012, section 127A.47, subdivision 7 , paragraphs (a), (b), and (c), based on elections held before July 1, 2013; (3) divide the result of clause (2) by the district's adjusted pupil units for fiscal year 2015; and (4) if the result of clause (3) is less than zero, set the allowance to zero. (b) A district's referendum allowance equals the sum of the district's initial referendum allowance for fiscal year 2015, plus any additional referendum allowance per adjusted pupil unit authorized after June 30, 2013, minus (i) the location equity revenue subtraction, and (ii) any allowances expiring in fiscal year 2016 or later, provided that the allowance may not be less than zero. For a district with more than one referendum allowance for fiscal year 2015 under Minnesota Statutes 2012, section 126C.17 , the allowance calculated under paragraph (a) must be divided into components such that the same percentage of the district's allowance expires at the same time as the old allowances would have expired under Minnesota Statutes 2012, section 126C.17 . (c) For purposes of this subdivision, a district's location equity revenue subtraction equals $424 for a district receiving location equity revenue undersection 126C.10, subdivision 2 d, paragraph (a), $212 for a district receiving location equity revenue under section 126C.10, subdivision 2 d, paragraph (b), and zero for all other school districts. 2007 2015 the greater of: (1) the sum of: (i) a district's referendum allowance for fiscal year 1994 times 1.177 times the annual inflationary increase as calculated under paragraph (b) plus (ii) its referendum conversion allowance for fiscal year 2003, minus (iii) $215; (2) the greater of (i): 26 percent of the formula allowance or (ii) $1,294 times ; or times the greatest of: (1) $1,845; (2) the sum of the referendum revenue the district would have received for fiscal year 2015 under Minnesota Statutes 2012, section 126C.17, subdivision 4 , based on elections held before July 1, 2013, and the adjustment the district would have received under Minnesota Statutes 2012, section 127A.47, subdivision 7 , paragraphs (a), (b), and (c), based on elections held before July 1, 2013, divided by the district's adjusted pupil units for fiscal year 2015; or (3) the product of the referendum allowance limit the district would have received for fiscal year 2015 under Minnesota Statutes 2012, section 126C.17, subdivision 2 , and the resident marginal cost pupil units the district would have received for fiscal year 2015 under Minnesota Statutes 2012, section 126C.05, subdivision 6 , plus the adjustment the district would have received under Minnesota Statutes 2012, section 127A.47, subdivision 7 , paragraphs (a), (b), and (c), based on elections held before July 1, 2013, divided by the district's adjusted pupil units for fiscal year 2015; minus $424 for a district receiving location equity revenue under section 126C.10, subdivision 2 d, paragraph (a), minus $212 for a district receiving location equity revenue under section 126C.10, subdivision 2 d, paragraph (b), or (3) (4) 2006 2013 resident marginal cost adjusted 2005 2016 2004 2015 years 2009 year 2016 (1) (3) the inflationary increase for fiscal year 2008 plus 2008 2015 resident marginal cost adjusted For fiscal year 2003 and later, , and the third tier referendum equalization revenue resident marginal cost adjusted For fiscal year 2006, a district's first tier referendum equalization allowance equals the lesser of the district's referendum allowance under subdivision 1 or $500. For fiscal year 2007, a district's first tier referendum equalization allowance equals the lesser of the district's referendum allowance under subdivision 1 or $600. For fiscal year 2008 and later, $700 $300 resident marginal cost adjusted For fiscal year 2006, a district's second tier referendum equalization allowance equals the lesser of the district's referendum allowance under subdivision 1 or 18.6 percent of the formula allowance, minus the district's first tier referendum equalization allowance. For fiscal year 2007 and later, 26 percent of the formula allowance $760 Notwithstanding paragraph (e), the second tier referendum allowance for a district qualifying for secondary sparsity revenue under section 126C.10, subdivision 7 , or elementary sparsity revenue under section 126C.10, subdivision 8 , equals the district's referendum allowance under subdivision 1 minus the district's first tier referendum equalization allowance. A district's third tier referendum equalization revenue equals the district's third tier referendum equalization allowance times the district's adjusted pupil units for that year. (g) A district's third tier referendum equalization allowance equals the lesser of the district's referendum allowance under subdivision 1 or 25 percent of the formula allowance, minus the sum of the district's first tier referendum equalization allowance and second tier referendum equalization allowance. (h) Notwithstanding paragraph (g), the third tier referendum allowance for a district qualifying for secondary sparsity revenue under section 126C.10, subdivision 7 , or elementary sparsity revenue under section 126C.10, subdivision 8 , equals the district's referendum allowance under subdivision 1 minus the sum of the district's first tier referendum equalization allowance and second tier referendum equalization allowance. and , and the third tier referendum equalization levy marginal cost $476,000 $880,000 marginalcost $270,000 $510,000 (d) A district's third tier referendum equalization levy equals the district's third tier referendum equalization revenue times the lesser of one or the ratio of the district's referendum market value per resident pupil unit to $290,000. or , , or third 26 25 resident marginal cost adjusted Subd. 7b. Referendum aid guarantee. (a) Notwithstanding subdivision 7, a district's referendum equalization aid for fiscal year 2015 must not be less than the sum of the referendum equalization aid the district would have received for fiscal year 2015 under Minnesota Statutes 2012, section 126C.17, subdivision 7 , and the adjustment the district would have received under Minnesota Statutes 2012, section 127A.47, subdivision 7 , paragraphs (a), (b), and (c). (b) Notwithstanding subdivision 7, referendum equalization aid for fiscal year 2016 and later, for a district qualifying for additional aid under paragraph (a) for fiscal year 2015, must not be less than the product of (1) the district's referendum equalization aid for fiscal year 2015, times (2) the lesser of one or the ratio of the district's referendum revenue for that school year to the district's referendum revenue for fiscal year 2015, times (3) the lesser of one or the ratio of the district's referendum market value used for fiscal year 2015 referendum equalization calculations to the district's referendum market value used for that year's referendum equalization calculations. resident marginal cost adjusted resident marginal cost adjusted resident marginal cost adjusted residentmarginal cost adjusted resident marginal cost adjusted Subd. 9a. Board-approved referendum allowance. Notwithstanding subdivision 9, a school district may convert up to $300 per adjusted pupil unit of referendum authority from voter approved to board approved by a board vote. A district with less than $300 per adjusted pupil unit of referendum authority may authorize new referendum authority up to the difference between $300 per adjusted pupil unit and the district's referendum authority. The board may authorize this levy for up to five years and may subsequently reauthorize that authority in increments of up to five years. EFFECTIVE DATE. This section is effective for revenue for fiscal year 2015 and later. OPERATING REFERENDUM FREEZE, FISCAL YEAR 2015. (a) Notwithstanding Minnesota Statutes, section 126C.17, subdivision 9 , a school district may not authorize an increase to its operating referendum in fiscal year 2015. A school district may reauthorize an operating referendum that is expiring in fiscal year 2015. (b) Paragraph (a) shall not apply to a district if, prior to June 30, 2013, the board adopted a resolution to conduct a referendum in 2013. (c) Paragraph (a) shall not apply to a district if the district did not authorize an operating referendum in fiscal year 2014. (d) Paragraph (a) shall not apply to a district if the district is in statutory operating debt under Minnesota Statutes, section 123B.81 , as of June 30, 2013, and has an approved plan with the Department of Education. as determined by the board based on budget and operations of the local water management entity five ten or a comprehensive watershed management plan as defined in section 103B.3363 increased or a comprehensive watershed management plan as defined in section 103B.3363 sufficient to generate a minimum amount The fee authorized in section 40A.152 may be used as a local match or as a supplement to state funding to accomplish implementation of comprehensive plans, watershed management plans, local water management plans, or comprehensive watershed management plans under chapter 103B, 103C, or 103D. at least 70 percent of the statewide (b) , for the technical assistance portion of the grant funds to leverage federal or other nonstate funds, or to address high-priority needs identified in local water management plans or comprehensive watershed management plans (b) The remaining cost-sharing funds may be allocated to districts as follows: (1) for technical and administrative assistance, not more than 20 percent of the funds; and (2) for conservation practices for lower priority erosion, sedimentation, or water quality problems. Soil Natural Resources , or another method approved by the Board of Water and Soil Resources, within the metropolitan areadefined in section 473.121 local water management plans adopted under section 103B.235 a comprehensive plan, local water management plan, or watershed management plan developed or amended, adopted, and approved according to chapter 103B, 103C, or 103D or limited dealer, as defined in section 327B.04 , under subdivision 9a EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. Subd. 9a. Manufactured home as dealer inventory. Manufactured homes as defined in section 327.31, subdivision 6 , shall be considered as dealer inventory, on the January 2 assessment date, if the home is: (1) listed as inventory and held by a licensed or limited dealer; (2) unoccupied and not available for rent; (3) connected or not connected to utilities when located in a manufactured home park; and (4) connected or not connected to utilities when located at a dealer's sales center. The exemption under this subdivision is allowable for up to five assessment years after the date a home is initially claimed as dealer inventory. EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. Licenses; refusal or revocation Assessor sanctions; refusal to license (a) (i) , or (ii) censure, warn, or fine any licensed assessor, or any other person employed by an assessment jurisdiction or contracting with an assessment jurisdiction for the purpose of valuing or classifying property for property tax purposes, or (5) failure to faithfully and fully perform his or her duties through malfeasance, misfeasance, or nonfeasance; or (5) (6) or suspension or revocation of or the imposition of a sanction provided under this subdivision (b) When appropriate for the level of infraction, a written warning must be given to assessors who have no prior identified infractions. The warning must identify the infraction and, as appropriate, detail future expectations of performance and behavior. Fines must not exceed $1,000 for the first occurrence and must not exceed $3,000 for each occurrence thereafter, and suspensions must not exceed one year for each occurrence, depending in each case upon the severity of the infraction and the level of negligence or intent. An action by the board to impose a sanction is subject to review in a contested case hearing under chapter 14. EFFECTIVE DATE. This section is effective beginning July 1, 2013. Subd. 3a. Report on disciplinary actions. Each odd-numbered year, the board must publish a report detailing the number and types of disciplinary actions recommended by the commissioner of revenue under section 273.0645, subdivision 2 , and the disposition of those recommendations by the board. The report must be presented to the house of representatives and senate committees with jurisdiction over property taxes by February 1 of each odd-numbered year. EFFECTIVE DATE. This section is effective beginning July 1, 2013. AND FINESand fines EFFECTIVE DATE. This section is effective beginning July 1, 2013. [270C.9901 ] ASSESSOR ACCREDITATION. Every individual who appraises or physically inspects real property for the purpose of determining its valuation or classification for property tax purposes must obtain licensure as an accredited Minnesota assessor from the State Board of Assessors by July 1, 2019, or within four years of that person having become licensed as a certified Minnesota assessor, whichever is later. EFFECTIVE DATE. This section is effective beginning January 1, 2014. : (1) 5,000 20,000 . ; and (2) for any property that was acquired on or after January 1, 2000, and on or before December 31, 2010, and is located in a city, the period must not exceed 15 years. EFFECTIVE DATE. This section is effective for assessment year 2013 and thereafter and for taxes payable in 2014 and thereafter. Subd. 98. Certain property owned by an Indian tribe. (a) Property is exempt that: (1) was classified as 3a under section 273.13, subdivision 24 , for taxes payable in 2013; (2) is located in a city of the first class with a population greater than 300,000 as of the 2010 federal census; (3) was on January 2, 2012, and is for the current assessment owned by a federally recognized Indian tribe, or its instrumentality, that is located within the state of Minnesota; and (4) is used exclusively for tribal purposes or institutions of purely public charity as defined in subdivision 7. (b) For purposes of this subdivision, a "tribal purpose" means a public purpose as defined in subdivision 8 and includes noncommercial tribal government activities. Property that qualifies for the exemption under this subdivision is limited to no more than two contiguous parcels and structures that do not exceed in the aggregate 20,000 square feet. Property acquired for single-family housing, market-rate apartments, agriculture, or forestry does not qualify for this exemption. The exemption created by this subdivision expires with taxes payable in 2024. EFFECTIVE DATE. This section is effective beginning with taxes payable in 2014. Subd. 99. Electric generation facility; personal property. (a) Notwithstanding subdivision 9, clause (a), and section 453.54, subdivision 20 , attached machinery and other personal property which is part of an electric generation facility that exceeds five megawatts of installed capacity and meets the requirements of this subdivision is exempt. At the time of construction, the facility must be: (1) designed to utilize natural gas as a primary fuel; (2) owned and operated by a municipal power agency as defined in section 453.52, subdivision 8 ; (3) designed to utilize reciprocating engines paired with generators to produce electrical power; (4) located within the service territory of a municipal power agency's electrical municipal utility that serves load exclusively in a metropolitan county as defined in section 473.121, subdivision 4 ; and (5) designed to connect directly with a municipality's substation. (b) Construction of the facility must be commenced after June 1, 2013, and before June 1, 2017. Property eligible for this exemption does not include electric transmission lines and interconnections or gas pipelines and interconnections appurtenant to the property or the facility. EFFECTIVE DATE. This section is effective for assessment year 2013, taxes payable in 2014, and thereafter. The commissioner of revenue may recommend to the state Board of Assessors the nonrenewal, suspension, or revocation of an assessor's license as provided in sections 270.41 to 270.50 . EFFECTIVE DATE. This section is effective beginning July 1, 2013. LOCALSubdivision 1. Local assessment practices. Subd. 2. Nonfeasance, misfeasance, and malfeasance. County assessors may file a written complaint with the commissioner of revenue detailing allegations of nonfeasance, misfeasance, or malfeasance by a local assessor. After receiving a complaint from a county assessor, the commissioner must complete an investigation and recommend an appropriate action to the State Board of Assessors. The commissioner is not required to have a written complaint from a county assessor in order to conduct an investigation and recommend an action to the board. Active investigative data relating to the investigation of complaints against an assessor by the commissioner of revenue are subject to section 13.39. EFFECTIVE DATE. This section is effective July 1, 2013. may be adjusted shall not be reduced and This section does not apply to (1) conservation restrictions or easements covering riparian buffers along lakes, rivers, and streams that are used for water quantity or quality control; or (2) to easements in a county that has adopted, by referendum, a program to protect farmland and natural areas since 1999. EFFECTIVE DATE. This section is effective for assessment year 2013 and thereafter, and for taxes payable in 2014 and thereafter. : (1) (2) (f) The first tier of market value of The remaining value of class 4d property has a class rate of 0.25 percent. For the purposes of this paragraph, the "first tier of market value of class 4d property" means the market value of each housing unit up to the first tier limit. For the purposes of this paragraph, all class 4d property value must be assigned to individual housing units. The first tier limit is $100,000 for assessment year 2014. For subsequent years, the limit is adjusted each year by the average statewide change in estimated market value of property classified as class 4a and 4d under this section for the previous assessment year, excluding valuation change due to new construction, rounded to the nearest $1,000, provided, however, that the limit may never be less than $100,000. Beginning with assessment year 2015, the commissioner of revenue must certify the limit for each assessment year by November 1 of the previous year. EFFECTIVE DATE. This section is effective beginning with assessment year 2014. subdivision subdivisions or 4 to 5 Subd. 5. Federal active service exception. In the case of a homestead property owned by an individual who is on federal active service, as defined in section 190.05, subdivision 5 c, as a member of the National Guard or a reserve component, a four-month grace period is granted for complying with the due dates imposed by subdivision 1. During this period, no late fees or penalties shall accrue against the property. The due date for property taxes owed under this chapter for an individual covered by this subdivision shall be September 15 for taxes due on May 15, and February 15 of the following year for taxes due on October 15. A taxpayer making a payment under this subdivision must accompany the payment with a signed copy of the taxpayer's orders or form DD214 showing the dates of active service which clearly indicate that the taxpayer was in active service as a member of the National Guard or a reserve component on the date the payment was due. This grace period applies to all homestead property owned by individuals on federal active service, as herein defined, for all of that property's due dates which fall on a day that is included in the taxpayer's federal active service. Subdivision 1. Delinquent property; rates. Subd. 2. Federal active service exception. Notwithstanding subdivision 1, a homestead property owned by an individual who is on federal active service, as defined in section 190.05, subdivision 5 c, as a member of the National Guard or a reserve component, shall not be deemed delinquent under this section if the due dates imposed under section 279.01 fall on a day in which the individual was on federal active service. and had a total market value of $500,000 or less for that same assessment with the approval of the county auditor (d) (f) A municipality as defined in section 429.011 , cities of the first class, and other special assessment authorities, that have certified special assessments against any parcel of property, may, through resolution, waive the requirement of payment of all current and delinquent special assessments at the time the confession is entered. If the municipality, city, or authority grants the waiver, 100 percent of all current year taxes, special assessments, and penalties due at the time, along with 20 percent of all delinquent taxes, special assessments, penalties, interest, and fees must be paid. The balance remaining shall be subject to and included in the installment plan. (d) When there are current and delinquent special assessments certified and billed against a parcel, the assessment authority or municipality as defined in section 429.011 may abate under section 375.192, subdivision 2 , all special assessments and the penalty and interest affiliated with the special assessments, and reassess the special assessments, penalties, and interest accrued thereon, under section 429.071, subdivision 2 . The municipality shall notify the county auditor of its intent to reassess as a precondition to the entry of the confession of judgment. Upon the notice to abate and reassess, the municipality shall, through resolution, notify the county auditor to remove all current and delinquent special assessments and the accrued penalty and interest on the special assessments, and the payment of all or a portion of the current and delinquent assessments shall not be required as part of the down payment due at the time the confession of judgment is entered in accordance with paragraph (c). (d) (e) (f) The county auditor may require conditions on properties including, but not limited to, environmental remediation action plan requirements, restrictions, or covenants, when considering a request for approval of eligibility for composition into a confession of judgment for delinquent taxes upon a parcel of property which was classified class 3a for the previous year's assessment. Unless the property is subject to subdivision 1a, (i) shall (ii) or one-fifth or four 281.13 281.17 if the land is within an incorporated area unless it is: (a) nonagricultural homesteaded land as defined in section 273.13, subdivision 22 ; (b) homesteaded agricultural land as defined in section 273.13, subdivision 23 , paragraph (a); or (c) seasonal residential recreational land as defined in section 273.13, subdivision 22 , paragraph (c), or 25, paragraph (d), clause (1), for which the period of redemption is five years from the date of sale to the state of Minnesota The period of redemption for all other lands sold to the state at a tax judgment sale shall be five years from the date of sale, except that the period of redemption for nonhomesteaded agricultural land as defined in section 273.13, subdivision 23 , paragraph (b), shall be two years from the date of sale if at that time that property is owned by a person who owns one or more parcels of property on which taxes are delinquent, and the delinquent taxes are more than 25 percent of the prior year's school district levy. Subd. 10. Hennepin and Ramsey Counties. For properties located in Hennepin and Ramsey Counties, the county may impose an additional mortgage registry tax as defined in sections 383A.80 and 383B.80 . EFFECTIVE DATE. This section is effective for deeds and mortgages acknowledged on or after July 1, 2013. [287.40 ] HENNEPIN AND RAMSEY COUNTIES. For properties located in Hennepin and Ramsey Counties, the county may impose an additional deed tax as defined in sections 383A.80 and 383B.80 . EFFECTIVE DATE. This section is effective for deeds and mortgages acknowledged on or after July 1, 2013. 2013 2028 EFFECTIVE DATE. This section is effective for all deeds and mortgages acknowledged on or after July 1, 2013. 2013 2028 EFFECTIVE DATE. This section is effective for all deeds and mortgages acknowledged on or after July 1, 2013. 2013 2028 EFFECTIVE DATE. This section is effective the day following final enactment. 2013 2028 EFFECTIVE DATE. This section is effective the day following final enactment. (a) 2018 2014 (b) For property taxes payable from 2015 through 2018, the administrative auditor shall increase the areawide net tax capacity each year by an amount equal to ten percent of the total additional areawide levy distributed to Bloomington under this subdivision from 1988 to 1999, divided by the areawide tax rate for taxes payable in the previous year. The administrative auditor must notify the commissioner of revenue of the amount determined by multiplying the increase in the areawide net tax capacity by the areawide tax rate determined under subdivision 5. The commissioner of revenue must pay the amount determined each payable year to the administrative auditor in two installments on July 10 and November 10, for distribution and settlement as provided in subdivision 7a. (c) A sum sufficient to meet the obligations under this subdivision is annually appropriated from the general fund to the commissioner of revenue. EFFECTIVE DATE. This section is effective beginning with taxes payable in 2015. solely by the Cook ambulance service and the Orr ambulanceservice capital expenditures as it relates to : (1) and not ; (2) attached and portable equipment for use in and for the ambulances; and (3) parts and replacement parts for maintenance and repair of the ambulances. The money may not be used , operation, (c) in equal amounts held in trust until funding for a new ambulance is needed by either the Cook ambulance service or the Orr ambulance service used for the purposes in paragraph (b) Subdivision 1. Levy authorized. annually township territory up to $1,000 annually , beginning with taxes payable in 2000 and ending with taxes payable in 2009 Subd. 2. Effective date. This section is effective June 1, 1999, without local approval. EFFECTIVE DATE; LOCAL APPROVAL. This section applies to taxes payable in 2014 and thereafter, and is effective the day after the Carlton County Board of Commissioners and its chief clerical officer timely complete their compliance with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. 2013 2018 2014 2019 EFFECTIVE DATE. This section is effective beginning with taxes payable in 2014. and or , or both, and or , or both, Upon application, that is contiguous to a municipality that is a member of the district in the district as provided in this subdivision This The board shall annually determine the total amount of the levy that is attributable to the cost of providing fire services and the cost of providing ambulance services within the primary service area. For those municipalities that only receive ambulance services, the costs for the provision of ambulance services shall be levied against taxable property within those municipalities at a rate necessary not to exceed 0.019 percent of the estimated market value. For those municipalities that receive both fire and ambulance services, the taxable estimated for taxes payable in 2010. The board shall annually determine the separate amounts of the levy that are attributable to the cost of providing fire services and the cost of providing ambulance services. Costs for the provision of ambulance services shall be levied against taxable property within the area of the district that receive the services. Costs for the provision of fire services shall be levied against taxable property within the area of the district that receive the services a member municipality opts to receive fire service from the districtor additional ambulance and municipality will community shall years year2011, for taxes payable in 2011 and 2012 thereafter EFFECTIVE DATE. This section is effective for assessment year 2012 and thereafter. MINNEAPOLIS AND ST. PAUL ENTERTAINMENT FACILITIES COORDINATION STUDY; APPROPRIATION. Subdivision 1. Statement of purpose. The legislature finds that the national economic structure of professional sports financing, as directly or indirectly sanctioned by federal law, compels state and local governments in smaller metropolitan areas, such as Minneapolis and St. Paul, to help finance the construction and operation of venues for professional sports franchises as a condition of hosting these franchises. The burden and risk associated with providing this assistance justifies authorizing and directing the cities and any associated private entities to enter into arrangements that attempt to maximize the combined revenues of these facilities from direct users, including those unrelated to professional sports, such as, but not limited to, joint booking of concerts and other events, to minimize the cost and risk to general taxpayers. Any efforts to put in place such joint marketing, promotion, and scheduling arrangements by the cities or associated private entities, in the view of the legislature, is a petition for enactment of this or subsequent enabling legislation under the Noerr-Pennington doctrine or state action under the Parker antitrust doctrine. This legislation and any resulting arrangements are intended to minimize the potential burden on general taxpayers of financing and operation of the arenas. Subd. 2. Study and report. On or before February 1, 2014, the cities of Minneapolis and St. Paul, in consultation with representatives of the primary professional sports team tenant of each arena, shall study and report to the legislature on establishing a joint governing structure to be responsible for the joint administration, financing, and operations of the facilities and the possible effects of joint governance on the finances of each arena and each city. The commissioner of administration, in consultation with the two cities, shall contract with an independent consultant to conduct all or a portion of the study. The cities of Minneapolis and St. Paul together shall pay one-half of the cost of the consultant contract. The commissioner may accept funding from other public entities and private organizations to pay for the contract. The study must: (1) examine the current finances of each arena including past and projected costs and revenues, projected capital improvements, and the current and projected impact of each arena on each city's general fund; (2) determine the impact of joint governance on the future finances of each city; (3) examine joint scheduling, marketing, and promotion of events at the arenas, either within a joint governance structure or as separate entities; and (4) estimate the amount of funding, if any, that would be required to operate and maintain the arenas under a joint governing structure. Subd. 3. Appropriation. Up to $50,000 is appropriated to the commissioner of administration from the general fund for fiscal year 2014 to pay up to one-half of the costs of the consultant contract under subdivision 2. EFFECTIVE DATE. This section is effective the day following final enactment. REIMBURSEMENT FOR PROPERTY TAX ABATEMENTS; APPROPRIATION. Subdivision 1. Reimbursement. The commissioner of revenue shall reimburse taxing jurisdictions for property tax abatements granted in Hennepin County under Laws 2011, First Special Session chapter 7, article 5, section 13, notwithstanding the time limits contained in that section. The reimbursements must be made to each taxing jurisdiction pursuant to the certification of the Hennepin County auditor. Subd. 2. Appropriation. In fiscal year 2014 only, $336,000 is appropriated to the commissioner of revenue from the general fund to make the payments required in this section. EFFECTIVE DATE. This section is effective the day following final enactment. ST. PAUL BALLPARK PROPERTY TAX EXEMPTION; SPECIAL ASSESSMENT. Any real or personal property acquired, owned, leased, controlled, used, or occupied by the city of St. Paul for the primary purpose of providing a ballpark for a minor league baseball team is declared to be acquired, owned, leased, controlled, used, and occupied for public, governmental, and municipal purposes, and is exempt from ad valorem taxation by the state or any political subdivision of the state, provided that the properties are subject to special assessments levied by a political subdivision for a local improvement in amounts proportionate to and not exceeding the special benefit received by the properties from the improvement. In determining the special benefit received by the properties, no possible use of any of the properties in any manner different from their intended use for providing a minor league ballpark at the time may be considered. Notwithstanding Minnesota Statutes, section 272.01 , subdivision 2, or 273.19 , real or personal property subject to a lease or use agreement between the city and another person for uses related to the purposes of the operation of the ballpark and related parking facilities is exempt from taxation regardless of the length of the lease or use agreement. This section, insofar as it provides an exemption or special treatment, does not apply to any real property that is leased for residential, business, or commercial development or other purposes different from those necessary to the provision and operation of the ballpark. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. PUBLIC ENTERTAINMENT FACILITY; PROPERTY TAX EXEMPTION; SPECIAL ASSESSMENT. Any real or personal property acquired, owned, leased, controlled, used, or occupied by the city of Minneapolis for the primary purpose of providing an arena for a professional basketball team is declared to be acquired, owned, leased, controlled, used, and occupied for public, governmental, and municipal purposes, and is exempt from ad valorem taxation by the state or any political subdivision of the state, provided that the properties are subject to special assessments levied by a political subdivision for a local improvement in amounts proportionate to and not exceeding the special benefit received by the properties from the improvement. In determining the special benefit received by the properties, no possible use of any of the properties in any manner different from their intended use for providing a professional basketball arena at the time may be considered. Notwithstanding Minnesota Statutes, section 272.01 , subdivision 2, or 273.19 , real or personal property subject to a lease or use agreement between the city and another person for uses related to the purposes of the operation of the arena and related parking facilities is exempt from taxation regardless of the length of the lease or use agreement. This section, insofar as it provides an exemption or special treatment, does not apply to any real property that is leased for residential, business, or commercial development, or for other purposes different from those necessary to the provision and operation of the arena. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of Minneapolis with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. PUBLIC ENTERTAINMENT FACILITY; CONSTRUCTION MANAGER AT RISK. (a) For any real or personal property acquired, owned, leased, controlled, used, or occupied by the city of Minneapolis for the primary purpose of providing an arena for a professional basketball team, the city of Minneapolis may contract for construction, materials, supplies, and equipment in accordance with Minnesota Statutes, section 471.345 , except that the city may employ or contract with persons, firms, or corporations to perform one or more or all of the functions of an engineer, architect, construction manager, or program manager with respect to all or any part of a project to renovate, refurbish, and remodel the arena under either the traditional design-bid-build plan or construction manager at risk plan, or a combination thereof. (b) The city may prepare a request for proposals for one or more of the functions described in paragraph (a). The request must be published in a newspaper of general circulation. The city may prequalify offerors by issuing a request for qualifications, in advance of the request for proposals, and select a short list of responsible offerors to submit proposals. (c) As provided in the request for proposals, the city may conduct discussions and negotiations with responsible offerors in order to determine which proposal is most advantageous to the city and to negotiate the terms of an agreement. In conducting discussions, there shall be no disclosure of any information derived from proposals submitted by competing offerors and the content of all proposals is nonpublic data under Minnesota Statutes, chapter 13, until such time as a notice to award a contract is given by the city. (d) Upon agreement on the guaranteed maximum price, the construction manager or program manager may enter into contracts with subcontractors for labor, materials, supplies, and equipment for the renovation project through the process of public bidding, except that the construction manager or program manager may, with the consent of the city: (1) narrow the listing of eligible bidders to those that the construction manager or program manager determines to possess sufficient expertise to perform the intended functions; (2) award contracts to the subcontractors that the construction manager or program manager determines provide the best value under a request for proposals, as described in Minnesota Statutes, section 16C.28, subdivision 1 , paragraph (a), clause (2), that are not required to be the lowest responsible bidder; and (3) for work the construction manager or program manager determines to be critical to the completion schedule, perform work with its own forces without soliciting competitive bids or proposals, if the construction manager or program manager provides evidence of competitive pricing. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of Minneapolis with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. EXTENSION OF PROPERTY TAX DUE DATE; COMMERCIAL SEASONAL RECREATIONAL PROPERTIES. Notwithstanding the provisions of Minnesota Statutes, section 279.01, subdivision 1 , for taxes payable in 2013 only, the penalty on first-half property taxes does not accrue until June 15 on commercial use real property used for seasonal residential recreational purposes and classified as class 1c or 4c, and on other commercial use real property classified as class 3a, provided that over 60 percent of the gross income earned by the enterprise on the class 3a property is earned during the months of May, June, July, and August. In order for the first half of the tax due on class 3a property to be paid after May 15 and before June 15 without penalty, the owner of the property must attach an affidavit to the payment attesting to compliance with the income provision of this subdivision. EFFECTIVE DATE. This section is effective the day following final enactment. REPORT ON CLASS 4D TIER STRUCTURE. The commissioners of revenue and housing finance shall report to the legislature by January 31, 2015, on the implementation of a second tier of market value for class 4d property under Minnesota Statutes, section 273.13, subdivision 25 , paragraph (f). The report shall include the number of class 4d properties subject to the second tier of market value for taxes payable in 2015 and the tax impact of the application of the second tier of market value. The report shall also include an analysis of the characteristics of the properties to which the second tier of market value applies, such as location, building type, and number of units. EFFECTIVE DATE. This section is effective July 1, 2013. REPORT AND STUDY ON CERTAIN PROPERTY USED IN BUSINESS AND PRODUCTION; ASSESSMENT MORATORIUM. Subdivision 1. Study and report. (a) In order to facilitate a legislative review of property tax assessment procedures for facilities used in the production of biofuels, wine, beer, distilled beverages, and dairy products, and the development of standards and criteria for determining the taxable status of these facilities, the commissioner of revenue must conduct a study and report the findings of the study. The study must: (1) include a detailed survey of counties identifying the components and tax status of biofuel facilities; (2) identify the function of components in facilities of the affected industries; (3) consider the taxability for certain components related to size, function, and use; (4) develop recommendations for assessment guidelines and policies for facilities of the affected industries; and (5) identify possible impacts to state and local taxes resulting from study recommendations. (b) The commissioner shall request the involvement and participation of stakeholders, including the affected industries, the assessment community, and others identified by the commissioner. (c) The commissioner shall report the findings to the chairs of the house of representatives and senate committees with jurisdiction over taxes, agriculture, and economic development as well as the commissioners of agriculture and employment and economic development by February 1, 2014. Subd. 2. Moratorium on changes in assessment practices. (a) For the 2013 and 2014 assessments, assessors must continue to use assessment practices or policies in effect in that county on January 2, 2012, for determining the taxable status of property used in the production of biofuels, wine, beer, distilled beverages, or dairy products. (b) An assessor must not change the taxable status of any existing property described in paragraph (a) from its status on January 2, 2012, unless the change is due to a change in the use of property, or to correct an error. For taxable properties, the assessor may change the estimated market value of the property and add value for any new construction that would have been taxable under practices and policies in place on January 2, 2012. (c) This subdivision expires on December 31, 2014. Any changes to the taxable status of the properties in paragraph (a) resulting from the study will not be effective until the 2015 assessment. PROPERTY TAX SAVINGS REPORT. (a) In addition to the certification of its proposed property tax levy underMinnesota Statutes, section 275.065 , each city that has a population over 500 and each county shall also include the amount of sales and use tax paid, or was estimated to be paid, in 2012. (b) At the time the notice of the proposed property taxes is mailed as required under Minnesota Statutes, section 275.065, subdivision 3 , the county treasurer shall also include a separate statement providing a list of sales and use tax certified by the county and cities within their jurisdiction. (c) At the public hearing required under Minnesota Statutes, section 275.065, subdivision 3 , the county and city must discuss the estimated savings realized to their budgets that resulted from the sales tax exemption authorized under Minnesota Statutes, section 297A.70, subdivision 2 , and how those savings will be used for property tax levy reductions, fee reductions, and other purposes as deemed appropriate. Reasonable costs of preparing the notice required in this section must be apportioned between taxing jurisdictions as follows: (1) one-half is allocated to the county; and (2) one-half is allocated among the cities. The amount allocated in clause (2) must be further apportioned among all the cities in the proportion that the number of parcels in the city bears to the number of parcels in all the cities that have populations over 500. EFFECTIVE DATE. This section is effective the day following final enactment, for taxes levied in 2013 and payable in 2014. LEVY LIMITS FOR TAXES LEVIED IN 2013. Subdivision 1. Population. " Population" means the population for the local governmental unit as established by the last federal census, by a census taken under section Minnesota Statutes, section 275.14 , or by an estimate made by the metropolitan council or by the state demographer under Minnesota Statutes, section 4A.02 , whichever is most recent as to the stated date of the count or estimate up to and including June 1 of the current levy year. Subd. 2. Local government unit. " Local governmental unit" means a county with a population greater than 5,000, or a statutory or home rule charter city with a population greater than 2,500. Subd. 3. Levy limit base. " Levy limit base" for a local governmental unit for levy year 2013 means the sum of its certified net tax capacity levy plus the total of aids and reimbursements that the local governmental unit is certified to receive underMinnesota Statutes, sections 477A.011 to 477A.014 , minus any amounts that would qualify as a special levy under Minnesota Statutes, section 275.70, subdivision 5 , clauses (1) to (4) and (7), for taxes levied in 2011 or 2012, whichever is greater. The levy limit base must be increased by three percent. Subd. 4. Property tax levy limit. For taxes levied in 2013, the net tax capacity levy limit for a local governmental unit is equal to its levy limit base determined under subdivision 3 plus any additional levy authorized under Minnesota Statutes, section 275.73 , which is levied against net tax capacity, reduced by the total amount of aids and reimbursements that the local governmental unit is certified to receive under Minnesota Statutes, sections 477A.011 to 477A.014 . The property tax levy limit for any local government cannot be less than the greater of its certified net tax capacity levies for taxes levied in 2011 or 2012. Subd. 5. Limit on levies. Notwithstanding any other provision of law or municipal charter to the contrary which authorize ad valorem taxes in excess of the limits established by this section, the provisions of this section apply to local governmental units for all purposes other than those for which special levies under Minnesota Statutes, section 275.70, subdivision 5 , clauses (1) to (5) and (7), and special assessments are made. Subd. 6. Levies in excess of levy limits. If the levy made by a city or county exceeds the levy limit provided in this section, except when the excess levy is due to the rounding of the rate in accordance with Minnesota Statutes, section 275.28 , the county auditor shall only extend the amount of taxes permitted under this section as provided for inMinnesota Statutes, section 275.16. Subd. 7. Calculation and notification. The commissioner of revenue shall make all necessary calculations for determining levy limits for local governmental units and notify the affected governmental units of their levy limits directly by September 1, 2013. The local governmental units shall, upon request, provide the commissioner with any information needed to make the calculations. The local governmental unit shall report by September 30, in a manner prescribed by the commissioner, the maximum amount of taxes it plans to levy for each of the purposes listed under special levies and any additional levy authorized under Minnesota Statutes, section 275.73 , along with any necessary documentation. The commissioner shall review the proposed special levies and make any adjustments needed. The commissioner's decision is final. The final allowed special levy amounts and any levy limit adjustments must be certified back to the local governments by December 10. In addition, the commissioner of revenue shall notify all county auditors on or before five working days after December 20 of the sum of the levy limit plus the total of allowed special levies for each local governmental unit located within their boundaries so that they may fix the levies as required inMinnesota Statutes, section 275.16. The local governmental units shall provide the commissioner of revenue with all information that the commissioner deems necessary to make the calculations provided for in this section. Subd. 8. Information necessary to calculate levy limit base. A local governmental unit must provide the commissioner with the information required to calculate the amount under subdivision 3, by July 20, 2013. If the information is not received by the commissioner by that date, or is not deemed sufficient to make the calculation under that clause, the commissioner has the discretion to set the local governmental unit's levy limit for all purposes including those purposes for which special levies may be made, equal to the amount of the local governmental unit's certified levy for the prior year. EFFECTIVE DATE. This section is effective for taxes levied in 2013, payable in 2014, only. APPROPRIATION. $2,000,000 in fiscal year 2014 only is appropriated from the general fund to the commissioner of revenue for a grant to the city of Moose Lake to reimburse for costs related to connection of state facilities to the sewer line. EFFECTIVE DATE. This section is effective July 1, 2013. 256.9658 , EFFECTIVE DATE. This section is effective July 1, 2013. Jet fuel and the same rate 15 cents as the aviation gasoline EFFECTIVE DATE. This section is effective July 1, 2014, and applied to sales and purchases made on or after that date. and the airflight property tax under section 270.72 EFFECTIVE DATE. This section is effective July 1, 2014, and applied to sales and purchases made on or after that date. (f) The sale or purchase of the following items that relate to aircraft operated under Federal Aviation Regulations, Parts 91 and 135, and associated installation charges: equipment and parts necessary for repair and maintenance of aircraft; and equipment and parts to upgrade and improve aircraft. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 4a. Deposit in state airports fund. Tax revenue collected from the sale or purchase of an aircraft taxable under this chapter must be deposited in the state airports fund, established in section 360.017 . EFFECTIVE DATE. This section is effective July 1, 2013, and applied to sales and purchases made on or after that date. , that weighs 4.5 pounds or less per thousand: (1) ; or (2) wrapped in any substance containing tobacco, however labeled or named, which, because of its appearance, size, the type of tobacco used in the filler, or its packaging, pricing, marketing, or labeling, is likely to be offered to or purchased by consumers as a cigarette, as defined in clause (1), unless it is wrapped in whole tobacco leaf and does not have a cellulose acetate or other cigarette-like filter EFFECTIVE DATE. This section is effective July 1, 2013. Subd. 10b. Moist snuff. " Moist snuff" means any finely cut, ground, or powdered smokeless tobacco that is intended to be placed or dipped in the mouth. EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 13a. Premium cigar. " Premium cigar" means any cigar that is hand-constructed and hand-rolled, has a wrapper that is made entirely from whole tobacco leaf, has a filler and binder that is made entirely of tobacco, except for adhesives or other materials used to maintain size, texture, or flavor, and has a wholesale price of no less than $2. EFFECTIVE DATE. This section is effective July 1, 2013. (a) little cigars; (b) Except for the imposition of tax under section 297F.05 , subdivisions 3 and 4, tobacco products includes a premium cigar, as defined in subdivision 13a. EFFECTIVE DATE. This section is effective July 1, 2013. 24 141.5 48 283 EFFECTIVE DATE. This section is effective July 1, 2013. Subd. 1a. Annual indexing. (a) Each year the commissioner shall adjust the tax rates under subdivision 1, including any adjustment made in prior years under this subdivision, by multiplying the mill rates for the current calendar year by an adjustment factor and rounding the result to the nearest mill. The adjustment factor equals the in-lieu sales tax rate that applies to the following calendar year divided by the in-lieu sales tax rate for the current calendar year. For purposes of this subdivision, "in-lieu sales tax rate" means the tax rate established under section 297F.25, subdivision 1 . For purposes of the calculations under this subdivision to be made in any year in which an increase in the federal or state excise tax on cigarettes is implemented, the commissioner shall exclude from the calculated average price for the current year an amount equal to any increase in the state or federal excise tax rate. (b) The commissioner shall publish the resulting rate by November 1 and the rate applies to sales made on or after January 1 of the following year. (c) The determination of the commissioner under this subdivision is not a rule and is not subject to the Administrative Procedure Act in chapter 14. EFFECTIVE DATE. This section is effective July 1, 2014. (a) Except as provided in subdivision 3a, 35 95 (b) Notwithstanding paragraph (a), a minimum tax equal to the rate imposed on a pack of 20 cigarettes weighing not more than three pounds per thousand, as established under subdivision 1, is imposed on each container of moist snuff. For purposes of this subdivision, a "container" means the smallest consumer-size can, package, or other container that is marketed or packaged by the manufacturer, distributor, or retailer for separate sale to a retail purchaser. When more than one container is packaged together, each container is subject to tax. EFFECTIVE DATE. This section is effective July 1, 2013, except the minimum tax under paragraph (b) is effective January 1, 2014. Subd. 3a. Rates; tobacco. (a) A tax is imposed upon all premium cigars in this state and upon any person engaged in business as a tobacco product distributor, at the lesser of: (1) the rate of 95 percent of the wholesale sales price of the premium cigars; or (2) $3.50 per premium cigar. (b) The tax imposed under paragraph (a) is imposed at the time the tobacco products distributor: (1) brings, or causes to be brought, into this state from outside the state premium cigars for sale; (2) makes, manufactures, or fabricates premium cigars in this state for sale in this state; or (3) ships or transports premium cigars to retailers in this state, to be sold by those retailers. EFFECTIVE DATE. This section is effective July 1, 2013. Except as provided in subdivision 4a, 35 95 or the minimum tax under subdivision 3, paragraph (b), whichever is greater EFFECTIVE DATE. This section is effective July 1, 2013. Subd. 4a. Use tax; premium cigars. A tax is imposed upon the use or storage by consumers of all premium cigars in this state, and upon such consumers, at the lesser of: (1) the rate of 95 percent of the cost to the consumer of the premium cigars; or (2) $3.50 per premium cigar. EFFECTIVE DATE. This section is effective July 1, 2013. 1.75 2.5 EFFECTIVE DATE. This section is effective July 1, 2013. 6.5 percent of the combined tax rate under section 297A.62 , multiplied by EFFECTIVE DATE. This section is effective July 1, 2013. 100,000 250,000 EFFECTIVE DATE. This section is effective for determinations based on calendar year 2012 production and thereafter. wholeleaf, and includes any cigarette as defined in section 297F.01, subdivision 3 EFFECTIVE DATE. This section is effective July 1, 2013. and . ; and (3) premium cigars as defined in section 297F.01, subdivision 13 a. EFFECTIVE DATE. This section is effective July 1, 2013. or, if the organization is a 501(c)(3) organization, if the value of all raffle prizes awarded by the organization at one event in a calendar year does not exceed $5,000 EFFECTIVE DATE. This section is effective July 1, 2013. at the rate of one percent of value; provided that the minimum tax on an aircraft subject to the provisions of sections 360.511 to360.67 shall not be less than 25 percent of the tax on said aircraft computed on its base price or $50 whichever is the higher. as follows: Base Price Tax Under $499,999 $100 $500,000 to $999,999 $200 $1,000,000 to $2,499,999 $2,000 $2,500,000 to $4,999,999 $4,000 $5,000,000 to $7,499,999 $7,500 $7,500,000 to $9,999,999 $10,000 $10,000,000 to $12,499,999 $12,500 $12,500,000 to $14,999,999 $15,000 $15,000,000 to $17,499,999 $17,500 $17,500,000 to $19,999,999 $20,000 $20,000,000 to $22,499,999 $22,500 $22,500,000 to $24,999,999 $25,000 $25,000,000 to $27,499,999 $27,500 $27,500,000 to $29,999,999 $30,000 $30,000,000 to $39,999,999 $50,000 $40,000,000 and over $75,000 from which depreciation in value at a fixed percent per annum can be counted, such , the base such Subd. 6. Depreciation. After the first year of aircraft life the base value for taxation purposes shall be reduced as follows: ten percent the second year, and 15 percent the third and each succeeding year thereafter, but in no event shall such tax be reduced below the minimum. EFFECTIVE DATE. This section is effective July 1, 2014, and applies to aircraft tax due on or after that date. 360.54 360.531 360.54 360.531 EFFECTIVE DATE. This section is effective July 1, 2014, and applies to aircraft tax due on or after that date. REPORT. On or before June 30, 2016, and every four years thereafter, the commissioner of transportation, in consultation with the commissioner of revenue, shall prepare and submit to the chairs and ranking minority members of the senate and house of representatives committees with jurisdiction over transportation policy and budget, a report that identifies the amount and sources of annual revenues attributable to each type of aviation tax, along with annual expenditures from the state airports fund, and any other transfers out of the fund, during the previous four years. The report must include draft legislation for any recommended statutory changes to ensure the future adequacy of the state airports fund. EFFECTIVE DATE. This section is effective July 1, 2014, and applies to aircraft tax due on or after that date. FLOOR STOCKS TAX. Subdivision 1. Cigarettes. (a) A floor stocks tax is imposed on every person engaged in the business in this state as a distributor, retailer, subjobber, vendor, manufacturer, or manufacturer's representative of cigarettes, on the stamped cigarettes and unaffixed stamps in the person's possession or under the person's control at 12:01 a.m. on July 1, 2013. The tax is imposed at the rate of 80 mills on each cigarette plus the additional cigarette sales tax determined by an adjustment to the weighted average retail price which reflects the price including the increased tax. (b) Each distributor, on or before July 11, 2013, shall file a return with the commissioner of revenue, in the form the commissioner prescribes, showing the stamped cigarettes and unaffixed stamps on hand at 12:01 a.m. on July 1, 2013, and the amount of tax due on the cigarettes and unaffixed stamps. Each retailer, subjobber, vendor, manufacturer, or manufacturer's representative, on or before July 11, 2013, shall file a return with the commissioner, in the form the commissioner prescribes, showing the cigarettes on hand at 12:01 a.m. on July 1, 2013, and the amount of tax due on the cigarettes. The tax imposed by this section is due and payable on or before September 4, 2013, and after that date bears interest at the rate of one percent per month. Subd. 2. Audit and enforcement. The tax imposed by this section is subject to the audit, assessment, interest, appeal, refund, penalty, enforcement, administrative, and collection provisions of Minnesota Statutes, chapters 270C and 297F. The commissioner of revenue may require a distributor to receive and maintain copies of floor stocks fee returns filed by all persons requesting a credit for returned cigarettes. Subd. 3. Deposit of proceeds. (a) The commissioner of revenue shall deposit $26,500,000 of the revenues from the tax under this section in the state treasury and credit them to the general reserve account established under Minnesota Statutes 297E.021, subdivision 4 . (b) The commissioner of revenue shall deposit any revenue remaining after the transfer under paragraph (a) to the general fund. EFFECTIVE DATE. This section is effective July 1, 2013. INTERIM SALES TAX RATE. Notwithstanding the provisions of Minnesota Statutes, section 297F.25 , the commissioner shall adjust the weighted average retail price in section 297F.25, subdivision 1 , on July 1, 2013, to reflect the price changes under this act. This weighted average shall be used to compute cigarette sales tax underMinnesota Statutes, section 297F.25, subdivision 1 , until December 31, 2013, when the commissioner shall resume annual adjustments to the weighted average sales price. The commissioner's determination of the adjustment that takes effect on January 1, 2014, must be limited to the change in the weighted average retail price that occurs during calendar year 2013 but after July 15, 2013. EFFECTIVE DATE. This section is effective July 1, 2013. TOBACCO TAX COLLECTION REPORT. Subdivision 1. Report to legislature. (a) The commissioner of revenue shall report to the 2014 legislature on the tobacco tax collection system, including recommendations to improve compliance under the excise tax for both cigarettes and other tobacco products. The purpose of the report is to provide information and guidance to the legislature on improvements to the tobacco tax collection system to: (1) provide a unified system of collecting both the cigarette and other tobacco taxes, regardless of category, size, or shape, that ensures the highest reasonable rates of tax collection; (2) discourage tax evasion; and (3) help to prevent illegal sale of tobacco products, which may make these products more accessible to youth. (b) In the report, the commissioner shall: (1) provide a detailed review of the present excise tax collection and compliance system as it applies to both cigarettes and other tobacco products. This must include an assessment of the levels of compliance for each category of products and the effect of the stamping requirement on compliance for each category of products and the effect of the stamping requirement on compliance rates for cigarettes relative to other tobacco products. It also must identify any weaknesses in the system; (2) survey the methods of collection and enforcement used by other states or nations, including identifying and discussing emerging best practices that ensure tracking of both cigarettes and other tobacco products and result in the highest rates of tax collection and compliance. These best practices must consider high-technology alternatives, such as use of bar codes, radio-frequency identification tags, or similar mechanisms for tracking compliance; (3) evaluate the adequacy and effectiveness of the existing penalties and other sanctions for noncompliance; (4) evaluate the adequacy of the resources allocated by the state to enforce the tobacco tax and prevention laws; and (5) make recommendations on implementation of a comprehensive tobacco tax collection system for Minnesota that can be implemented by January 1, 2014, including: (i) recommendations on the specific steps needed to institute and implement the new system, including estimates of the state's costs of doing so and any additional personnel requirements; (ii) recommendations on methods to recover the cost of implementing the system from the industry; (iii) evaluation of the extent to which the proposed system is sufficiently flexible and adaptable to adjust to modifications in the construction, packaging, formatting, and marketing of tobacco products by the industry; and (iv) recommendations to modify existing penalties or to impose new penalties or other sanctions to ensure compliance with the system. Subd. 2. Due date. The report required by subdivision 1 is due February 15, 2014. Subd. 3. Procedure. The report required under this section must be made in the manner provided under Minnesota Statutes, section 3.195. In addition, copies must be provided to the chairs and ranking minority members of the legislative committees and divisions with jurisdiction over taxation. Subd. 4. Appropriation. (a) $100,000 is appropriated from the general fund to the commissioner of revenue for fiscal year 2014 for the cost of preparing the report under subdivision 1. (b) The appropriation under this subdivision is a onetime appropriation and is not included in the base budget. EFFECTIVE DATE. This section is effective the day following final enactment. REPEALER. REPEAL Minnesota Statutes 2012, sections 16A.725 ; andREPEAL 256.9658 , are repealed.EFFECTIVE DATE. This section is effective July 1, 2013. (i) "Liquidation event" means a conversion of qualified investment for cash, cash and other consideration, or any other form of equity or debt interest. EFFECTIVE DATE. This section is effective for qualified small businesses certified after June 30, 2013. (i) , or (ii) the business has not been in operation for more than 20 years if the business is engaged in the research, development, or production of medical devices or pharmaceuticals for which United States Food and Drug Administration approval is required for use in the treatment or diagnosis of a disease or condition and . ; and (10) the business has not issued securities that are traded on a public exchange. , : (1) . ; (2) the business must not have issued securities that are traded on a public exchange; (3) the business must not issue securities that are traded on a public exchange within 180 days after the date on which the qualified investment was made; and (4) the business must not have a liquidation event within 180 days after the date on which the qualified investment was made. EFFECTIVE DATE. This section is effective for qualified small businesses certified after June 30, 2013, except the amendments to paragraph (c), clause (7), are effective the day following final enactment. , mailing address, telephone number, e-mail address, contact person's name, and industry type EFFECTIVE DATE. This section is effective the day following final enactment. [136A.129 ] GREATER MINNESOTA INTERNSHIP PROGRAM. Subdivision 1. Definitions. (a) For the purposes of this section, the terms defined in this subdivision have the meanings given to them. (b) "Eligible employer" means a taxpayer under section 290.01 with employees located in greater Minnesota. (c) "Eligible institution" means a Minnesota public postsecondary institution or a Minnesota private, nonprofit, baccalaureate degree-granting college or university. (d) "Eligible student" means a student enrolled in an eligible institution who has completed one-half of the credits necessary for the respective degree or certification. (e) "Greater Minnesota" means the area of the state outside of the counties of Anoka, Carver, Chisago, Dakota, Hennepin, Isanti, Ramsey, Scott, Sherburne, Washington, and Wright. Subd. 2. Program established. The Office of Higher Education shall administer a greater Minnesota internship program through eligible institutions to provide credit at the eligible institution for internships and tax credits for eligible employers who hire interns for employment in greater Minnesota. Subd. 3. Program components. (a) An intern must be an eligible student who has been admitted to a major program that is related to the intern experience as determined by the eligible institution. (b) To participate in the program, an eligible institution must: (1) enter into written agreements with eligible employers to provide internships that are at least 12 weeks long and located in greater Minnesota; (2) determine that the work experience of the internship is related to the eligible student's course of study; and (3) provide academic credit for the successful completion of the internship or ensure that it fulfills requirements necessary to complete a vocational technical education program. (c) To participate in the program, an eligible employer must enter into a written agreement with an eligible institution specifying that the intern: (1) would not have been hired without the tax credit described in subdivision 4; (2) did not work for the employer in the same or a similar job prior to entering the agreement; (3) does not replace an existing employee; (4) has not previously participated in the program; (5) will be employed at a location in greater Minnesota; (6) will be paid at least minimum wage for a minimum of 16 hours per week for a period of at least 12 weeks; and (7) will be supervised and evaluated by the employer. (d) The written agreement between the eligible institution and the eligible employer must certify a credit amount to the employer, not to exceed $2,000 per intern. The total dollar amount of credits that an eligible institution certifies to eligible employers in a calendar year may not exceed the amount of its allocation under subdivision 4. (e) Participating eligible institutions and eligible employers must report annually to the office. The report must include at least the following: (1) the number of interns hired; (2) the number of hours and weeks worked by interns; and (3) the compensation paid to interns. (f) An internship required to complete an academic program does not qualify for the greater Minnesota internship program under this section. Subd. 4. Tax credit allowed. An employer is entitled to a tax credit as provided in section 290.06, subdivision 36 . The total amount of credits allocated in a calendar year must not exceed $2,000,000. The office shall determine relevant criteria to allocate the tax credits including the geographic distribution of credits to work locations outside the metropolitan area, and shall allocate credits to eligible institutions that meet the criteria on a first come, first served basis. Any credits allocated to an institution but not used may be reallocated to eligible institutions. The office shall allocate a portion of the administrative fee under section 290.06, subdivision 36 , to participating eligible institutions for their administrative costs. Subd. 5. Reports to the legislature. (a) By February 1, 2015, the office and the Department of Revenue shall report to the legislature on the greater Minnesota internship program. The report must include at least the following: (1) the number and dollar amount of credits allowed; (2) the number of interns employed under the program; and (3) the cost of administering the program. (b) By February 1, 2016, the office and the Department of Revenue shall report to the legislature with an analysis of the effectiveness of the program in stimulating businesses to hire interns and in assisting participating interns in finding permanent career positions. This report must include the number of students who participated in the program who were subsequently employed full-time by the employer. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2013. , except that a foreign operating corporation as defined in section 290.01, subdivision 6 b , is not required to file a return EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. The provisions of sections 315 and 331 of the American Taxpayer Relief Act of 2012, Public Law 112-240, extension of increased expensing limitations and treatment of certain real property as section 179 property and extension and modification of bonus depreciation, are effective at the same time they become effective for federal purposes. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (15) (12) (15) (12) (16) (13) (16) (13) and ; and (18) the amount of expenses not allowed for federal income tax purposes due to claiming the railroad track maintenance credit under section 45G(a) of the Internal Revenue Code EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (8) the exempt foreign trade income of a foreign sales corporation under sections 921(a) and 291 of the Internal Revenue Code; (9) (8) (10) (9) (11) the amount of any deemed dividend from a foreign operating corporation determined pursuant to section 290.17, subdivision 4 , paragraph (g). The deemed dividend shall be reduced by the amount of the addition to income required by clauses (20), (21), (22), and (23); (12) (10) (13) the amount of net income excluded under section 114 of the Internal Revenue Code; (14) (11) (15) (12) (16) (13) (17) (14) (18) for taxable years beginning before January 1, 2013, the exclusion allowed under section 139A of the Internal Revenue Code for federal subsidies for prescription drug plans; (19) (15) and (20) an amount equal to the interest and intangible expenses, losses, and costs paid, accrued, or incurred by any member of the taxpayer's unitary group to or for the benefit of a corporation that is a member of the taxpayer's unitary business group that qualifies as a foreign operating corporation. For purposes of this clause, intangible expenses and costs include: (i) expenses, losses, and costs for, or related to, the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property; (ii) losses incurred, directly or indirectly, from factoring transactions or discounting transactions; (iii) royalty, patent, technical, and copyright fees; (iv) licensing fees; and (v) other similar expenses and costs. For purposes of this clause, "intangible property" includes stocks, bonds, patents, patent applications, trade names, trademarks, service marks, copyrights, mask works, trade secrets, and similar types of intangible assets. This clause does not apply to any item of interest or intangible expenses or costs paid, accrued, or incurred, directly or indirectly, to a foreign operating corporation with respect to such item of income to the extent that the income to the foreign operating corporation is income from sources without the United States as defined in subtitle A, chapter 1, subchapter N, part 1, of the Internal Revenue Code; (21) except as already included in the taxpayer's taxable income pursuant to clause (20), any interest income and income generated from intangible property received or accrued by a foreign operating corporation that is a member of the taxpayer's unitary group. For purposes of this clause, income generated from intangible property includes: (i) income related to the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property; (ii) income from factoring transactions or discounting transactions; (iii) royalty, patent, technical, and copyright fees; (iv) licensing fees; and (v) other similar income. For purposes of this clause, "intangible property" includes stocks, bonds, patents, patent applications, trade names, trademarks, service marks, copyrights, mask works, trade secrets, and similar types of intangible assets. This clause does not apply to any item of interest or intangible income received or accrued by a foreign operating corporation with respect to such item of income to the extent that the income is income from sources without the United States as defined in subtitle A, chapter 1, subchapter N, part 1, of the Internal Revenue Code; (22) the dividends attributable to the income of a foreign operating corporation that is a member of the taxpayer's unitary group in an amount that is equal to the dividends paid deduction of a real estate investment trust under section 561(a) of the Internal Revenue Code for amounts paid or accrued by the real estate investment trust to the foreign operating corporation; (23) the income of a foreign operating corporation that is a member of the taxpayer's unitary group in an amount that is equal to gains derived from the sale of real or personal property located in the United States; (24) for taxable years beginning before January 1, 2010, the additional amount allowed as a deduction for donation of computer technology and equipment under section 170(e)(6) of the Internal Revenue Code, to the extent deducted from taxable income; and (25) (16) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (9) (8) section 290.01, (10) 80 percent of royalties, fees, or other like income accrued or received from a foreign operating corporation or a foreign corporation which is part of the same unitary business as the receiving corporation, unless the income resulting from such payments or accruals is income from sources within the United States as defined in subtitle A, chapter 1, subchapter N, part 1, of the Internal Revenue Code; (11) (10) (12) (11) (13) (12) (14) (13) (15) for a corporation whose foreign sales corporation, as defined in section 922 of the Internal Revenue Code, constituted a foreign operating corporation during any taxable year ending before January 1, 1995, and a return was filed by August 15, 1996, claiming the deduction under section 290.21, subdivision 4 , for income received from the foreign operating corporation, an amount equal to 1.23 multiplied by the amount of income excluded under section 114 of the Internal Revenue Code, provided the income is not income of a foreign operating company; (16) (14) (17) (15) (15) (12) (15) (12) (18) (16) (16) (13) and (19) (17) section 290.01, (25). (16); and (18) the amount of expenses not allowed for federal income tax purposes due to claiming the railroad track maintenance credit under section 45G(a) of the Internal Revenue Code. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. $25,680 $35,480 $25,680 $35,480 $102,030 $140,960 $102,030 $140,960, but not over $250,000 . ; (4) On all over $250,000, 9.85 percent. $17,570 $24,270 $17,570 $24,270 $57,710 $79,730 $57,710 $79,730, but not over $150,000 . ; (4) On all over $150,000, 9.85 percent. $21,630 $29,880 $21,630 $29,880 $86,910 $120,070 $86,910 $120,070, but not over $200,000 . ; (4) On all over $200,000, 9.85 percent. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 2000 2013 19992012 2001 2014 "1999" "2012" 2001 2014 1999 2012 2000 2013 1999 2012 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. Subd. 36. Greater Minnesota internship credit. (a) A taxpayer who is an eligible employer may take a credit against the tax due under this chapter equal to the lesser of: (1) 40 percent of the compensation paid to an intern qualifying under the program established under section 136A.129 , but not to exceed $2,000 per intern; or (2) the amount certified to the taxpayer by an eligible institution out of the institution's allocation of credits for the calendar year, as provided in section 136A.129 . (b) Credits allowed to a partnership, a limited liability company taxed as a partnership, an S corporation, or multiple owners of property are passed through to the partners, members, shareholders, or owners, respectively, pro rata to each partner, member, shareholder, or owner based on their share of the entity's income for the taxable year. (c) If the amount of credit which the taxpayer is eligible to receive under this subdivision exceeds the taxpayer's tax liability under this chapter, the commissioner of revenue shall refund the excess to the taxpayer. (d) An amount necessary to pay claims for refund provided in this subdivision is appropriated from the general fund to the commissioner of revenue. (e) An amount equal to one percent of the total amount of the credits authorized under section 136A.129, subdivision 4 , for an administrative fee for the Office of Higher Education and participating eligible institutions is appropriated from the general fund to the commissioner of revenue, for a transfer to the Office of Higher Education. (f) For purposes of this subdivision, the terms "eligible employer" and "eligible institution" have the meanings given in section 136A.129 . EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2013. , : either (i) met one of the following criteria: (i) has or ; or (iii) has been determined by the military to be eligible for compensation from a pension or other retirement pay from the federal government for service in the military, as computed under United States Code, title 10, sections 1401 to 1414, 1447 to 1455, or 12733; EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and after December 31, 2012, sum of the subdivision subdivisions and 2c , on all of the entities required to be included on the combined report of the unitary business. If the amount of the credit allowed exceeds the liability for tax of the taxpayer, but is allowed as a result of the liability for tax of other members of the unitary group for the taxable year, the taxpayer must allocate the excess as a research credit to another member of the unitary group including amounts allocated to other members of the unitary group EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and before January 1, 2013, and before January 1, 2013, EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. under section 47(a)(2) of the Internal Revenue Code (f) "Federal credit" means the credit allowed under section 47(a)(2) of the Internal Revenue Code. (g) "Placed in service" has the meaning used in section 47 of the Internal Revenue Code. (h) "Qualified rehabilitation expenditures" has the meaning given in section 47 of the Internal Revenue Code. EFFECTIVE DATE. This section is effective the day following final enactment. $5,000 0.5 percent of qualified rehabilitation expenditures, up to $40,000 expenses expenditures of revenue and must notify the developer in writing of its determination of revenue (e) Any decision of the office under paragraph (c) may be challenged as a contested case under chapter 14. The contested case proceeding must be initiated within 45 days of the date of written notification by the office. EFFECTIVE DATE. This section is effective the day following final enactment and the change in paragraph (a) applies to applications first received on or after the day following final enactment. ; grants An assignment is not valid unless the assignee notifies the commissioner within 30 days of the date that the assignment is made. notifying the commissioner of the assignment of a credit certificate and for (c) Credits passed through to partners, members, shareholders, or owners pursuant to subdivision 5 are not an assignment of a credit certificate under this subdivision. (d) A grant agreement between the office and the recipient of a grant may allow the grant to be issued to another individual or entity. EFFECTIVE DATE. This section is effective the day following final enactment. or any other executed agreement EFFECTIVE DATE. This section is effective the day following final enactment. 2015 2021 2016 2022 2018 2024 2019 2025 EFFECTIVE DATE. This section is effective the day following final enactment. 6.4 6.75 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 6.4 6.75 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 6.4 6.75 EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (15) (12) (17) (15) (6) The special rule for dividends from section 936 companies under section 56(g)(4)(C)(iii) does not apply. (7) (6) (8) (7) (9) (8) (10) (9) (11) (10) (12) (11) (13) (12) or , or (iii) the amount of royalties, fees or other like income subtracted as provided in section 290.01, subdivision 19 d , clause (10) (14) (13) (15) (14) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. less than $ 500,000 $ 0 $ 500,000 to $ 999,999 $ 100 $ 1,000,000 to $ 4,999,999 $ 300 $ 5,000,000 to $ 9,999,999 $ 1,000 $ 10,000,000 to $ 19,999,999 $ 2,000 $ 20,000,000 or more $ 5,000 less than $ 930,000 $ 0 $ 930,000 to $ 1,869,999 $ 190 $ 1,870,000 to $ 9,339,999 $ 560 $ 9,340,000 to $ 18,679,999 $ 1,870 $ 18,680,000 to $ 37,359,999 $ 3,740 $ 37,360,000 or more $ 9,340 less than $ 500,000 $ 0 $ 500,000 to $ 999,999 $ 100 $ 1,000,000 to $ 4,999,999 $ 300 $ 5,000,000 to $ 9,999,999 $ 1,000 $ 10,000,000 to $ 19,999,999 $ 2,000 $ 20,000,000 or more $ 5,000 less than $ 930,000 $ 0 $ 930,000 to $ 1,869,999 $ 190 $ 1,870,000 to $ 9,339,999 $ 560 $ 9,340,000 to $ 18,679,999 $ 1,870 $ 18,680,000 to $ 37,359,999 $ 3,740 $ 37,360,000 or more $ 9,340 (c) The commissioner shall adjust the dollar amounts of both the tax and the property, payrolls, and sales or receipts thresholds in paragraphs (a) and (b) by the percentage determined pursuant to the provisions of section 1(f) of the Internal Revenue Code, except that in section 1(f)(3)(B) the word "2012" must be substituted for the word "1992." For 2014, the commissioner shall determine the percentage change from the 12 months ending on August 31, 2012, to the 12 months ending on August 31, 2013, and in each subsequent year, from the 12 months ending on August 31, 2012, to the 12 months ending on August 31 of the year preceding the taxable year. The determination of the commissioner pursuant to this subdivision is not a "rule" subject to the Administrative Procedure Act contained in chapter 14. The tax amounts as adjusted must be rounded to the nearest $10 amount and the threshold amounts must be adjusted to the nearest $10,000 amount. For tax amounts that end in $5, the amount is rounded up to the nearest $10 amount and for the threshold amounts that end in $5,000, the amount is rounded up to the nearest $10,000. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and the modification provided in section 290.01, subdivision 19d , clause (10), EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. Except as provided in section 290.17, subdivision 4 , paragraph (i), is not deemed to does not a corporation is two or more corporations are that corporation is a member of a group of two or more business entities and member of the group corporation ; except that the income and apportionment factors of a foreign entity, other than an entity treated as a C corporation for federal income tax purposes, that are included in the federal taxable income, as defined in section 63 of the Internal Revenue Code as amended through the date named in section 290.01, subdivision 19 , of a domestic corporation, domestic entity, or individual must be included in determining net income and the factors to be used in the apportionment of net income pursuant to section 290.191 or 290.20 not included on a combined report and which is The net income and apportionment factors under section 290.191 or 290.20 of foreign operating corporations shall not be included in the net income or the apportionment factors of the unitary business except as provided in paragraph (g). (g) The adjusted net income of a foreign operating corporation shall be deemed to be paid as a dividend on the last day of its taxable year to each shareholder thereof, in proportion to each shareholder's ownership, with which such corporation is engaged in a unitary business. Such deemed dividend shall be treated as a dividend under section 290.21, subdivision 4 . Dividends actually paid by a foreign operating corporation to a corporate shareholder which is a member of the same unitary business as the foreign operating corporation shall be eliminated from the net income of the unitary business in preparing a combined report for the unitary business. The adjusted net income of a foreign operating corporation shall be its net income adjusted as follows: (1) any taxes paid or accrued to a foreign country, the commonwealth of Puerto Rico, or a United States possession or political subdivision of any of the foregoing shall be a deduction; and (2) the subtraction from federal taxable income for payments received from foreign corporations or foreign operating corporations under section 290.01, subdivision 19 d , clause (10), shall not be allowed. If a foreign operating corporation incurs a net loss, neither income nor deduction from that corporation shall be included in determining the net income of the unitary business. (h) (g) other than foreign operating corporations ; except that the income and apportionment factors of a foreign entity, other than an entity treated as a C corporation for federal income tax purposes, that is included in the federal taxable income, as defined in section 63 of the Internal Revenue Code as amended through the date named in section 290.01, subdivision 19 , of a domestic corporation, domestic entity, or individual must be included in determining net income and the factors to be used in the apportionment of net income pursuant to section 290.191 or 290.20 (i) Deductions for expenses, interest, or taxes otherwise allowable under this chapter that are connected with or allocable against dividends, deemed dividends described in paragraph (g), or royalties, fees, or other like income described in section 290.01, subdivision 19 d , clause (10), shall not be disallowed. (j) (h) (h) (g) (h) (g) Except as otherwise provided by paragraph (f), all sales of the unitary business made within this state pursuant to section 290.191 or 290.20 must be included on the combined report of a corporation or other entity that is a member of the unitary business and is subject to the jurisdiction of this state to impose tax under this chapter. (k) (i) EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. and ; and . (6) royalties, fees, or other like income of a type which qualify for a subtraction from federal taxable income under section 290.01, subdivision 19 d , clause (10). not described in paragraph (a), clause (6), EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. The dividend deduction provided in this subdivision does not apply to a dividend received from a real estate investment trust as defined in section 856 of the Internal Revenue Code. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. (9) (8) (11) (10) costs of rehabilitation are first paid under construction contracts entered into after May 1, 2010 rehabilitation expenditures are first paid by the developer or taxpayer after May 1, 2010, for rehabilitation that occurs after May 1, 2010, provided that the application under subdivision 3 is submitted before the project is placed in service EFFECTIVE DATE. This section is effective the day following final enactment and applies retroactively for taxable years beginning after December 31, 2009, and for certified historic structures placed in service after May 1, 2010, but the office may not issue certificates allowed under the change to this section until July 1, 2013. ESTIMATED TAXES; EXCEPTIONS. No addition to tax, penalties, or interest may be made under Minnesota Statutes, section 289A.25 , for any period before September 15, 2013, with respect to an underpayment of estimated tax, to the extent that the underpayment was created or increased by the increase in income tax rates under this article. EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. REPEALER. AMEND Minnesota Statutes 2012, sections 290.01, subdivision 6b ;AMEND 290.06 , subdivision 22a ; andAMEND 290.0921 , subdivision 7 , are repealed.EFFECTIVE DATE. This section is effective for taxable years beginning after December 31, 2012. 292, EFFECTIVE DATE. This section is effective for gifts made after December 31, 2012. and . ; and (9) in the case of a gift return, the donor. EFFECTIVE DATE. This section is effective the day following final enactment. sum of the and federal adjusted taxable gifts made within three years of the date of the decedent's death EFFECTIVE DATE. This section is effective for estates of decedents dying after December 31, 2012. April 14, 2011 January 3, 2013 sections 501 and 901 of Public Law 107-16, as amended by Public Law 111-312, and section 301(c) of Public Law 111-312 section 2011, paragraph (f), of the Internal Revenue Code (ii) the amount of taxable gifts, as defined in section 292.16 , and made by the decedent within three years of the decedent's date of death; (ii) (iii) : (i) with respect to (ii) or for a gift of tangible personal property within three years of death, the state or country in which it was normally kept or located when the gift was executed with respect to (iii) or for a gift of intangible personal property within three years of death, the state or country in which the decedent was domiciled when the gift was executed For a nonresident decedent with an ownership interest in a pass-through entity with assets that include real or tangible personal property, situs of the real or tangible personal property is determined as if the pass-through entity does not exist and the real or tangible personal property is personally owned by the decedent. If the pass-through entity is owned by a person or persons in addition to the decedent, ownership of the property is attributed to the decedent in proportion to the decedent's capital ownership share of the pass-through entity. (10) "Pass-through entity" includes the following: (i) an entity electing S corporation status under section 1362 of the Internal Revenue Code; (ii) an entity taxed as a partnership under subchapter K of the Internal Revenue Code; (iii) a single-member limited liability company or similar entity, regardless of whether it is taxed as an association or is disregarded for federal income tax purposes under Code of Federal Regulations, title 26, section 301.7701 -3; or (iv) a trust to the extent the property is includible in the decedent's federal gross estate. EFFECTIVE DATE. This section is effective for decedents dying after December 31, 2012. The tax is reduced by: (1) the gift tax paid by the decedent under section 292.17 on gifts included in the Minnesota adjusted taxable estate and not subtracted as qualified farm or small business property; and (2) any credit allowed under subdivision 1c. EFFECTIVE DATE. This section is effective for decedents dying after December 31, 2012. Subd. 1c. Nonresident decedent tax credit. (a) The estate of a nonresident decedent that is subject to tax under this chapter on the value of Minnesota situs property held in a pass-through entity is allowed a credit against the tax due under this section equal to the lesser of: (1) the amount of estate or inheritance tax paid to another state that is attributable to the Minnesota situs property held in the pass-through entity; or (2) the amount of tax paid under this section attributable to the Minnesota situs property held in the pass-through entity. (b) The amount of tax attributable to the Minnesota situs property held in the pass-through entity must be determined by the increase in the estate or inheritance tax that results from including the market value of the property in the estate or treating the value as a taxable inheritance to the recipient of the property. EFFECTIVE DATE. This section is effective for decedents dying after December 31, 2012. , or a trust whose present beneficiaries are all family members as defined in section 2032A(e)(2) of the Internal Revenue Code from upon the death of (6) (7) (4) (5) EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30, 2011. The decedent or the decedent's spouse must have materially participated in the trade or business within the meaning of section 469 of the Internal Revenue Code during the taxable year that ended before the date of the decedent's death. For purposes of this subdivision, an ownership interest includes the interest the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue Code. During the taxable year that ended before the decedent's death, the trade or business must not have been a passive activity within the meaning of section 469(c) of the Internal Revenue Code, and the decedent or the decedent's spouse must have materially participated in the trade or business within the meaning of section 469(h) of the Internal Revenue Code, excluding section 469(h)(3) of the Internal Revenue Code and any other provision provided by United States Treasury Department regulation that substitutes material participation in prior taxable years for material participation in the taxable year that ended before the decedent's death. (4) (4) (5) or , , publicly traded securities, or assets not used in the operation of the trade or business amount value or , , publicly traded securities, or assets not used in the operation of the trade or business (5) (6) , including property the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue Code, In the case of a sole proprietor, if the property replaced similar property within the three-year period, the replacement property will be treated as having been owned for the three-year period ending on the date of death of the decedent. (6) A family member continuously uses the property in the operation of the trade or business for three years following the date of death of the decedent. For three years following the date of death of the decedent, the trade or business is not a passive activity within the meaning of section 469(c) of the Internal Revenue Code, and a family member materially participates in the operation of the trade or business within the meaning of section 469(h) of the Internal Revenue Code, excluding section 469(h)(3) of the Internal Revenue Code and any other provision provided by United States Treasury Department regulation that substitutes material participation in prior taxable years for material participation in the three years following the date of death of the decedent. (8) EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30, 2011. a farm meeting the requirements of agricultural land and is owned by a person or entity that is either not subject to or is in compliance with , and was classified for property tax purposes as the homestead of the decedent or the decedent's spouse or both under section 273.124 , and as class 2a property under section 273.13, subdivision 23 For property taxes payable in the taxable year of the decedent's death, the property is classified as class 2a property under section 273.13, subdivision 23 , and is classified as agricultural homestead, agricultural relative homestead, or special agricultural homestead under section 273.124 . (4) , including property the decedent is deemed to own under sections 2036, 2037, and 2038 of the Internal Revenue Code, either by ownership of the agricultural land or pursuant to holding an interest in an entity that is not subject to or is in compliance with section 500.24 (4) A family member continuously uses the property in the operation of the trade or business (5) The property is classified for property tax purposes as class 2a property under section 273.13, subdivision 23 , (5) (6) EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30, 2011. use the qualified property which was acquired or passed from the decedent satisfy the requirement under subdivision 9, clause (7); or 10, clause (5) In the case of a sole proprietor, if the qualified heir replaces qualified small business property excluded under subdivision 9 with similar property, then the qualified heir will not be treated as having disposed of an interest in the qualified property. EFFECTIVE DATE. This section is effective retroactively for estates of decedents dying after June 30, 2011. [292.16 ] DEFINITIONS. (a) For purposes of this chapter, the following definitions apply. (b) The definitions of terms defined in section 291.005 apply. (c) "Resident" has the meaning given in section 290.01, subdivision 7 , paragraph (a). (d) "Taxable gifts" means: (1) the transfers by gift which are included in taxable gifts for federal gift tax purposes under the following sections of the Internal Revenue Code: (i) section 2503; (ii) sections 2511 to 2514; and (iii) sections 2516 to 2519; less (2) the deductions allowed in sections 2522 to 2524 of the Internal Revenue Code. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013. [292.17 ] GIFT TAX. Subdivision 1. Imposition. (a) A tax is imposed on the transfer of property by gift by any individual resident or nonresident in an amount equal to ten percent of the amount of the taxable gift. (b) The donor is liable for payment of the tax. If the gift tax is not paid when due, the donee of any gift is personally liable for the tax to the extent of the value of the gift. Subd. 2. Lifetime credit. A credit is allowed against the tax imposed under this section equal to $100,000. This credit applies to the cumulative amount of taxable gifts made by the donor during the donor's lifetime. Subd. 3. Out-of-state gifts. Taxable gifts exclude the transfer of: (1) real property located outside of this state; (2) tangible personal property that was normally kept at a location outside of the state on the date the gift was executed; and (3) intangible personal property made by an individual who is not a resident at the time the gift was executed. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013. [292.18 ] RETURNS. (a) Any individual who makes a taxable gift during the taxable year shall file a gift tax return in the form and manner prescribed by the commissioner. (b) If the donor dies before filing the return, the executor of the donor's will or the administrator of the donor's estate shall file the return. If the donor becomes legally incompetent before filing the return, the guardian or conservator shall file the return. (c) The return must include: (1) each gift made during the calendar year which is to be included in computing the taxable gifts; (2) the deductions claimed and allowable under section 292.16 , paragraph (d), clause (2); (3) a description of the gift, and the donee's name, address, and Social Security number; (4) the fair market value of gifts not made in money; and (5) any other information the commissioner requires to administer the gift tax. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013. [292.19 ] FILING REQUIREMENTS. Gift tax returns must be filed by the April 15 following the close of the calendar year, except if a gift is made during the calendar year in which the donor dies, the return for the donor must be filed by the last date, including extensions, for filing the gift tax return for federal gift tax purposes for the donor. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013. [292.20 ] APPRAISAL OF PROPERTY; DECLARATION BY DONOR. The commissioner may require the donor or the donee to show the property subject to the tax under section 292.17 to the commissioner upon demand and may employ a suitable person to appraise the property. The donor shall submit a declaration, in a form prescribed by the commissioner and including any certification required by the commissioner, that the property shown by the donor on the gift tax return includes all of the property transferred by gift for the calendar year and not deductible under section292.16 , paragraph (d), clause (2). EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013. [292.21 ] ADMINISTRATIVE PROVISIONS. Subdivision 1. Payment of tax; penalty for late payment. The tax imposed under section 292.17 is due and payable to the commissioner by the April 15 following the close of the calendar year during which the gift was made. The return required under section 292.19 must be included with the payment. If a taxable gift is made during the calendar year in which the donor dies, the due date is the last date, including extensions, for filing the gift tax return for federal gift tax purposes for the donor. If any person fails to pay the tax due within the time specified under this section, a penalty applies equal to ten percent of the amount due and unpaid or $100, whichever is greater. The unpaid tax and penalty bear interest at the rate under section 270C.40 from the due date of the return. Subd. 2. Extensions. The commissioner may, for good cause, extend the time for filing a gift tax return, if a written request is filed with a tentative return accompanied by a payment of the tax, which is estimated in the tentative return, on or before the last day for filing the return. Any person to whom an extension is granted must pay, in addition to the tax, interest at the rate under section 270C.40 from the date on which the tax would have been due without the extension. Subd. 3. Changes in federal gift tax. If the amount of a taxpayer's taxable gifts for federal gift tax purposes, as reported on the taxpayer's federal gift tax return for any calendar year, is changed or corrected by the Internal Revenue Service or other officer of the United States or other competent authority, the taxpayer shall report the change or correction in federal taxable gifts within 180 days after the final determination of the change or correction, and concede the accuracy of the determination or provide a letter detailing how the federal determination is incorrect or does not change the Minnesota gift tax. Any taxpayer filing an amended federal gift tax return shall also file within 180 days an amended return under this chapter and shall include any information the commissioner requires. The time for filing the report or amended return may be extended by the commissioner upon due cause shown. Notwithstanding any limitation of time in this chapter, if, upon examination, the commissioner finds that the taxpayer is liable for the payment of an additional tax, the commissioner shall, within a reasonable time from the receipt of the report or amended return, notify the taxpayer of the amount of additional tax, together with interest computed at the rate under section 270C.40 from the date when the original tax was due and payable. Within 30 days of the mailing of the notice, the taxpayer shall pay the commissioner the amount of the additional tax and interest. If, upon examination of the report or amended return and related information, the commissioner finds that the taxpayer has overpaid the tax due the state, the commissioner shall refund the overpayment to the taxpayer. Subd. 4. Application of federal rules. In administering the tax under this chapter, the commissioner shall apply the provisions of sections 2701 to 2704 of the Internal Revenue Code. The words "secretary or his delegate," as used in those sections of the Internal Revenue Code, mean the commissioner. EFFECTIVE DATE. This section is effective for taxable gifts made after June 30, 2013. [116J.3738 ] QUALIFIED EXPANSIONS OF GREATER MINNESOTA BUSINESSES. Subdivision 1. Definitions. (a) For purposes of this section, the following terms have the meanings given unless the context clearly indicates otherwise. (b) "Agricultural processing facility" means one or more facilities or operations that transform, package, sort, or grade livestock or livestock products, agricultural commodities, or plants or plant products into goods that are used for intermediate or final consumption including goods for nonfood use, and surrounding property. (c) "Business" means an individual, corporation, partnership, limited liability company, association, or any other entity engaged in operating a trade or business located in greater Minnesota. (d) "City" means a statutory or home rule charter city. (e) "Greater Minnesota" means the area of the state that excludes the metropolitan area, as defined in section 473.121, subdivision 2 . (f) "Qualified business" means a business that satisfies the requirements of subdivision 2, has been certified under subdivision 3, and has not been terminated under subdivision 5. Subd. 2. Qualified business. (a) A business is a qualified business if it satisfies the requirement of this paragraph and is not disqualified under the provisions of paragraph (b). To qualify, the business must: (1) have operated its trade or business in a city or cities in greater Minnesota for at least one year before applying under subdivision 3; (2) pay or agree to pay in the future each employee compensation, including benefits not mandated by law, that on an annualized basis equal at least 120 percent of the federal poverty level for a family of four; (3) plan and agree to expand its employment in one or more cities in greater Minnesota by the minimum number of employees required under subdivision 3, paragraph (c); and (4) received certification from the commissioner under subdivision 3 that it is a qualified business. (b) A business is not a qualified business if it is either: (1) primarily engaged in making retail sales to purchasers who are physically present at the business's location or locations in greater Minnesota; or (2) a public utility, as defined in section 336B.01 . (c) The requirements in paragraph (a) that the business' operations and expansion be located in a city do not apply to an agricultural processing facility. Subd. 3. Certification of qualified business. (a) A business may apply to the commissioner for certification as a qualified business under this section. The commissioner shall specify the form of the application, the manner and times for applying, and the information required to be included in the application. The commissioner may impose an application fee in an amount sufficient to defray the commissioner's cost of processing certifications. A business must file a copy of its application with the chief clerical officer of the city at the same time it applies to the commissioner. For an agricultural processing facility located outside the boundaries of a city, the business must file a copy of the application with the county auditor. (b) The commissioner shall certify each business as a qualified business that: (1) satisfies the requirements of subdivision 2; (2) the commissioner determines would not expand its operations in greater Minnesota without the tax incentives available under subdivision 4; and (3) enters a business subsidy agreement with the commissioner that pledges to satisfy the minimum expansion requirements of paragraph (c) within three years or less following execution of the agreement. The commissioner must act on an application within 60 days after its filing. Failure by the commissioner to take action within the 60-day period is deemed approval of the application. (c) The following minimum expansion requirements apply, based on the number of employees of the business at locations in greater Minnesota: (1) a business that employees 50 or fewer full-time equivalent employees in greater Minnesota when the agreement is executed must increase its employment by five or more full-time equivalent employees; (2) a business that employees more than 50 but fewer than 200 full-time equivalent employees in greater Minnesota when the agreement is executed must increase the number of its full-time equivalent employees in greater Minnesota by at least ten percent; or (3) a business that employees 200 or more full-time equivalent employees in greater Minnesota when the agreement is executed must increase its employment by at least 21 full-time equivalent employees. (d) The city, or a county for an agricultural processing facility located outside the boundaries of a city, in which the business proposes to expand its operations may file comments supporting or opposing the application with the commissioner. The comments must be filed within 30 days after receipt by the city of the application and may include a notice of any contribution the city or county intends to make to encourage or support the business expansion, such as the use of tax increment financing, property tax abatement, additional city or county services, or other financial assistance. (e) Certification of a qualified business is effective for the 12-year period beginning on the first day of the calendar month immediately following execution of the business subsidy agreement. Subd. 4. Available tax incentives. A qualified business is entitled to a sales tax exemption, as provided insection 297A.68, subdivision 49 , for purchases made during the period the business was certified as a qualified business under this section. Subd. 5. Termination of status as a qualified business. (a) The commissioner shall put in place a system for monitoring and ensuring that each certified business meets within three years or less the minimum expansion requirement in its business subsidy agreement and continues to satisfy those requirements for the rest of the duration of the certification under subdivision 3. This system must include regular reporting by the business to the commissioner of its baseline and current employment levels and any other information the commissioner determines may be useful to ensure compliance and for legislative evaluation of the effectiveness of the tax incentives. (b) A business ceases to be a qualified business and to qualify for the sales tax exemption under section 297A.68, subdivision 49 , under this subdivision upon the earlier of the following dates: (1) the end of the duration of its designation under subdivision 3, paragraph (e), effective as provided under this subdivision or other provision of law for the tax incentive; or (2) the date the commissioner finds that the business has breached its business subsidy agreement and failed to satisfy the minimum expansion required by subdivision 3 and its agreement. (c) A business may contest the commissioner's finding that it breached its business subsidy agreement under paragraph (b), clause (2), under the contested case procedures in the Administrative Procedure Act, chapter 14. (d) The commissioner, after consulting with the commissioner of revenue, may waive a breach of the business subsidy agreement and permit continued receipt of tax incentives, if the commissioner determines that termination of the tax incentives is not in the best interest of the state or the local government units and the business' breach of the agreement is a result of circumstances beyond its control including, but not limited to: (1) a natural disaster; (2) unforeseen industry trends; (3) a decline in economic activity in the overall or greater Minnesota economy; or (4) loss of a major supplier or customer of the business. EFFECTIVE DATE. This section is effective the day following final enactment. In applying the provisions of this chapter, the terms "tangible personal property" and "retail sale" include the taxable services listed in paragraph (g), clause (6), items (i) to (vi) and (viii), and the provision of these taxable services, unless specifically provided otherwise. Services performed by an employee for an employer are not taxable. Services performed by a partnership or association for another partnership or association are not taxable if one of the entities owns or controls more than 80 percent of the voting power of the equity interest in the other entity. Services performed between members of an affiliated group of corporations are not taxable. For purposes of the preceding sentence, "affiliated group of corporations" means those entities that would be classified as members of an affiliated group as defined under United States Code, title 26, section 1504, disregarding the exclusions in section 1504(b). . For purposes of this clause, "road construction" means construction of: (i) public roads; (ii) cartways; and (iii) private roads in townships located outside of the seven-county metropolitan area up to the point of the emergency response location sign or any organization at the direction of a county In applying the provisions of this chapter, the terms "tangible personal property" and "retail sale" include taxable services listed in clause (6), items (i) to (vi) and (viii), and the provision of these taxable services, unless specifically provided otherwise. Services performed by an employee for an employer are not taxable. Services performed by a partnership or association for another partnership or association are not taxable if one of the entities owns or controls more than 80 percent of the voting power of the equity interest in the other entity. Services performed between members of an affiliated group of corporations are not taxable. For purposes of the preceding sentence, "affiliated group of corporations" means those entities that would be classified as members of an affiliated group as defined under United States Code, title 26, section 1504, disregarding the exclusions in section 1504(b). For purposes of clause (5), "road construction" means construction of (1) public roads, (2) cartways, and (3) private roads in townships located outside of the seven-county metropolitan area up to the point of the emergency response location sign. cable and pay , and direct satellite services (l) A sale and a purchase includes furnishing for a consideration of specified digital products or other digital products or granting the right for a consideration to use specified digital products or other digital products on a temporary or permanent basis and regardless of whether the purchaser is required to make continued payments for such right. Wherever the term "tangible personal property" is used in this chapter, other than in subdivisions 10 and 38, the provisions also apply to specified digital products, or other digital products, unless specifically provided otherwise or the context indicates otherwise. (m) A sale and purchase includes the furnishing for consideration of the following services: (1) repairing and maintaining electronic and precision equipment, which service can be deducted as a business expense under the Internal Revenue Code. This includes, but is not limited to, repair or maintenance of electronic devices, computers and computer peripherals, monitors, computer terminals, storage devices, and CD-ROM drives; other office equipment such as photocopying machines, printers, and facsimile machines; televisions, stereos, sound systems, video or digital recorders and players; two-way radios and other communications equipment; radar and sonar equipment, scientific instruments, microscopes, and medical equipment; (2) repairing and maintaining commercial and industrial machinery and equipment. For purposes of this subdivision, the following items are not commercial or industrial machinery and equipment: (i) motor vehicles; (ii) furniture and fixtures; (iii) ships; (iv) railroad stock; and (v) aircraft; and (3) warehousing or storage services for tangible personal property, excluding: (i) agricultural products; (ii) refrigerated storage; (iii) electronic data; and (iv) self-storage services and storage of motor vehicles, recreational vehicles, and boats, not eligible to be deducted as a business expense under the Internal Revenue Code. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013, except that paragraph (m), clause (3), is effective for sales and purchases made after March 31, 2014. : (1) of tangible personal property ; and (2) any sale of a service enumerated in subdivision 3, for any purpose other than resale by the purchaser in the normal course of business as defined in subdivision 21 (n) A sale of motor vehicle repair paint and materials by a motor vehicle repair or body shop business is a retail sale and the sales tax is imposed on the gross receipts from the retail sale of the paint and materials. The motor vehicle repair or body shop that purchases motor vehicle repair paint and motor vehicle repair materials for resale must either: (1) separately state each item of paint and each item of materials, and the sales price of each, on the invoice to the purchaser; or (2) in order to calculate the sales price of the paint and materials, use a method which estimates the amount and monetary value of the paint and materials used in the repair of the motor vehicle by multiplying the number of labor hours by a rate of consideration for the paint and materials used in the repair of the motor vehicle following industry standard practices that fairly calculate the gross receipts from the retail sale of the motor vehicle repair paint and motor vehicle repair materials. An industry standard practice fairly calculates the gross receipts if the sales price of the paint and materials used or consumed in the repair of a motor vehicle equals or exceeds the purchase price paid by the motor vehicle repair or body shop business. Under this clause, the invoice must either separately state the "paint and materials" as a single taxable item, or separately state "paint" as a taxable item and "materials" as a taxable item. This clause does not apply to wholesale transactions at an auto auction facility. (o) A sale of specified digital products or other digital products to an end user with or without rights of permanent use and regardless of whether rights of use are conditioned upon payment by the purchaser is a retail sale. When a digital code has been purchased that relates to specified digital products or other digital products, the subsequent receipt of or access to the related specified digital products or other digital products is not a retail sale. (p) A payment made to a cooperative electric association or public utility as a contribution in aid of construction is a contract for improvement to real property and is not a retail sale. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. and . ; and (5) specified digital products, or other digital products, transferred electronically. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Cable Pay Cable Pay direct to home satellite , or any similar or comparable method of service basic, extended, premium, all programming services, including subscriptions, digital video recorders, digital, EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. , including specified digital products or other digital products EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. of a telecommunication service A ring tone does not include ring back tones or other digital audio files that are not stored on the purchaser's communication device. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 49. Motor vehicle repair paint and motor vehicle repair materials. " Motor vehicle repair paint" means a substance composed of solid matter suspended in a liquid medium and applied as a protective or decorative coating to the surface of a motor vehicle in order to restore the motor vehicle to its original condition, and includes primer, body paint, clear coat, and paint thinner used to paint motor vehicles, as defined in section 297B.01 . " Motor vehicle repair materials" means items, other than motor vehicle repair paint or motor vehicle parts, that become a part of a repaired motor vehicle or are consumed in repairing the motor vehicle at retail, and include abrasives, battery water, body filler or putty, bolts and nuts, brake fluid, buffing pads, chamois, cleaning compounds, degreasing compounds, glaze, grease, grinding discs, hydraulic jack oil, lubricants, masking tape, oxygen and acetylene, polishes, rags, razor blades, sandpaper, sanding discs, scuff pads, sealer, solder, solvents, striping tape, tack cloth, thinner, waxes, and welding rods. Motor vehicle repair materials do not include items that are not used directly on the motor vehicle, such as floor dry that is used to clean the shop, or cleaning compounds and rags that are used to clean tools, equipment, or the shop and are not used to clean the motor vehicle. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 50. Digital audio works. " Digital audio works" means works that result from a fixation of a series of musical, spoken, or other sounds, that are transferred electronically. Digital audio works includes such items as the following which may either be prerecorded or live: songs, music, readings of books or other written materials, speeches, ring tones, or other sound recordings. Digital audio works does not include audio greeting cards sent by electronic mail. Unless the context provides otherwise, in this chapter digital audio works includes the digital code, or a subscription to or access to a digital code, for receiving, accessing, or otherwise obtaining digital audio works. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 51. Digital audiovisual works. " Digital audiovisual works" means a series of related images which, when shown in succession, impart an impression of motion, together with accompanying sounds, if any, that are transferred electronically. Digital audiovisual works includes such items as motion pictures, movies, musical videos, news and entertainment, and live events. Digital audiovisual works does not include video greeting cards sent by electronic mail. Unless the context provides otherwise, in this chapter digital audiovisual works includes the digital code, or a subscription to or access to a digital code, for receiving, accessing, or otherwise obtaining digital audiovisual works. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 52. Digital books. " Digital books" means any literary works, other than digital audiovisual works or digital audio works, expressed in words, numbers, or other verbal or numerical symbols or indicia so long as the product is generally recognized in the ordinary and usual sense as a "book." It includes works of fiction and nonfiction and short stories. It does not include periodicals, magazines, newspapers, or other news or information products, chat rooms, or weblogs. Unless the context provides otherwise, in this chapter digital books includes the digital code, or a subscription to or access to a digital code, for receiving, accessing, or otherwise obtaining digital books. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 53. Digital code. " Digital code" means a code which provides a purchaser with a right to obtain one or more specified digital products or other digital products. A digital code may be transferred electronically, such as through electronic mail, or it may be transferred on a tangible medium, such as on a plastic card, a piece of paper or invoice, or imprinted on another product. A digital code is not a code that represents a stored monetary value that is deducted from a total as it is used by the purchaser, and it is not a code that represents a redeemable card, gift card, or gift certificate that entitles the holder to select a digital product of an indicated cash value. The end user of a digital code is any purchaser except one who receives the contractual right to redistribute a digital product which is the subject of the transaction. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 54. Other digital products. " Other digital products" means the following items when transferred electronically: (1) greeting cards; and (2) online video or electronic games. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 55. Specified digital products. " Specified digital products" means digital audio works, digital audiovisual works, and digital books that are transferred electronically to a customer. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 56. Transferred electronically. " Transferred electronically" means obtained by the purchaser by means other than tangible storage media. For purposes of this subdivision, it is not necessary that a copy of the product be physically transferred to the purchaser. A product will be considered to have been transferred electronically to a purchaser if the purchaser has access to the product. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 58. Self-storage service. " Self-storage service" means a storage service that provides secure areas, such as rooms, units, compartments or containers, whether accessible from outside or from within a building, that are designated for the use of a purchaser, where the purchaser retains the care custody and control of their property, including self-storage units, mini-storage units, and areas by any other name to which the purchaser retains either unlimited free access or free access within reasonable business hours or upon reasonable notice to the service provider to add or remove property, but does not mean the rental of an entire building, such as a warehouse. Self-storage service does not include general warehousing and storage services where the warehouse typically handles, stores, and retrieves a purchaser's property using the warehouse's staff and equipment, and does not allow the purchaser free access to the storage space and does not include bailments. EFFECTIVE DATE. This section is effective July 1, 2013. 6.2 9.2 EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. the laws of the United States in accordance with the terms and conditions of federal remote seller law , . (b) To the extent allowed by the United States Constitution and the laws of the United States, a retailer making retail sales from outside this state to a destination within this state and not maintaining a place of business in this state shall collect sales and use taxes and remit them to the commissioner under section 297A.77 , EFFECTIVE DATE. This section is effective the day after final enactment. Subd. 4a. Solicitor. (a) "Solicitor," for purposes of subdivision 1, paragraph (a), means a person, whether an independent contractor or other representative, who directly or indirectly solicits business for the retailer. (b) A retailer is presumed to have a solicitor in this state if it enters into an agreement with a resident under which the resident, for a commission or other substantially similar consideration, directly or indirectly refers potential customers, whether by a link on an Internet Web site, or otherwise, to the seller. This paragraph only applies if the total gross receipts are at least $10,000 in the 12-month period ending on the last day of the most recent calendar quarter before the calendar quarter in which the sale is made. For purposes of this paragraph, gross receipts means receipts from sales to customers located in the state who were referred to the retailer by all residents with this type of agreement with the retailer. (c) The presumption under paragraph (b) may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the retailer that would satisfy the nexus requirement of the United States Constitution during the 12-month period in question. Nothing in this section shall be construed to narrow the scope of the terms affiliate, agent, salesperson, canvasser, or other representative for purposes of subdivision 1, paragraph (a). (d) For purposes of this paragraph, "resident" includes an individual who is a resident of this state, as defined in section 290.01 , or a business that owns tangible personal property located in this state or has one or more employees providing services for the business in this state. (e) This subdivision does not apply to chapter 290 and does not expand or contract the jurisdiction to tax a trade or business under chapter 290. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. or ; (3) in the case of drop shipment sales, a seller engaged in drop shipping may claim a resale exemption based on an exemption certificate provided by its customer or reseller, or any other acceptable information available to the seller engaged in drop shipping evidencing qualification for a resale exemption, regardless of whether the customer or reseller is registered to collect and remit sales and use tax in the state EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 6a. Multiple points of use. (a) Notwithstanding the provisions of subdivisions 2 and 3, a business purchaser that has not received authorization to pay the tax directly to the commissioner may use an exemption certificate indicating multiple points of use if: (1) the purchaser knows at the time of its purchase of a digital good, computer software delivered electronically, or a service that the good or service will be concurrently available for use in more than one taxing jurisdiction; and (2) the purchaser delivers to the seller the exemption certificate indicating multiple points of use at the time of purchase. (b) Upon receipt of the fully completed exemption certificate indicating multiple points of use, the seller is relieved of the obligation to collect, pay, or remit the applicable tax and the purchaser is obligated to collect, pay, or remit the applicable tax on a direct pay basis. The provisions of section 297A.665 apply to this paragraph. (c) The purchaser delivering the exemption certificate indicating multiple points of use may use any reasonable but consistent and uniform method of apportionment that is supported by the purchaser's business records as they exist at the time of the consummation of the sale. (d) The purchaser shall provide the exemption certificate indicating multiple points of use to the seller at the time of purchase. (e) A purchaser that has received authorization to pay the tax directly to the commissioner is not required to deliver to the seller an exemption certificate indicating multiple points of use. A purchaser that has received authorization to pay the tax directly to the commissioner shall follow the provisions of paragraph (c) in apportioning the tax due on a digital good, computer software delivered electronically, or a service that will be concurrently available for use in more than one taxing jurisdiction. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. (b) Items purchased in transactions covered by: (1) Medicare as defined under title XVIII of the Social Security Act, United States Code, title 42, section 1395, et seq.; or (2) Medicaid as defined under title XIX of the Social Security Act, United States Code, title 42, section 1396, et seq. (b) (c) including single-patient use items, but does not include including (8) A transaction is covered by Medicare or Medicaid if any portion of the cost of the item purchased in the transaction is paid for or reimbursed by the federal government or the state of Minnesota pursuant to the Medicare or Medicaid program, by a private insurance company administering the Medicare or Medicaid program on behalf of the federal government or the state of Minnesota, or by a managed care organization for the benefit of a patient enrolled in a prepaid program that furnishes medical services in lieu of conventional Medicare or Medicaid coverage pursuant to agreement with the federal government or the state of Minnesota. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 7a. Accessories and supplies. Accessories and supplies required for the effective use of durable medical equipment for home use only or purchased in a transaction covered by medicare or Medicaid, that are not already exempt under section 297A.67, subdivision 7 , are exempt. Accessories and supplies for the effective use of a prosthetic device that are not already exempt under section 297A.67, subdivision 7 , are exempt. For purposes of this subdivision "durable medical equipment," "prosthetic device," "Medicare," and "Medicaid" have the definitions given in section 297A.67, subdivision 7 . EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. , including digital books, EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. tangible , , or paragraph (m) EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. The tax must be imposed and collected as if the rate under section 297A.62, subdivision 1 , applied, and then refunded in the manner provided in section 297A.75 . EFFECTIVE DATE. This section is effective for sales and purchases made after August 31, 2014. , or a qualified refurbished data center, , or a qualified refurbished data center , or a qualified refurbished data center, 30,000 25,000 $50,000,000 $30,000,000 24 48 30,000 25,000 ; and , including: (i) installation of enterprise information technology equipment, environmental control, computer software, and energy efficiency improvements; and (ii) building improvements; and For purposes of this subdivision, "computer software" includes, but is not limited to, software utilized or loaded at the qualified data center, including maintenance, licensing, and software customization. (d) For purposes of this subdivision, a "qualified refurbished data center" means an existing facility that qualifies as a data center under paragraph (c), clauses (2) and (3), but that is comprised of one or more buildings that consist in the aggregate of at least 25,000 square feet, and that are located on a single parcel or contiguous parcels, where the total cost of construction or refurbishment, investment in enterprise information technology equipment, and computer software is at least $50,000,000 within a 24-month period. (d) (e) (e) (f) (f) (g) (g) (h) EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 49. Greater Minnesota business expansions. (a) Purchases and use of tangible personal property or taxable services by a qualified business, as defined in section 116J.3738 , are exempt if: (1) the business subsidy agreement provides that the exemption under this subdivision applies; (2) the property or services are primarily used or consumed in greater Minnesota; and (3) the purchase was made and delivery received during the duration of the certification of the business as a qualified business under section 116J.3738 . (b) Purchase and use of construction materials and supplies used or consumed in, and equipment incorporated into, the construction of improvements to real property in greater Minnesota are exempt if the improvements after completion of construction are to be used in the conduct of the trade or business of the qualified business, as defined in section 116J.3738 . This exemption applies regardless of whether the purchases are made by the business or a contractor. (c) The exemptions under this subdivision apply to a local sales and use tax. (d) The tax on purchases imposed under this subdivision must be imposed and collected as if the rate under section 297A.62 applied, and then refunded in the manner provided in section 297A.75 . No more than $7,000,000 may be refunded in a fiscal year for all purchases under this subdivision. Refunds must be allocated on a first come, first served basis. If more than $7,000,000 of eligible claims are made in a fiscal year, claims by qualified businesses carryover to the next fiscal year, and the commissioner must first allocate refunds to qualified businesses eligible for a refund in the preceding fiscal year. Any portion of the balance of funds allocated for refunds under this paragraph does not cancel and shall be carried forward to and available for refunds in subsequent fiscal years. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2014. local governments, and ; and . (7) towns. town local government (d) As used in this subdivision, "local governments" means cities, counties, and townships. (d) (e) EFFECTIVE DATE. This section is effective for sales and purchases made after December 31, 2013. or as allowed under subdivision 9a EFFECTIVE DATE. This section is effective retroactively for sales and purchases made after June 30, 2012. is or services are EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. and , , and critical access dental providers (c) (d) (c) (d) Sales, except for those listed in paragraph (d), to a critical access dental provider are exempt, if the items purchased are used in providing critical access dental care services. For the purposes of this subdivision, "critical access dental provider" means a dentist or dental clinic that qualifies under section 256B.76, subdivision 4 , paragraph (b) and, in the previous calendar year, had no more than 15 percent of its patients covered by private dental insurance. (d) or , or critical access dental provider, or , , or critical access dental provider or ,, or critical access dental provider or, , or critical access dental provider (d) (e) (e) (f) EFFECTIVE DATE. This section is effective retroactively for sales and purchases made after June 30, 2007. Purchasers may apply for a refund of tax paid for qualifying purchases under this subdivision made after June 30, 2007, and before July 1, 2013, in the manner provided in Minnesota Statutes, section 297A.75. Notwithstanding limitations on claims for refunds under Minnesota Statutes, section 297A.40 , claims may be filed with the commissioner until June 30, 2014. Subd. 9a. Established religious orders. (a) Sales of lodging, prepared food, candy, soft drinks, and alcoholic beverages at noncatered events between an established religious order and an affiliated institution of higher education are exempt. (b) For purposes of this subdivision, "established religious order" means an organization directly or indirectly under the control or supervision of a church or convention or association of churches, where members of the organization: (1) normally live together as part of a community; (2) make long-term commitments to live under a strict set of moral and spiritual rules; and (3) work or engage full time in a combination of prayer, religious study, church reform or renewal, or other religious, educational, or charitable goals of the organization. (c) For purposes of this subdivision, an institution of higher education is "affiliated" with an established religious order if members of the religious order are represented on the governing board of the institution of higher education and the two organization share campus space and common facilities. EFFECTIVE DATE. This section is effective retroactively for sales and purchases made after June 30, 2012. and services or services EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. or services EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 18. Nursing homes and boarding care homes. (a) All sales, except those listed in paragraph (b), to a nursing home licensed under section 144A.02 or a boarding care home certified as a nursing facility under title 19 of the Social Security Act are exempt if the facility: (1) is exempt from federal income taxation pursuant to section 501(c)(3) of the Internal Revenue Code; and (2) is certified to participate in the medical assistance program under title 19 of the Social Security Act, or certifies to the commissioner that it does not discharge residents due to the inability to pay. (b) This exemption does not apply to the following sales: (1) building, construction, or reconstruction materials purchased by a contractor or a subcontractor as a part of a lump-sum contract or similar type of contract with a guaranteed maximum price covering both labor and materials for use in the construction, alteration, or repair of a building or facility; (2) construction materials purchased by tax-exempt entities or their contractors to be used in constructing buildings or facilities that will not be used principally by the tax-exempt entities; (3) lodging as defined under section 297A.61, subdivision 3 , paragraph (g), clause (2), and prepared food, candy, soft drinks, and alcoholic beverages as defined in section 297A.67, subdivision 2 ; and (4) leasing of a motor vehicle as defined in section 297B.01, subdivision 11 , except as provided in paragraph (c). (c) This exemption applies to the leasing of a motor vehicle as defined insection 297B.01, subdivision 11 , only if the vehicle is: (1) a truck, as defined in section 168.002 ; a bus, as defined in section168.002 ; or a passenger automobile, as defined in section 168.002 , if the automobile is designed and used for carrying more than nine persons including the driver; and (2) intended to be used primarily to transport tangible personal property or residents of the nursing home or boarding care home. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013. Subd. 45. Biopharmaceutical manufacturing facility. (a) Materials and supplies used or consumed in, capital equipment incorporated into, and privately owned infrastructure in support of the construction, improvement, or expansion of a biopharmaceutical manufacturing facility in the state are exempt if the following criteria are met: (1) the facility is used for the manufacturing of biologics; (2) the total capital investment made at the facility exceeds $50,000,000; and (3) the facility creates and maintains at least 190 full-time equivalent positions at the facility. These positions must be new jobs in Minnesota and not the result of relocating jobs that currently exist in Minnesota. (b) The tax must be imposed and collected as if the rate under section297A.62 applied, and refunded in the manner provided in section 297A.75 . (c) To be eligible for a refund, the owner of the biopharmaceutical manufacturing facility must: (1) initially apply to the Department of Employment and Economic Development for certification no later than one year from the final completion date of construction, improvement, or expansion of the facility; and (2) for each year that the owner of the biopharmaceutical manufacturing facility applies for a refund, the owner must have received written certification from the Department of Employment and Economic Development that the facility has met the criteria of paragraph (a). (d) The refund is to be paid annually at a rate of 25 percent of the total allowable refund payable to date, with the commissioner making annual payments of the remaining refund until all of the refund has been paid. (e) For purposes of this subdivision, "biopharmaceutical" and "biologics" are interchangeable and mean medical drugs or medicinal preparations produced using technology that uses biological systems, living organisms or derivatives of living organisms, to make or modify products or processes for specific use. The medical drugs or medicinal preparations include but are not limited to proteins, antibodies, nucleic acids, and vaccines. EFFECTIVE DATE. This section is effective retroactively to capital investments made and jobs created after December 31, 2012, and effective retroactively for sales and purchases made after December 31, 2012, and before July 1, 2019. Subd. 46. Research and development facility. Materials and supplies used or consumed in, and equipment incorporated into, the construction or improvement of a research and development facility that has laboratory space of at least 400,000 square feet and utilizes both high-intensity and low-intensity laboratories, provided that the project has a total construction cost of at least $140,000,000 within a 24-month period. The tax on purchases imposed under this subdivision must be imposed and collected as if the rate under section 297A.62 applied and then refunded in the manner provided in section 297A.75 . EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013, and before September 1, 2015. Subd. 47. Industrial measurement manufacturing and controls facility. (a) Materials and supplies used or consumed in, capital equipment incorporated into, fixtures installed in, and privately owned infrastructure in support of the construction, improvement, or expansion of an industrial measurement manufacturing and controls facility are exempt if: (1) the total capital investment made at the facility is at least $60,000,000; (2) the facility employs at least 250 full-time equivalent employees that are not employees currently employed by the company in the state; and (3) the Department of Employment and Economic Development determines that the expansion, remodeling, or improvement of the facility has a significant impact on the state economy. (b) The tax must be imposed and collected as if the rate under section297A.62 applied and refunded in the manner provided in section 297A.75 , only after the following criteria are met: (1) a refund may not be issued until the owner of the facility has received certification from the Department of Employment and Economic Development that the company meets the requirements in paragraph (a); and (2) to receive the refund, the owner of the industrial measurement manufacturing and controls facility must initially apply to the Department of Employment and Economic Development for certification no later than one year from the final completion date of construction, improvement, or expansion of the industrial measurement manufacturing and controls facility. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2013, and before December 31, 2015. (1) capital equipment exempt under section 297A.68, subdivision 5 ; (2) (1) (3) (2) (4) (3) (5) (4) (6) (5) (7) (6) (8) (7) (9) (8) (10) (9) (11) (10) (12) (11) (13) (12) (14) (13) : (i) (ii) a biopharmaceutical manufacturing facility exempt under section 297A.71, subdivision 45 ; (iii) a research and development facility exempt under section 297A.71, subdivision 4 b; and (iv) an industrial measurement manufacturing and controls facility exempt under section 297A.71, subdivision 47 ; (15) (14) and (16) (15) ; (16) items purchased for use in providing critical access dental services exempt under section 297A.70, subdivision 7 , paragraph (c); and (17) items and services purchased under a business subsidy agreement for use or consumption primarily in greater Minnesota exempt under section 297A.68, subdivision 49 EFFECTIVE DATE. The change to clause (1) is effective for sales and purchases made after August 31, 2014. The changes in clauses (13), (16), and (17), are effective the day following final enactment. to (3) , (2), and (16) (4) (3) (7) (6) (5) (4) (6) (5) (8) (7) (9) (8) (10), (9), (12), , and (15) and (17) (10), (12), (16) (15) EFFECTIVE DATE. This section is effective the day following final enactment. clause (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14), clauses (3) to (16) (17) EFFECTIVE DATE. This section is effective the day following final enactment. (e) Notwithstanding paragraph (d), only : (1) . ; (2) disseminate information included in the resolution adopted under subdivision 2; (3) provide notice of, and conduct public forums at which proponents and opponents on the merits of the referendum are given equal time to express their opinions on the merits of the referendum; (4) provide facts and data on the impact of the proposed sales tax on consumer purchases; and (5) provide facts and data related to the programs and projects to be funded with the sales tax. EFFECTIVE DATE. This section is effective the day following final enactment. , except as provided in paragraph (e), In each of calendar years 2006 to 2014, revenue not to exceed $3,500,000 may be used to pay the principal of bonds issued for capital projects of the city. After December 31, 2014, revenue from the tax imposed under subdivision 1 may not be used for this purpose. If the amount necessary to meet obligations under paragraphs (a) and (d) are less than 40 percent of the revenue from the tax in any year, the city may place the difference between 40 percent of the revenue and the amounts allocated under paragraphs (a) and (d) in an economic development fund to be used for any economic development purposes. EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. 2030 2042 EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. one three one three design, Complex infrastructure, including but not limited to, $43,500,000 $50,000,000 infrastructure, including but not limited to, and the food and beverage tax authorized under Laws 2009, chapter 88, article 4, section 23, The authority of the city to impose a tax under subdivision 1a shall expire when the principal and interest on any bonds or other obligations issued prior to December 31, 2014, to finance the construction, renovation, improvement, and expansion of the Mayo Civic Center Complex and related skyway access, lighting, parking, or landscaping have been paid, including any bonds issued to refund such bonds, or at an earlier time as the city shall, by ordinance, determine. Any funds remaining after completion of the project and retirement or redemption of the bonds shall be placed in the general fund of the city. The city may, by ordinance, repeal the tax provided that: (1) the revenues raised before the repeal are sufficient to meet all bond or other obligations backed by revenues of the tax; and (2) the repeal date meets the requirements of section 297A.99, subdivision 12 . EFFECTIVE DATE. This section is effective the day after the governing body of the city of Rochester and its chief fiscal officer comply with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. or extending the tax regional or extending the tax EFFECTIVE DATE. This section is effective for the city that approves them the day after compliance by the governing body of each city with Minnesota Statutes, section 645.021, subdivision 3 . Notwithstanding Minnesota Statutes, section 297A.99, subdivision 3 , paragraphs (a), (c), and (d), a city may extend the tax imposed under subdivision 1 through December 31, 2038, if approved by voters of the city no later than November 7, 2017, at either a general election or at a special election held on a first Tuesday after a first Monday in November. EFFECTIVE DATE. This section is effective for the city that approves them the day after compliance by the governing body of each city with Minnesota Statutes, section 645.021, subdivision 3 . improvements to the Sportsman Park/Ballfields, Riverside Park, Lions Park/Pavilion, Cedar South Park also known as Eldorado Park, and Spring Street Park; improvements to and extension of the River County Bike Trail; , and , improvement, and development of regional parks, bicycle trails, park land, open space, and of a walkways, as described in the city improvement plan adopted by the city council by resolution on December 12, 2006, and walkway over Interstate 94 and State Highway 24; and the acquisition of construction of EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of Clearwater with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. Authorized expenses for each organization include, but are not limited to, acquiring property; predesign; design; and paying construction, furnishing, and equipment costs related to these facilities and paying debt service on bonds or other obligations issued by the city. EFFECTIVE DATE. This section is effective the day following final enactment. CITY OF MARSHALL; VALIDATION OF PRIOR ACT. (a) Notwithstanding the time limits in Minnesota Statutes, section 645.021 , the city of Marshall may approve Laws 2010, chapter 389, article 5, section 6, as amended by Laws 201l, First Special Session chapter 7, article 4, section 9, and file its approval with the secretary of state by June 15, 2013. If approved as authorized under this paragraph, actions undertaken by the city pursuant to the approval of the voters on November 6, 2012, and otherwise in accordance with Laws 2010, chapter 389, article 5, section 6, as amended by Laws 201l, First Special Session chapter 7, article 4, section 9, are validated. (b) Notwithstanding the time limit on the imposition of tax under Laws 2010, chapter 389, article 5, section 6, subdivision 1, as amended by Laws 201l, First Special Session chapter 7, article 4, section 9, and subject to local approval under paragraph (a), the city of Marshall may impose the tax on or before July 1, 2013. EFFECTIVE DATE. This section is effective the day following final enactment. CITY OF PROCTOR; VALIDATION OF PRIOR ACT. Notwithstanding the time limits in Minnesota Statutes, section 645.021 , the city of Proctor may approve, by resolution, Laws 2008, chapter 366, article 7, section 13, and Laws 2010, chapter 389, article 5, sections 1 and 2, and file its approval with the secretary of state by January 1, 2014. If approved under this paragraph, actions undertaken by the city pursuant to the approval of the voters on November 2, 2010, and otherwise in accordance with those laws are validated. EFFECTIVE DATE. This section is effective the day following final enactment. REPEALER. (a) AMEND Minnesota Statutes 2012, sections 297A.61, subdivision 27 ; andAMEND 297A.68 , subdivision 35 , are repealed.(b) Laws 2009, chapter 88, article 4, section 23, as amended by Laws 2010, chapter 389, article 5, section 4, is repealed. EFFECTIVE DATE. Paragraph (a) is effective for sales and purchases made after June 30, 2013. Paragraph (b) is effective the day following final enactment. or other public improvements or , , or other funds of the port authority and the city of Bloomington EFFECTIVE DATE. This section is effective upon compliance of the governing body of the city of Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 . Subd. 19. Additional border city allocation; 2013. (a) In addition to the tax reductions authorized in subdivisions 12 to 18, the commissioner shall allocate $750,000 for tax reductions to border city enterprise zones in cities located on the western border of the state. The commissioner shall allocate this amount among cities on a per capita basis. Allocations made under this subdivision may be used for tax reductions under section 469.171 , or for other offsets of taxes imposed on or remitted by businesses located in the enterprise zone, but only if the municipality determines that the granting of the tax reduction or offset is necessary to retain a business within or attract a business to the zone. The city alternatively may elect to use any portion of the allocation under this paragraph for tax reductions under section 469.1732 or 469.1734 . (b) The commissioner shall allocate $750,000 for tax reductions under section 469.1732 or 469.1734 to cities with border city enterprise zones located on the western border of the state. The commissioner shall allocate this amount among the cities on a per capita basis. The city alternatively may elect to use any portion of the allocation provided in this paragraph for tax reductions under section 469.171 . EFFECTIVE DATE. This section is effective July 1, 2013. or qualified border retail facilities; or (7) (6) (5) (d) Notwithstanding the requirements of paragraph (a) and the finding requirements of section 469.174, subdivision 12 , tax increments from an economic development district may be used to provide improvements, loans, subsidies, grants, interest rate subsidies, or assistance in any form to developments consisting of buildings and ancillary facilities, if all the following conditions are met: (1) the municipality finds that the project will create or retain jobs in this state, including construction jobs, and that construction of the project would not have commenced before July 1, 2012, without the authority providing assistance under the provisions of this paragraph; (2) construction of the project begins no later than July 1, 2012; (3) the request for certification of the district is made no later than June 30, 2012; and (4) for development of housing under this paragraph, the construction must begin before January 1, 2012. The provisions of this paragraph may not be used to assist housing that is developed to qualify under section 469.1761, subdivision 2 or 3, or similar requirements of other law, if construction of the project begins later than July 1, 2011. EFFECTIVE DATE. This section is effective for districts for which the request for certification was made after June 30, 2012. (c)(1) Tax increments may not be used to pay for the cost of public improvements, equipment, or other items, if: (i) the improvements, equipment, or other items are located outside of the area of the tax increment financing district from which the increments were collected; and (ii) the improvements, equipment, or items that (A) primarily serve a decorative or aesthetic purpose, or (B) serve a functional purpose, but their cost is increased by more than 100 percent as a result of the selection of materials, design, or type as compared with more commonly used materials, designs, or types for similar improvements, equipment, or items. (2) The provisions of this paragraph do not apply to expenditures related to the rehabilitation of historic structures that are: (i) individually listed on the National Register of Historic Places; or (ii) a contributing element to a historic district listed on the National Register of Historic Places. EFFECTIVE DATE. This section is effective the day following final enactment for all tax increment financing districts, regardless of when the request for certification was made, but applies only to amounts spent after final enactment. increased to six years deemed to end on December 31, 2016 EFFECTIVE DATE. This section is effective the day following final enactment and applies to districts certified on or after January 1, 2005, and before April 20, 2009. , excluding that portion of the school rate attributable to the general education levy under section 126C.13 , EFFECTIVE DATE. This section is effective for districts for which the request for certification is made after April 15, 2013. Subd. 1d. Original net tax capacity adjustment; homestead market value exclusion. (a) Upon approval by the municipality, by resolution, the authority may elect to reduce the original net tax capacity of a qualified district by the amount of the tax capacity attributable to the market value exclusion undersection 273.13, subdivision 35 , for taxes payable in the year preceding the election. The amount of the reduction may not reduce the original net tax capacity below zero. (b) For purposes of this subdivision, a qualified district means a tax increment financing district that satisfies the following conditions: (1) for taxes payable in 2011, the authority received a homestead market value credit reimbursement under section 273.1384 for the district of $10,000 or more; (2) for taxes payable in 2013, the reduction in captured tax capacity resulting from the market value exclusion for the district was equal to or greater than 1.75 percent of the district's captured tax capacity; and (3) either (i) the authority is permitted to expend increments on activities under the provisions of section 469.1763, subdivision 3 , or an equivalent provision of special law on July 1, 2013, or (ii) the district's tax increments received for taxes payable in 2012 exceeded the amount of debt service payments due during calendar year 2012 on bonds issued under section 469.178 to which the district's increments are pledged. The calculation of the amount under clause (2) must reflect any adjustments to original net tax capacity made under subdivision 1, paragraphs (d) and (e), for the homestead market value exclusion. (c) The authority must notify the county auditor of its election under this section no later than July 1, 2014. Notifications made by July 1, 2013, are effective beginning for taxes payable in 2014, and notifications made after July 1, 2013, are effective beginning for taxes payable in 2015. EFFECTIVE DATE. This section is effective the day following final enactment and applies to all tax increment financing districts regardless of when the request for certification was made. Subd. 1e. Adjustments; qualifying districts. (a) For any tax increment financing district that satisfies the requirements of paragraph (b), the original net tax capacity must be reduced by the full amount of the original net tax capacity or $20,000, whichever is less. (b) A tax increment financing district qualifies under this subdivision if it satisfies the following conditions: (1) the district was certified after January 1, 2011, and before January 1, 2012; (2) for assessment year 2012, at least 75 percent of the tax capacity of the district is class 4d property; and (3) for assessment year 2012, the average estimated market value is over $115,000 per housing unit for the portion of the property that is class 4d. (c) An authority or a property owner within a tax increment financing district must notify the county assessor of a district that qualifies under this subdivision by July 1, 2013. (d) This subdivision expires on December 31, 2021. EFFECTIVE DATE. This section is effective beginning for taxes payable in 2014. , except increment attributable to the general education levy, (d) The amount of taxes attributable to imposing the general education levy under section 126C.13 must be returned to the school district within which the tax increment financing district is located. EFFECTIVE DATE. This section is effective for districts for which the request for certification is made after April 15, 2013. Subd. 3c. Mall of America. (a) When computing the net tax capacity under section 473F.05 , the Hennepin County auditor shall exclude the captured tax capacity of Tax Increment Financing Districts No. 1-C and No. 1-G in the city of Bloomington. (b) Notwithstanding the provisions of subdivision 2, paragraph (a), the commercial-industrial contribution percentage for the city of Bloomington is the contribution net tax capacity divided by the total net tax capacity of commercial-industrial property in the city, excluding any commercial-industrial property that is captured tax capacity of Tax Increment Financing Districts No. 1-C and No. 1-G. (c) The property taxes to be paid on commercial-industrial tax capacity that is included in the captured tax capacity of Tax Increment Financing Districts No. 1-C and No. 1-G in the city of Bloomington must be determined as described in subdivision 6, except that the portion of the tax that is based on the areawide tax rate is to be treated as tax increment under section 469.176 . (d) The provisions of this subdivision take effect only if the clerk of the city of Bloomington certifies to the Hennepin County auditor that the city has entered into a binding written agreement with the Metropolitan Council to repair and restore, or to replace, the old Cedar Avenue bridge for use by bicycle commuters and recreational users. (e) This subdivision expires on the earliest of the following dates: (1) when the tax increment financing districts have been decertified in 2024 or 2035, as provided by section 22, subdivision 2 or 4; or (2) on January 1, 2014, if the city clerk fails to make the certification provided in paragraph (d) or if the city fails to file its local approval of section 23 with the secretary of state by December 31, 2013. EFFECTIVE DATE. This section is effective beginning for property taxes payable in 2014. (a) ten-year 15-year (b) Notwithstanding the provisions of Minnesota Statutes, section 469.176 , or any other law to the contrary, the city of Bloomington and its port authority may extend the duration limits of the district for a period through December 31, 2039. (c) Effective for taxes payable in 2014, tax increment for the district must be computed using the current local tax rate, notwithstanding the provisions of Minnesota Statutes, section 469.177, subdivision 1 a. EFFECTIVE DATE. Paragraphs (a) and (c) are effective upon compliance by the governing body of the city of Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 . Paragraph (b) is effective upon compliance by the governing bodies of the city of Bloomington, Hennepin County, and Independent School District No. 271 with the requirements of Minnesota Statutes, sections 469.1782, subdivision 2 , and 645.021 , subdivision 3. ORIGINAL TAX CAPACITY PARCELS DEEMED OCCUPIED (a) The provisions of this section apply to redevelopment tax increment financing districts created by the Housing and Redevelopment Authority in and for the city of Oakdale in the areas comprised of the parcels with the following parcel identification numbers: (1) 3102921320053; 3102921320054; 3102921320055; 3102921320056; 3102921320057; 3102921320058; 3102921320062; 3102921320063; 3102921320059; 3102921320060; 3102921320061; 3102921330005; and 3102921330004; and (2) 2902921330001 and 2902921330005. (b) For a district subject to this section, the Housing and Redevelopment Authority may, when requesting certification of the original tax capacity of the district under Minnesota Statutes, section 469.177 , elect to have the original tax capacity of the district be certified as the tax capacity of the land. (c) The authority to request certification of a district under this section expires on July 1, 2013. (a) Parcel numbers 3102921320054, 3102921320055, 3102921320056, 3102921320057, 3102921320061, and 3102921330004 are deemed to meet the requirements of Minnesota Statutes, section 469.174, subdivision 10 , paragraph (d), notwithstanding any contrary provisions of that paragraph, if the following conditions are met: (1) a building located on any part of each of the specified parcels was demolished after the Housing and Redevelopment Authority for the city of Oakdale adopted a resolution under Minnesota Statutes, section 469.174, subdivision 10 , paragraph (d), clause (3); (2) the building was removed either by the authority, by a developer under a development agreement with the Housing and Redevelopment Authority for the city of Oakdale, or by the owner of the property without entering into a development agreement with the Housing and Redevelopment Authority for the city of Oakdale; and (3) the request for certification of the parcel as part of a district is filed with the county auditor by December 31, 2017. (b) The provisions of this section allow an election by the Housing and Redevelopment Authority for the city of Oakdale for the parcels deemed occupied under paragraph (a), notwithstanding the provisions of Minnesota Statutes, sections 469.174, subdivision 10 , paragraph (d), and 469.177 , subdivision 1, paragraph (f). (c) The city may elect, in the tax increment financing plan, to collect increment from a redevelopment district created under the provisions of this section for an additional ten years beyond the limit in Minnesota Statutes, section 469.176, subdivision 1 b. EFFECTIVE DATE. This section is effective upon compliance by the governing body of the city of Oakdale with the requirements of Minnesota Statutes, section 645.021, subdivision 3 , except that the provisions of paragraph (c) are effective only upon compliance with Minnesota Statutes, section 469.1782, subdivision 2 , by Ramsey County and Independent School District No. 622. 2024 2040 area parcels described in clause (2) : or parcel numbers 3102921320053, 3102921320054, 3102921320055, 3102921320056, 3102921320057, 3102921320058, 3102921320059, 3102921320060, 3102921320061, 3102921320062, 3102921320063, 3102921330004, and 3102921330005, of the referenced in this subdivision that serves any of the referenced parcels , except the authority under this clause does not apply to increments collected after the conclusion of the duration limit under general law EFFECTIVE DATE. This section is effective upon compliance by the governing body of the city of Oakdale with the requirements of Minnesota Statutes, section 645.021, subdivision 3 , except that the amendments to subdivision 1 are effective only upon compliance with Minnesota Statutes, section 469.1782, subdivision 2 , by Ramsey County and Independent School District No. 622. ST. CLOUD; TAX INCREMENT FINANCING. The request for certification of Tax Increment Financing District No. 2, commonly referred to as the Norwest District, in the city of St. Cloud is deemed to have been made on or after August 1, 1979, and before July 1, 1982. Revenues derived from tax increment for that district must be treated for purposes of any law as revenue of a tax increment financing district for which the request for certification was made during that time period. EFFECTIVE DATE. This section is effective upon approval by the governing body of the city of St. Cloud and compliance with Minnesota Statutes, section 645.021, subdivision 3 . CITY OF GLENCOE; TAX INCREMENT FINANCING DISTRICT EXTENSION. Subdivision 1. Duration of district. Notwithstanding the provisions of Minnesota Statutes, section 469.176, subdivision 1 b, paragraph (a), clause (4), or any other law to the contrary, the city of Glencoe may collect tax increments from Tax Increment Financing District No. 4 (McLeod County District No. 007) through December 31, 2023, subject to the conditions in subdivision 2. Subd. 2. Exclusive use of revenues. (a) All tax increments derived from Tax Increment Financing District No. 4 (McLeod County District No. 007) that are collected after December 31, 2013, must be used only to pay debt service on or to defease bonds that were outstanding on January 1, 2013 and that were issued to finance improvements serving: (1) Tax Increment Financing District No. 14 (McLeod County District No. 033) (Downtown); (2) Tax Increment Financing District No. 15 (McLeod County District No. 035) (Industrial Park); and (3) benefited properties as further described in proceedings related to the city's series 2007A bonds, dated September 1, 2007, and any bonds issued to refund those bonds. (b) Increments may also be used to pay debt service on or to defease bonds issued to refund the bonds described in paragraph (a), if the refunding bonds do not increase the present value of debt service due on the refunded bonds when the refunding is closed. (c) When the bonds described in paragraphs (a) and (b) have been paid or defeased, the district must be decertified and any remaining increment returned to the city, county, and school district as provided in Minnesota Statutes, section 469.176, subdivision 2 , paragraph (c), clause (4). EFFECTIVE DATE. This section is effective upon compliance by the governing bodies of the city of Glencoe, McLeod County, and Independent School District No. 2859 with the requirements of Minnesota Statutes, sections 469.1782, subdivision 2 , and645.021 , subdivision 3. CITY OF ELY; TAX INCREMENT FINANCING. Subdivision 1. Extension of district. Notwithstanding Minnesota Statutes, section 469.176, subdivision 1 b, or any other law to the contrary, the city of Ely may collect tax increment from Tax Increment Financing District No. 1 through December 31, 2021. Increments from the district may only be used to pay binding obligations and administrative expenses. Subd. 2. Binding obligations. For purposes of this section, "binding obligations" means the binding contractual or debt obligation of Tax Increment Financing District No. 1 entered into before January 1, 2013. Subd. 3. Expenditures outside district. Notwithstanding Minnesota Statutes, section 469.1763, subdivision 2 , the governing body of the city of Ely may elect to transfer revenues derived from increments from its Tax Increment Financing District No. 3 to the tax increment account established under Minnesota Statutes, section 469.177, subdivision 5 , for Tax Increment Financing District No. 1. The amount that may be transferred is limited to the lesser of: (1) $168,000; or (2) the total amount due on binding obligations and outstanding on that date, less the amount of increment collected by Tax Increment Financing District No. 1 after December 31, 2012, and administrative expenses of Tax Increment Financing District No. 1 incurred after December 31, 2012. EFFECTIVE DATE. This section is effective upon approval by the governing bodies of the city of Ely, St. Louis County, and Independent School District No. 696 with the requirements of Minnesota Statutes, sections 469.1782, subdivision 2 , and645.021 , subdivision 3. DAKOTA COUNTY COMMUNITY DEVELOPMENT AGENCY; TAX INCREMENT FINANCING DISTRICT. Subdivision 1. Authorization. Notwithstanding the provisions of any other law, the Dakota County Community Development Agency may establish a redevelopment tax increment financing district comprised of the properties that (1) were included in the CDA 10 Robert Street and Smith Avenue district in the city of West St. Paul, and (2) were not decertified before July 1, 2012. The district created under this section terminates no later than December 31, 2023. Subd. 2. Special rules. The requirements for qualifying a redevelopment district under Minnesota Statutes, section 469.174, subdivision 10 , do not apply to parcels located within the district. Minnesota Statutes, section 469.176, subdivision 4 j, do not apply to the district. The original tax capacity of the district is $93,239. Subd. 3. Authorized expenditures. Tax increment from the district may be expended to pay for any eligible activities authorized by Minnesota Statutes, chapter 469, within the redevelopment area that includes the district provided that the boundaries of the redevelopment area may not be expanded to add new area after April 1, 2013. All such expenditures are deemed to be activities within the district underMinnesota Statutes, section 469.1763 , subdivisions 2 and 4. Subd. 4. Adjusted net tax capacity. The captured tax capacity of the district must be included in the adjusted net tax capacity of the city, county, and school district for the purposes of determining local government aid, education aid, and county program aid. The county auditor shall report to the commissioner of revenue the amount of the captured tax capacity for the district at the time the assessment abstracts are filed. EFFECTIVE DATE. This section is effective upon compliance by the governing body of the Dakota County Community Development Agency with the requirements of Minnesota Statutes, section 645.021, subdivision 3 . CITY OF APPLE VALLEY; TAX INCREMENT FINANCING DISTRICT. Subdivision 1. Definitions. (a) For the purposes of this section, the following terms have the meanings given to them. (b) "City" means the city of Apple Valley. (c) "Project area" means the following parcels: parcel numbers 01-03500-25-010, 01-03500-03-011, 01-03500-02-010, 01-03500-52-011, 01-03500-78-011, 01-03500-77-014, 01-03500-75-010, 01-03400-05-050, (d) "Soil deficiency district" means a type of tax increment financing district consisting of a portion of the project area in which the city finds by resolution that the following conditions exist: (1) unusual terrain or soil deficiencies that occurred over 70 percent of the acreage in the district require substantial filling, grading, or other physical preparation for use; and (2) the estimated cost of the physical preparation under clause (1), but excluding costs directly related to roads as defined in Minnesota Statutes, section 160.01 , and local improvements as described in Minnesota Statutes, sections 429.021, subdivision 1 , other than clauses (8) to (10), and 430.01 , exceeds the fair market value of the land before completion of the preparation. Subd. 2. Special rules. (a) If the city elects, upon the adoption of the tax increment financing plan for a district, the rules under this section apply to a redevelopment district, renewal and renovation district, soil condition district, or soil deficiency district established by the city or a development authority of the city in the project area. The city, or a development authority acting on its behalf, may establish one or more soils deficiency districts within the project area. (b) Prior to or upon the adoption of the first tax increment plan subject to the special rules under this subdivision, the city must find by resolution that parcels consisting of at least 70 percent of the acreage of the project area, excluding street and railroad rights-of-way, are characterized by one or more of the following conditions: (1) peat or other soils with geotechnical deficiencies that impair development of commercial buildings or infrastructure; (2) soils or terrain that requires substantial filling in order to permit the development of commercial buildings or infrastructure; (3) landfills, dumps, or similar deposits of municipal or private waste; (4) quarries or similar resource extraction sites; (5) floodway; and (6) substandard buildings, within the meaning of Minnesota Statutes, section 469.174, subdivision 10 . (c) For the purposes of paragraph (b), clauses (1) to (5), a parcel is characterized by the relevant condition if at least 60 percent of the area of the parcel contains the relevant condition. For the purposes of paragraph (b), clause (6), a parcel is characterized by substandard buildings if substandard buildings occupy at least 30 percent of the area of the parcel. (d) The five-year rule under Minnesota Statutes, section 469.1763, subdivision 3 , is extended to ten years for any district, and the period underMinnesota Statutes, section 469.1763, subdivision 4 , is extended to 11 years. (e) Notwithstanding any provision to the contrary in Minnesota Statutes, section 469.1763, subdivision 2 , paragraph (a), not more than 80 percent of the total revenue derived from tax increments paid by properties in any district, measured over the life of the district, may be expended on activities outside the district but within the project area. (f) For a soil deficiency district: (1) increments may be collected through 20 years after the receipt by the authority of the first increment from the district; and (2) except as otherwise provided in this subdivision, increments may be used only to: (i) acquire parcels on which the improvements described in item (ii) will occur; (ii) pay for the cost of correcting the unusual terrain or soil deficiencies and the additional cost of installing public improvements directly caused by the deficiencies; and (iii) pay for the administrative expenses of the authority allocable to the district. (g) The authority to approve tax increment financing plans to establish tax increment financing districts under this section expires December 31, 2022. EFFECTIVE DATE. This section is effective upon compliance with Minnesota Statutes, section 645.021, subdivision 3 . CITY OF APPLE VALLEY; USE OF TAX INCREMENT FINANCING. Subdivision 1. Developments consisting of building and ancillary facilities. Notwithstanding Minnesota Statutes, section 469.176 , subdivisions 4c and 4m, the city of Apple Valley may use tax increment financing to provide improvements, loans, subsidies, grants, interest rate subsidies, or assistance in any form to developments consisting of buildings and ancillary facilities, if all of the following conditions are met: (1) the city of Apple Valley finds that the project will create or retain jobs in Minnesota, including construction jobs; (2) the city of Apple Valley finds that construction of the project will not commence before July 1, 2014, without the use of tax increment financing; (3) the request for certification of the district is made no later than June 30, 2014; (4) construction of the project begins no later than July 1, 2014; and (5) for development of housing, construction of the project begins no later than December 31, 2013. Subd. 2. Extension of authority to spend tax increments. Notwithstanding the time limits in Minnesota Statutes, section 469.176, subdivision 4 m, the city of Apple Valley has the authority to spend tax increments under Minnesota Statutes, section 469.176, subdivision 4 m, until December 31, 2014. EFFECTIVE DATE. This section is effective upon approval by the governing body of the city of Apple Valley and timely compliance with Minnesota Statutes, section 645.021, subdivision 3 . CITY OF MINNEAPOLIS; STREETCAR FINANCING. Subdivision 1. Definitions. (a) For purposes of this section, the following terms have the meanings given them. (b) "City" means the city of Minneapolis. (c) "County" means Hennepin County. (d) "District" means the areas certified by the city under subdivision 2 for collection of value capture taxes. (e) "Project area" means the area including one city block on either side of a streetcar line designated by the city to serve the downtown and adjacent neighborhoods of the city. Subd. 2. Authority to establish district. (a) The governing body of the city may, by resolution, establish a value capture district consisting of some or all of the taxable parcels located within one or more of the following areas of the city, as described in the resolution: (1) the area bounded by Nicollet Avenue on the west, 16th Street East on the south, First Avenue South on the east, and 14th Street East on the north; (2) the area bounded by Spruce Place on the west, 14th Street West on the south, LaSalle Avenue on the east, and Grant Street West on the north; (3) the area bounded by Nicollet Avenue or Mall on the west, Fifth Street South on the south, Marquette Avenue on the east, and Fourth Street South on the north; (4) the area bounded by First Avenue North on the west, Washington Avenue on the south, Hennepin Avenue on the east, and Second Street North on the north; and (5) the area bounded by Fifth Street North East on the west, Central Avenue North East on the southeast, Sixth Street North East on the east, Hennepin Avenue East on the south, and First Avenue North East on the north. (b) The city may establish the district and the project area only after holding a public hearing on its proposed creation after publishing notice of the hearing and the proposal at least once not less than ten days nor more than 30 days before the date of the hearing. Subd. 3. Calculation of value capture district; administrative provisions. (a) If the city establishes a value capture district under subdivision 2, the city shall request the county auditor to certify the district for calculation of the district's tax revenues. (b) For purposes of calculating the tax revenues of the district, the county auditor shall treat the district as if it were a request for certification of a tax increment financing district under the provisions of Minnesota Statutes, section 469.177, subdivision 1 , and shall calculate the tax revenues of the district for each year of its duration under subdivision 5 as equaling the amount of tax increment that would be computed by applying the provisions of Minnesota Statutes, section 469.177 , subdivisions 1, 2, and 3, to determine captured tax capacity and multiplying by the current tax rate, excluding the state general tax rate. The city shall provide the county auditor with the necessary information to certify the district, including the option for calculating revenues derived from the areawide tax rate under Minnesota Statutes, chapter 473F. (c) The county auditor shall pay to the city at the same times provided for settlement of taxes and payment of tax increments the tax revenues of the district. The city must use the tax revenues as provided under subdivision 4. Subd. 4. Permitted uses of district tax revenues. (a) In addition to paying for reasonable administrative costs of the district, the city may spend tax revenues of the district for property acquisition, improvements, and equipment to be used for operations within the project area, along with related costs, for: (1) planning, design, and engineering services related to the construction of the streetcar line; (2) acquiring property for, constructing, and installing a streetcar line; (3) acquiring and maintaining equipment and rolling stock and related facilities, such as maintenance facilities, which need not be located in the project area; (4) acquiring, constructing, or improving transit stations; and (5) acquiring or improving public space, including the construction and installation of improvements to streets and sidewalks, decorative lighting and surfaces, and plantings related to the streetcar line. (b) The city may issue bonds or other obligations under Minnesota Statutes, chapter 475, without an election, to fund acquisition or improvement of property of a capital nature authorized by this section, including any costs of issuance. The city may also issue bonds or other obligations to refund those bonds or obligations. Payment of principal and interest on the bonds or other obligations issued under this paragraph is a permitted use of the district's tax revenues. (c) Tax revenues of the district may not be used for the operation of the streetcar line. Subd. 5. Duration of the district. A district established under this section is limited to the lesser of (1) 25 years of tax revenues, or (2) the time necessary to collect tax revenues equal to the amount of the capital costs permitted under subdivision 4 or the amount needed to pay or defease bonds or other obligations issued under subdivision 4, whichever is later. EFFECTIVE DATE. This section is effective the day following final enactment. CITY OF MAPLEWOOD; TAX INCREMENT FINANCING DISTRICT; SPECIAL RULES. (a) If the city of Maplewood elects, upon the adoption of a tax increment financing plan for a district, the rules under this section apply to one or more redevelopment tax increment financing districts established by the city or the economic development authority of the city. The area within which the redevelopment tax increment districts may be created is parcel 362922240002 (the "parcel") or any replatted parcels constituting a part of the parcel and the adjacent rights-of-way. For purposes of this section, the parcel is the "3M Renovation and Retention Project Area" or "project area." (b) The requirements for qualifying redevelopment tax increment districts under Minnesota Statutes, section 469.174, subdivision 10 , do not apply to the parcel, which is deemed eligible for inclusion in a redevelopment tax increment district. (c) The 90 percent rule under Minnesota Statutes, section 469.176, subdivision 4 j, does not apply to the parcel. (d) The expenditures outside district rule under Minnesota Statutes, section 469.1763, subdivision 2 , does not apply; the five-year rule under Minnesota Statutes, section 469.1763, subdivision 3 , is extended to ten years; and expenditures must only be made within the project area. (e) If, after one year from the date of certification of the original net tax capacity of the tax increment district, no demolition, rehabilitation, or renovation of property has been commenced on a parcel located within the tax increment district, no additional tax increment may be taken from that parcel, and the original net tax capacity of the parcel shall be excluded from the original net tax capacity of the tax increment district. If 3M Company subsequently commences demolition, rehabilitation, or renovation, the authority shall certify to the county auditor that the activity has commenced, and the county auditor shall certify the net tax capacity thereof as most recently certified by the commissioner of revenue and add it to the original net tax capacity of the tax increment district. The authority must submit to the county auditor evidence that the required activity has taken place for each parcel in the district. (f) The authority to approve a tax increment financing plan and to establish a tax increment financing district under this section expires December 31, 2018. EFFECTIVE DATE. This section is effective upon approval by the governing body of the city of Maplewood and upon compliance with Minnesota Statutes, section 645.021, subdivision 3 . CITY OF BLOOMINGTON; TAX INCREMENT FINANCING. Subdivision 1. Addition of property to Tax Increment Financing District No. 1-G. (a) Notwithstanding the provisions of Minnesota Statutes, section 469.175, subdivision 4 , or any other law to the contrary, the governing bodies of the Port Authority of the city of Bloomington and the city of Bloomington may elect to eliminate the real property north of the existing building line on Lot 1, Block 1, Mall of America 7th Addition, exclusive of Lots 2 and 3 from Tax Increment Financing District No. 1-C within Industrial Development District No. 1 Airport South in the city of Bloomington, Minnesota, and expand the boundaries of Tax Increment Financing District No. 1-G to include that property. (b) If the city elects to transfer parcels under this authority, the county auditor shall transfer the original tax capacity of the affected parcels from Tax Increment Financing District No. 1-C to Tax Increment Financing District No. 1-G. Subd. 2. Authority to extend duration limit; computation of increment. (a) Notwithstanding Minnesota Statutes, section 469.176 , or Laws 1996, chapter 464, article 1, section 8, or any other law to the contrary, the city of Bloomington and its port authority may extend the duration limits of Tax Increment Financing Districts No. 1-C and No. 1-G through December 31, 2034. (b) Effective for property taxes payable in 2017 through 2034, the captured tax capacity of Tax Increment Financing District No. 1-C must be included in computing the tax rates of each local taxing district and the tax increment equals only the amount of tax computed under Minnesota Statutes, section 473F.08, subdivision 3 c, paragraph (c). (c) Effective for property taxes payable in 2019 through 2034, the captured tax capacity of Tax Increment Financing District No. 1-G must be included in computing the tax rates of each local taxing district and the tax increment for the district equals only the amount of tax computed under Minnesota Statutes, section 473F.08, subdivision 3 c, paragraph (c). Subd. 3. Treatment of increment. Increments received under the provisions of subdivision 2, paragraph (b) or (c), and Minnesota Statutes, section 473F.08, subdivision 3 c, are deemed to be tax increments of Tax Increment Financing District No. 1-G, notwithstanding any law to the contrary, and without regard to whether they are attributable to captured tax capacity of Tax Increment Financing District No. 1-C. Subd. 4. Condition. The authority under this section expires and Tax Increment Financing Districts No. 1-C and No. 1-G must be decertified for taxes payable in 2024 and thereafter, if the total estimated market value of improvements for parcels located in Tax Increment Financing District No. 1-G, as modified, do not exceed $100,000,000 by taxes payable in 2023. EFFECTIVE DATE. This section is effective upon compliance of the governing body of the city of Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 , but only if the city enters into a binding written agreement with the Metropolitan Council to repair and restore, or to replace, the old Cedar Avenue bridge for use by bicycle commuters and recreational users. This section is effective without approval of the county and school district under Minnesota Statutes, section 469.1782, subdivision 2 . The legislature finds that the county and school district are not "affected local government units" within the meaning of Minnesota Statutes, section 469.1782 , because the provision allowing extended collection of increment by the tax increment financing districts does not affect their tax bases and tax rates dissimilarly to other counties and school districts in the metropolitan area. CITY OF BLOOMINGTON; OLD CEDAR AVENUE BRIDGE. (a) Notwithstanding any law to the contrary, the city of Bloomington shall transfer from the tax increment financing accounts for its Tax Increment Financing District No. 1-C and Tax Increment Financing District No. 1-G an amount equal to the tax increment for each district that is computed under the provisions of Minnesota Statutes, section 473F.08, subdivision 3 c, for taxes payable in 2014 to an account or fund established for the repair, restoration, or replacement of the Old Cedar Avenue bridge for use by bicycle commuters and recreational users. The city is authorized to and must use the transferred funds to complete the repair, renovation, or replacement of the bridge. (b) No signs, plaques, or markers acknowledging or crediting donations for, sponsorships of, or naming rights may be posted on or in the vicinity of the Old Cedar Avenue bridge. EFFECTIVE DATE. This section is effective upon compliance by the city of Bloomington with the requirements of Minnesota Statutes, section 645.021, subdivision 3 . the Destination Medical Center Corporation established pursuant to section469.41 , Subd. 48. Construction materials, public infrastructure related to the destination medical center. Materials and supplies used in, and equipment incorporated into, the construction and improvement of publicly owned buildings and infrastructure included in the development plan adopted under section 469.43 , and financed with public funds, are exempt. EFFECTIVE DATE. This section is effective for sales and purchases made after June 30, 2015, and before July 1, 2049. [469.40 ] DEFINITIONS. Subdivision 1. Application. For the purposes of sections 469.40 to 469.47 , the terms defined in this section have the meanings given them. Subd. 2. City. " City" means the city of Rochester. Subd. 3. County. " County" means Olmsted County. Subd. 4. Destination Medical Center Corporation, corporation, DMCC. "Destination Medical Center Corporation," "corporation," or "DMCC" means the nonprofit corporation created by the city as provided in section 469.41 , and organized under chapter 317A. Subd. 5. Destination Medical Center Development District. " Destination medical center development district" or "development district" means a geographic area in the city identified in the DMCC development plan in which public infrastructure projects are implemented. Subd. 6. Development plan. " Development plan" means the plan adopted by the DMCC under section 469.43 . Subd. 7. Financial interest. " Financial interest" means a person's direct or indirect ownership or investment interest or compensation arrangement, whether through business, investment, or family, including spouse, children and stepchildren, and other relatives living with the person, as follows: (1) ownership or investment interest in the development, acquisition, or construction of a project in the development district; (2) compensation arrangement with respect to the development, acquisition, or construction of a project in the development district; or (3) potential ownership or investment interest in, or compensation arrangement with respect to, the development, acquisition, or construction of a project in the development district. Subd. 8. Medical business entity. " Medical business entity" means a medical business entity with its principal place of business in the city that, as of the effective date of this section, together with all business entities of which it is the sole member or sole shareholder, collectively employs more than 30,000 persons in the state. Subd. 9. Nonprofit economic development agency, agency. " Nonprofit economic development agency" or "agency" means the nonprofit agency required under section 469.43 to provide experience and expertise to the DMCC for purposes of developing and marketing the destination medical center. Subd. 10. Project. "Project" means a project to implement the development plan, whether public or private. Subd. 11. Public infrastructure project. (a) "Public infrastructure project" means a project financed in part or in whole with public money in order to support the medical business entity's development plans, as identified in the DMCC development plan. A public infrastructure project may: (1) acquire real property and other assets associated with the real property; (2) demolish, repair, or rehabilitate buildings; (3) remediate land and buildings as required to prepare the property for acquisition or development; (4) install, construct, or reconstruct elements of public infrastructure required to support the overall development of the destination medical center development district including, but not limited to, streets, roadways, utilities systems and related facilities, utility relocations and replacements, network and communication systems, streetscape improvements, drainage systems, sewer and water systems, subgrade structures and associated improvements, landscaping, façade construction and restoration, wayfinding and signage, and other components of community infrastructure; (5) acquire, construct or reconstruct, and equip parking facilities and other facilities to encourage intermodal transportation and public transit; (6) install, construct or reconstruct, furnish, and equip parks, cultural, and recreational facilities, facilities to promote tourism and hospitality, conferencing and conventions, broadcast and related multimedia infrastructure; (7) make related site improvements including, without limitation, excavation, earth retention, soil stabilization and correction, and site improvements to support the destination medical center development district; (8) prepare land for private development and to sell or lease land; (9) costs of providing relocation benefits to occupants of acquired properties; and (10) construct and equip all or a portion of one or more suitable structures on land owned by the city for sale or lease to private development; provided, however, that the portion of any structure directly financed by the city as a public infrastructure project must not be sold or leased to a medical business entity. (b) A public infrastructure project is not a business subsidy under section116J.993 . Subd. 12. Year. "Year" means a calendar year, except where otherwise provided. [469.41 ] DESTINATION MEDICAL CENTER CORPORATION ESTABLISHED. Subdivision 1. DMCC created. The city must establish a destination medical center corporation as a nonprofit corporation under chapter 317A to provide the city with expertise in preparing and implementing the development plan to establish the city as a destination medical center. Except as provided in sections 469.40 to 469.47 , the nonprofit corporation is not subject to laws governing the city. Subd. 2. Membership; quorum. (a) The corporation's governing board consists of eight members appointed, as follows: (1) the mayor of the city, or the mayor's designee, subject to approval by the city council; (2) the city council president, or the city council president's designee, subject to approval by the city council; (3) the chair or member of the county board, appointed by the county board; (4) a representative of the medical business entity appointed by and serving at the pleasure of the medical business entity; and (5) four members appointed by the governor, subject to confirmation by the senate. (b) Appointing authorities must make their respective appointments as soon as practicable after the effective date of this section, but no later than 60 days after enactment of this section. (c) A quorum of the board is six members. Subd. 3. Terms. (a) A member first appointed after the effective date of this section under subdivision 2, paragraph (a), clauses (1), (2), and (3), serves for a term coterminous with the term of the elected office, but may be reappointed. (b) Two members first appointed after the effective date of this section under subdivision 2, paragraph (a), clause (5), serve from the date of appointment until the first Tuesday after the first Monday in January 2017, and two members first appointed after the effective date of this section under subdivision 2, paragraph (a), clause (5), serve from the date of appointment until the first Tuesday after the first Monday in January 2020. Thereafter, members appointed by the governor serve six-year terms. Subd. 4. Vacancies. A vacancy occurs as provided in section 351.02 or upon a member's removal under subdivision 7. A vacancy on the board must be filled by the appointing authority for the balance of the term in the same manner as a regular appointment. Subd. 5. Chair. The board must elect a chair from among the governor's appointees. The governor must convene the first meeting within 30 days of completion of all appointments to the board. Subd. 6. Pay. Members must be compensated as provided in section 15.0575, subdivision 3 . For the purposes of this subdivision, the member representing the medical business entity shall be treated as if an employee of a political subdivision. All money paid for compensation or reimbursement must be paid out of the corporation's budget. Subd. 7. Removal for cause. A member may be removed by the board for inefficiency, neglect of duty, or misconduct in office. A member may be removed only after a hearing of the board. A copy of the charges must be given to the board member at least ten days before the hearing. The board member must be given an opportunity to be heard in person or by counsel at the hearing. When written charges have been submitted against a board member, the board may temporarily suspend the member. If the board finds that those charges have not been substantiated, the board member must be immediately reinstated. If a board member is removed, a record of the proceedings, together with the charges and findings, must be filed with the office of the appointing authority. Subd. 8. Open meeting law; data practices. Meetings of the corporation and any committee or subcommittee of the corporation are subject to the open meeting law in chapter 13D. The corporation is a government entity for purposes of chapter 13. Subd. 9. Conflicts of interest. Except for the member appointed by the medical business entity, a member must not be a director, officer, or employee of the medical business entity. A member must not participate in or vote on a decision of the corporation relating to any project authorized by or under consideration by the corporation in which the member has either a direct or indirect financial interest. No member may serve as a lobbyist, as defined under section 10A.01, subdivision 21 . Subd. 10. Public official. A member of the corporation is a public official, as defined in section 10A.01, subdivision 35 . Subd. 11. Powers. The corporation may exercise any other powers that are granted by its articles of incorporation and bylaws to the extent that those powers are not inconsistent with the provisions of sections 469.40 to 469.47 . Subd. 12. Contract for services. (a) The corporation may contract for the services of the nonprofit economic development agency, financial advisors, other consultants, agents, public accountants, legal counsel, and other persons needed to perform its duties and exercise its powers. The corporation may contract with the city or county to provide administrative, clerical, and accounting services to the corporation. (b) The corporation must contract with the nonprofit agency for the services enumerated in section 469.43, subdivision 6 , paragraph (a). The requirement to contract with the nonprofit agency does not limit the corporation's authority to contract with other providers for the services. Subd. 13. DMCC approval of projects. A project must be approved by the corporation before it is proposed to the city. The corporation must review the project proposed for consistency with the adopted development plan. Subd. 14. Dissolution. The city must provide for the terms for dissolution of the corporation in the articles of incorporation. [469.42 ] OFFICERS; DUTIES; ORGANIZATIONAL MATTERS. Subdivision 1. Bylaws, rules, seal. The corporation may adopt bylaws and rules of procedure and may adopt an official seal. Subd. 2. Officers. The corporation must annually elect a treasurer. The chair must appoint a secretary and assistant treasurer. The secretary and assistant treasurer need not, but may, be members of the board. Subd. 3. Duties and powers. The officers have the usual duties and powers of their offices. They may be given other duties and powers by the corporation. The corporation must establish and maintain a Web site. Subd. 4. Treasurer's duties. The treasurer: (1) must receive and is responsible for corporation money; (2) is responsible for the acts of the assistant treasurer; (3) must disburse corporation money by check or electronic procedures; (4) must keep an account of the source of all receipts, and of the nature, purpose, and authority of all disbursements; and (5) must file the corporation's detailed financial statement with its secretary at least once a year at times set by the authority. Subd. 5. Secretary. The secretary must perform duties as required by the board. Subd. 6. Assistant treasurer. The assistant treasurer has the powers and duties of the treasurer if the treasurer is absent or disabled. [469.43 ] DEVELOPMENT PLAN. Subdivision 1. Development plan; adoption by DMCC; notice; findings. (a) The corporation, working with the city and the nonprofit economic development agency, must prepare and adopt a development plan. The corporation must hold a public hearing before adopting a development plan. At least 60 days before the hearing, the corporation must make copies of the proposed plan available to the public at the corporation and city offices during normal business hours, on the corporation's and city's Web site, and as otherwise determined appropriate by the corporation. At least ten days before the hearing, the corporation must publish notice of the hearing in the official newspaper of the city. The development plan may not be adopted, unless the corporation finds, by resolution, that: (1) the plan provides an outline for the development of the city as a destination medical center, and the plan is sufficiently complete, including the identification of planned and anticipated projects, to indicate its relationship to definite state and local objectives; (2) the proposed development affords maximum opportunity, consistent with the needs of the city, county, and state, for the development of the city by private enterprise as a destination medical center; (3) the proposed development conforms to the general plan for the development of the city and is consistent with the city comprehensive plan; (4) the plan includes: (i) strategic planning consistent with a destination medical center in the core areas of commercial research and technology, learning environment, hospitality and convention, sports and recreation, livable communities, including mixed-use urban development and neighborhood residential development, retail/dining/entertainment, and health and wellness; (ii) estimates of short- and long-range fiscal and economic impacts; (iii) a framework to identify and prioritize short- and long-term public investment and public infrastructure project development and to facilitate private investment and development, including the criteria and process for evaluating and underwriting development proposals; (iv) land use planning; (v) transportation and transit planning; (vi) operational planning required to support the medical center development district; and (vii) ongoing market research plans; and (5) the city has approved the plan. (b) The identification of planned and anticipated projects under paragraph (a), clause (1), must give priority to projects that will pay wages at least equal to the basic cost of living wage as calculated by the commissioner of employment and economic development for the county in which the project is located. The calculation of the basic cost of living wage must be done as provided for under section 116J.013 , if enacted by the 2013 legislature. Subd. 2. Development plan approval by city. Section 15.99 does not apply to review and approval of the development plan. The city shall act on the development plan within 60 days following its submission by the corporation. The city may incorporate the development plan into the city's comprehensive plan. Subd. 3. Subject to city requirements. All projects are subject to the planning, zoning, sanitary, and building laws; ordinances; regulations; and land use plans that apply to the city. Subd. 4. Modification of development plan. The corporation may modify the development plan at any time. The corporation must update the development plan not less than every five years. A modification or update under this subdivision must be adopted by the corporation upon the notice and after the public hearing and findings required for the original adoption of the development plan, including approval by the city. Subd. 5. Medical center development districts; creation; notice; findings. As part of the development plan, the corporation may create and define the boundaries of medical center development districts and subdistricts at any place or places within the city. Projects may be undertaken within defined medical center development districts consistent with the development plan. Subd. 6. Nonprofit economic development agency. (a) The medical business entity must establish a nonprofit economic development agency organized under chapter 317A to provide experience and expertise in developing and marketing the destination medical center. The corporation must engage the agency to assist the corporation in preparing the development plan. The governing board of the agency must be comprised of members of the medical community, city, and county. The agency must collaborate with city, county, and other community representatives. The nonprofit agency must provide services to assist the corporation and city in implementing the goals, objectives, and strategies in the development plan including, but not limited to: (1) facilitating private investment through development of a comprehensive marketing program to global interests; (2) developing and updating the criteria for evaluating and underwriting development proposals; (3) drafting and implementing the development plan, including soliciting and evaluating proposals for development and evaluating and making recommendations to the authority and the city regarding those proposals; (4) providing transactional services in connection with approved projects; (5) developing patient, visitor, and community outreach programs for a destination medical center development district; (6) working with the corporation to acquire and facilitate the sale, lease, or other transactions involving land and real property; (7) seeking financial support for the corporation, the city, and a project; (8) partnering with other development agencies and organizations, the city, and the county in joint efforts to promote economic development and establish a destination medical center; (9) supporting and administering the planning and development activities required to implement the development plan; (10) preparing and supporting the marketing and promotion of the medical center development district; (11) preparing and implementing a program for community and public relations in support of the medical center development district; (12) assisting the corporation or city and others in applications for federal grants, tax credits, and other sources of funding to aid both private and public development; and (13) making other general advisory recommendations to the corporation and the city, as requested. (b) The nonprofit economic development agency must disclose to the city and to the corporation the existence, nature, and all material facts regarding any financial interest its employees or contractors have in any public infrastructure project submitted to the city for approval and any financial interest its employees or contractors have in the destination medical center development. " Contractors" includes affiliates of the contractors or members or shareholders with an ownership interest of more than 20 percent in the contractor. Subd. 7. Audit of nonprofit economic development agency contract. Any contract for services between the corporation and the nonprofit economic development agency paid, in whole or in part, with public money provides the corporation, the city, and the state auditor the right to audit the books and records of the agency that are necessary to certify: (1) the nature and extent of the services furnished pursuant to the contract; and (2) that the payment for services and related disbursements complies with all state laws, regulations, and the terms of the contract. Any contract for services between the corporation and the agency paid, in whole or in part, with public money must require the corporation to maintain for the life of the corporation accurate and complete books and records directly relating to the contract. Subd. 8. Report. By February 15 of each year, the corporation and city must jointly submit a report to the chairs and ranking minority members of the legislative committees and divisions with jurisdiction over local and state government operations, economic development, and taxes, and to the commissioners of revenue and employment and economic development, and the county. The corporation and city must also submit the report as provided in section 3.195. The report must include: (1) the development plan and any proposed changes to the development plan; (2) progress of projects identified in the development plan; (3) actual costs and financing sources, including the amount paid with state aid under section 469.47 , and required local contributions of projects completed in the previous two years by the corporation, city, county, and the medical business entity; (4) estimated costs and financing sources for projects to be started in the next two years by the corporation, city, county, and the medical business entity; and (5) debt service schedules for all outstanding obligations of the city for debt issued for projects identified in the plan. [469.44 ] CITY POWERS, DUTIES; AUTHORITY TO ISSUE BONDS. Subdivision 1. Port authority powers. The city may exercise the powers of a port authority under sections 469.048 to469.068 for the purposes of implementing the destination medical center development plan. Subd. 2. Support to the corporation. The city must provide financial and administrative support, and office and other space, to the corporation. The city may appropriate city funds to the corporation for its work. Subd. 3. City to issue debt. The city may issue general obligation bonds, revenue bonds, or other obligations, as it determines appropriate, to finance public infrastructure projects, as provided by chapter 475. Notwithstanding section 475.53 , obligations issued under this section are not subject to the limits on net debt, regardless of their source of security or payment. Notwithstanding section 475.58 or any other law or charter provision to the contrary, issuance of obligations under the provisions of this section are not subject to approval of the electors. The city may pledge any of its revenues, including property taxes, the taxes authorized by sections 469.45 and 469.46 , and the state aid under section469.47 , as security for and to pay the obligations. The city must not issue obligations that are only payable from or secured by state aid under section 469.47 . Subd. 4. Local government tax base not reduced. Nothing in sections 469.40 to 469.47 reduces the tax base or affects the taxes due and payable to the city, the county, or any school district within the boundaries of the city, including without limitation, the city's general local sales tax. Subd. 5. Project implementation before plan adoption. The city may exercise the powers under subdivision 3 with respect to any public infrastructure project commenced within the area that will be in the destination medical center development district after the effective date of this section but before the development plan is adopted subject to approval by the corporation. Actions taken under this authority must be approved by the corporation to be credited against the local contribution required under section 469.47, subdivision 4 . Subd. 6. American made steel. The city must require that a public infrastructure project use American steel products to the extent practicable. In determining whether it is practicable, the city may consider the exceptions to the requirement in Public Law 111-5, section 1605. Subd. 7. City contracts; construction requirements. For all public infrastructure projects, the city must make every effort to hire and cause the construction manager and any subcontractors to employ women and members of minority communities. Goals for construction contracts must be established in the manner required under the city's minority and women-owned business enterprises utilization plan. Subd. 8. Conduit bond issuance. (a) Upon the request of the corporation or the nonprofit agency, the city or its economic development authority shall issue revenue bonds or other similar obligations for a qualifying project. Revenue bonds or other obligations as used in this subdivision means bonds or other obligations issued under sections 469.152 to 469.165 or under chapter 462C, the interest on which is tax exempt. The city or its development authority shall use its best efforts to issue the bonds or other obligations as promptly and efficiently as possible following the request and the provision of the information and completion of the actions by the corporation or the nonprofit agency that are necessary for the issuance. Upon request of the corporation or nonprofit agency, the city or its economic development authority shall adopt methods and procedures that preserve the confidentiality of private donors or other private participants in the qualifying project, including structures and methods that do not require disclosing information on the donors or participants to the city or its economic development authority, and shall segregate in separate accounts all funds related to a qualifying project from other city and authority funds. (b) For purposes of this section, a "qualifying project" means a project, as that term is defined in section 469.153 , or a project that would qualify for financing under chapter 462C, that: (1) the corporation finds is consistent with and will further the goals of the development plan; (2) is located in a medical development district; and (3) has a commitment of private funding sources such as donations of money or in-kind contributions, other than revenues generated by the project, equal to at least ten percent of the total capital cost of the project. Subd. 9. Public bidding exemption. (a) Notwithstanding section 469.068 or any other law to the contrary, the city need not require competitive bidding with respect to a parking facility or other public improvements constructed in conjunction with, and directly above or below, or adjacent and integrally related to, a private development financed or developed under the development plan. (b) For purposes of this section, "city" includes the development authority established by the city. [469.45 ] CITY TAX AUTHORITY. Subdivision 1. Rochester, other local taxes authorized. (a) Notwithstanding section 477A.016 , or any other contrary provision of law, ordinance, or city charter, and in addition to any taxes the city may impose on these transactions under another statute or law, the city of Rochester may, by ordinance, impose at a rate or rates, determined by the city, any of the following taxes: (1) a tax on the gross receipts from the furnishing for consideration of lodging and related services as defined in section 297A.61, subdivision 3 , paragraph (g), clause (2); the city may choose to impose a differential tax based on the number of rooms in the facility; (2) a tax on the gross receipts of food and beverages sold primarily for consumption on the premises by restaurants and places of refreshment that occur in the city of Rochester; the city may elect to impose the tax in a defined district of the city; and (3) a tax on the admission receipts to entertainment and recreational facilities, as defined by ordinance, in the city of Rochester. (b) The provisions of section 297A.99 , subdivisions 4 to 13, govern the administration, collection, and enforcement of any tax imposed by the city under paragraph (a). (c) The proceeds of any taxes imposed under this subdivision, less refunds and costs of collection, must be used by the city only to meet its share of obligations for public infrastructure projects contained in the development plan and approved by the corporation, including any associated financing costs. Any tax imposed under paragraph (a) expires at the earlier of December 31, 2049, or when the city council determines that sufficient funds have been raised from the tax plus all other local funding sources authorized in this article to meet the city obligation for financing public infrastructure projects contained in the development plan and approved by the corporation, including any associated financing costs. Subd. 2. General sales tax authority. The city may elect to extend the existing local sales and use tax under section 13 or to impose an additional rate of up to one quarter of one percent tax on sales and use under section 11. The proceeds of any extended or additional taxes imposed under this subdivision, less refunds and costs of collection, must be used by the city only to meet its share of obligations for public infrastructure projects contained in the development plan and approved by the corporation, including all financing costs. Revenues collected in any year to meet the obligations must be used for payment of obligations or expenses for public infrastructure projects approved by the corporation. Subd. 3. Special abatement rules. (a) If the city or the county elects to use tax abatement under sections469.1812 to 469.1815 to finance costs of public infrastructure projects, including all financing costs, the special rules under this subdivision apply. Taxes abated for public infrastructure projects must be used only for obligations or other infrastructure projects approved by the corporation. (b) The limitations under section 469.1813, subdivision 6 , do not apply to the city or the county. (c) The limitations under section 469.1813, subdivision 8 , do not apply and property taxes abated by the city or the county to finance costs of public infrastructure projects are not included for purposes of applying section 469.1813, subdivision 8 , to the use of tax abatement for other purposes of the city or the county; however, the total amount of property taxes abated by the city and the county under this authority must not exceed $87,750,000. Subd. 4. Special tax increment financing rules. If the city elects to establish one or more redevelopment tax increment financing districts within the area of the destination medical center development district to fund public infrastructure projects, the requirements, definitions, limitations, or restrictions in the following statutes do not apply: sections 469.174 , subdivisions 10 and 25, clause (2); 469.176 , subdivisions 4j, 4l, and 5; and 469.1763 , subdivisions 2, 3, and 4. The provisions of this subdivision expire effective for tax increments expended after December 31, 2049. After that date, the provisions of section 469.1763, subdivision 4 , apply to any remaining unspent or unobligated increments. [469.46 ] COUNTY TAX AUTHORITY. (a) Notwithstanding sections 297A.99 , 297A.993 , and 477A.016 , or any other contrary provision of law, ordinance, or charter, and in addition to any taxes the county may impose under another law or statute, the Board of Commissioners of Olmsted County may, by resolution, impose a transit tax of up to one quarter of one percent on retail sales and uses taxable under chapter 297A. The provisions of section 297A.99 , subdivisions 4 to 13, govern the imposition, administration, collection, and enforcement of the tax authorized under this paragraph. (b) The Board of Commissioners of Olmsted County may, by resolution, levy an annual wheelage tax of up to $10 on each motor vehicle kept in the county when not in operation which is subject to annual registration and taxation under chapter 168, for transportation projects within the county. The wheelage tax must not be imposed on the vehicles exempt from wheelage tax under section 163.051, subdivision 1 . The board, by resolution, may provide for collection of the wheelage tax by county officials, or it may request that the tax be collected by the state registrar on behalf of the county. The provisions of section 163.051 , subdivisions 2, 2a, 3, and 7, must govern the administration, collection, and enforcement of the tax authorized under this paragraph. The tax authorized under this section is in addition to any tax the county may be authorized to impose under section 163.051 , but until January 1, 2018, the county tax imposed under this paragraph, in combination with any tax imposed under section 163.051 , must equal the specified rate under section 163.051 . (c) The proceeds of any taxes imposed under paragraph (a), less refunds and costs of collection, must be first used by the county to meet its local matching contributions under section 469.47, subdivision 6 , for financing transit infrastructure related to the public infrastructure projects contained in the development plan and approved by the corporation, including any financing costs. Revenues collected in any calendar year in excess of the county obligation to pay for projects contained in the development plan may be retained by the county and used for funding other transportation projects, including roads and bridges, airports, and transportation improvements. (d) Any taxes imposed under paragraph (a) expire December 31, 2049, or at an earlier time if approved by resolution of the county board of commissioners. The taxes must not terminate before the county board of commissioners determines that revenues from these taxes and any other revenue source the county dedicates are sufficient to pay the county share of transit project costs and financing costs under the development plan. [469.47 ] STATE INFRASTRUCTURE AID. Subdivision 1. Definitions. (a) For purposes of this section, the following terms have the meanings given them. (b) "Commissioner" means the commissioner of employment and economic development. (c) "Construction projects" means: (1) for expenditures by a medical business entity, construction of buildings in the city for which the building permit was issued after June 30, 2013; and (2) for any other expenditures, construction of privately owned buildings and other improvements that are undertaken pursuant to or as part of the development plan and are located within a medical center development district. (d) "Expenditures" means expenditures made by a medical business entity or by an individual or private entity on construction projects for the capital cost of the project including, but not limited to: (1) design and predesign, including architectural, engineering, and similar services; (2) legal, regulatory, and other compliance costs of the project; (3) land acquisition, demolition of existing improvements, and other site preparation costs; (4) construction costs, including all materials and supplies of the project; and (5) equipment and furnishings that are attached to or become part of the real property. Expenditures excludes supplies and other items with a useful life of less than a year that are not used or consumed in constructing improvements to real property or are otherwise chargeable to capital costs. (e) "Qualified expenditures" has the following meaning. In the first year in which aid is paid under this section, "qualified expenditures" means the total certified expenditures since June 30, 2013, through the end of the preceding year, minus $200,000,000. For subsequent years, "qualified expenditures" means the certified expenditures for the preceding year. (f) "Transit costs" means the portions of a public infrastructure project that are for public transit intended primarily to serve the district, such as transit stations, equipment, rights-of-way, and similar costs. Subd. 2. Certification of expenditures. By April 1 of each year, the medical business entity must certify to the commissioner the amount of expenditures made by the medical business entity in the preceding year. For expenditures made by an individual or entity other than the medical business entity, the corporation shall compile the information on the expenditures and may certify the amount to the commissioner. The certification must be made in the form that the commissioner prescribes and include any documentation of and supporting information regarding the expenditures that the commissioner requires. By August 1 of each year, the commissioner must determine the amount of the expenditures for the preceding year. Subd. 3. General state infrastructure aid. (a) General state infrastructure aid may not be paid out under this section until total expenditures exceed $200,000,000. (b) The amount of the general state infrastructure aid for a fiscal year equals the sum of qualified expenditures, multiplied by 2.75 percent. The maximum amount of state aid payable in any year is limited to no more than $30,000,000. If the aid entitlement for the year exceeds the maximum annual limit, the excess is an aid carryover to later years. The carryover aid must be paid in the first year in which the aid entitlement for the current year is less than the maximum annual limit, but only to the extent the carryover, when added to the current year aid, is less than the maximum annual limit. If the commissioner determines that the city has made the required matching local contribution under subdivision 4, the commissioner must pay to the city the amount of general state infrastructure aid for the year by September 1. (c) The city must use general state infrastructure aid it receives under this subdivision for improvements and other capital costs related to the public infrastructure projects approved by the corporation, other than transit costs. The city must maintain appropriate records to document the use of the funds under this requirement. (d) The commissioner, in consultation with the commissioner of management and budget, and representatives of the city and the corporation, must establish a total limit on the amount of state aid payable under this subdivision that will be adequate to finance, in combination with the local contribution, $455,000,000 of general public infrastructure projects. Subd. 4. General aid; local matching contribution. In order to qualify for general state infrastructure aid, the city must enter a written agreement with the commissioner that requires the city to make a qualifying local matching contribution to pay for $128,000,000 of the cost of public infrastructure projects approved by the corporation, including financing costs, using funds other than state aid received under this section. The $128,000,000 required local matching contribution is reduced by one half of the amounts the city pays for operating and administrative costs of the corporation up to a maximum amount agreed to by the board and the city. The agreement must provide for the manner, timing, and amounts of the city contributions, including the city's commitment for each year. Notwithstanding any law to the contrary, the agreement may provide that the city contributions for public infrastructure project principal costs may be made over a 20-year period at a rate not greater than $1 from the city for each $2.55 from the state. The local match contribution may be provided by the city from any source identified in section 469.45 and any other local tax proceeds or other funds from the city and may include providing funds to assist developers undertaking projects in accordance with the development plan or by the city directly undertaking public infrastructure projects in accordance with the development plan, provided the projects have been approved by the corporation. City contributions that are in excess of this ratio carry forward and are credited towards subsequent years. The commissioner and city may agree to amend the agreement at any time in light of new information or other appropriate factors. The city may enter into arrangements with the county to pay for or otherwise meet the local matching contribution requirement. Any public infrastructure project within the area that will be in the destination medical center development district whose implementation is started or funded by the city after the effective date of this section but before the development plan is adopted, as provided by section 469.46, subdivision 5 , will be included for the purposes of determining the amount the city has contributed as required by this section and the agreement with the commissioner, subject to approval by the corporation. Subd. 5. State transit aid. (a) The city qualifies for state transit aid under this section if the county contributes the required local matching contribution under subdivision 6 or the city or county has agreed to make an equivalent contribution out of other funds for the year. (b) If the city qualifies for aid under paragraph (a), the commissioner must pay the city the state transit aid in the amount calculated under this paragraph. The amount of the state transit aid for a fiscal year equals the sum of qualified expenditures, as certified by the commissioner for the prior year, multiplied by 0.75 percent, reduced by the amount of the local contribution under subdivision 6. The maximum amount of state transit aid payable in any year is limited to no more than $7,500,000. If the aid entitlement for the year exceeds the maximum annual limit, the excess is an aid carryover to later years. The carryover aid must be paid in the first year in which the aid entitlement for the current year is less than the maximum annual limit, but only to the extent the carryover, when added to the current year aid, is less than the maximum annual limit. (c) The commissioner, in consultation with the commissioner of management and budget, and representatives of the city and the corporation, must establish a total limit on the amount of state aid payable under this subdivision that will be adequate to finance, in combination with the local contribution, $116,000,000 of transit costs. (d) The city must use state transit aid it receives under this subdivision for transit costs. The city must maintain appropriate records to document the use of the funds under this requirement. Subd. 6. Transit aid; local matching contribution. (a) The required local matching contribution for state transit aid equals the lesser of: (1) 40 percent of the state transit aid under subdivision 5; or (2) the amount that would be raised by a 0.15 percent sales tax imposed by the county in the preceding year. The county may impose the sales tax or the wheelage tax under section 469.46 to meet this obligation. (b) If the county elects not to impose any of the taxes authorized under section 469.46 , the county, or city, or both, may agree to make the local contribution out of other available funds, other than state aid payable under this section. The commissioner of revenue must estimate the required amount and certify it to the commissioner, city, and county. Subd. 7. Prevailing wage requirement. During the construction, installation, remodelling, and repairs of any public infrastructure project funded by state aid or a local matching contribution under this section, laborers and mechanics at the site must be paid the prevailing wage rate as defined in section 177.42, subdivision 6 , and the project is subject to the requirements of sections 177.30 and 177.41 to 177.44 . Subd. 8. Termination. No aid may be paid under this section after fiscal year 2049. Subd. 9. Appropriation. An amount sufficient to pay the state general infrastructure and state transit aid authorized under this section is appropriated to the commissioner from the general fund. (a) 297A.48 297A.99 subdivision paragraph (b) Notwithstanding Minnesota Statutes, sections 297A.99 and 477A.016 , or any other contrary provision of law, ordinance, or charter, the city of Rochester may, by ordinance, impose an additional sales and use tax of up to one quarter of one percent. The provisions of Minnesota Statutes, section 297A.99 , subdivisions 1 and 4 to 13, govern the imposition, administration, collection, and enforcement of the tax authorized under this paragraph. , paragraph (a), The city shall use $5,000,000 of the money allocated to the purpose in paragraph (c), clause (9), for grants to the cities of Byron, Chatfield, Dodge Center, Dover, Elgin, Eyota, Kasson, Mantorville, Oronoco, Pine Island, Plainview, St. Charles, Stewartville, Zumbrota, Spring Valley, West Concord, and Hayfield for economic development projects that these communities would fund through their economic development authority or housing and redevelopment authority. Notwithstanding Minnesota Statutes, section 297A.99 , subdivisions 2 and 3, if the city decides to extend the taxes in subdivisions 1, paragraph (a), and 2, as allowed under subdivision 5, paragraph (c), the city must use any amount in excess of the amount necessary to meet obligations under paragraphs (a) to (c) from those taxes to fund obligations, including financing costs, related to public infrastructure projects in the development plan adopted underMinnesota Statutes, section 469.43. (f) Revenues from the tax under subdivision 1, paragraph (b), must be used to fund obligations, including financing costs, related to the public infrastructure projects contained in the development plan approved by the DMCC and adopted by the city under Minnesota Statutes, section 469.43. , paragraph (a), beyond the date , up to December 31, 2049, provided that all additional revenues above those necessary to fund the projects and associated financing costs listed in subdivision 3, paragraphs (a) to (e), are committed to fund public infrastructure projects contained in the development plan adopted under Minnesota Statutes, section 469.43 , including all financing costs; otherwise the taxes terminate when $111,500,000 of paragraph (a) paragraphs (a) to (e) , paragraph (a), if approved by the voters of the city at the general election in 2012. If the election to authorize the additional $139,500,000 of bonds plus an amount equal to the costs of the issuance of the bonds is placed on the general election ballot in 2012, the city may continue to collect the taxes authorized in subdivisions 1 and 2 until December 31, 2012. The question put to the voters must indicate that an affirmative vote would allow sales tax revenues be raised for an extended period of time and an additional $139,500,000 of bonds plus an amount equal to the costs of issuance of the bonds, to be issued above the amount authorized in the previous elections required under paragraphs (a) and (b) for the projects and amounts specified in subdivision 3. If the taxes authorized in subdivisions 1 and 2 are extended under this paragraph, the taxes expire when the city council determines that $139,500,000 has been received from the taxes to finance the projects plus an amount sufficient to prepay or retire at maturity the principal, interest, and premium due on any bonds issued for the projects under subdivision 4, including any bonds issued to refund the bonds. Any funds remaining after completion of the projects and retirement or redemption of the bonds may be placed in the general fund of the city (d) The tax imposed under subdivision 1, paragraph (b), expires at the earlier of 2049, or when the city council determines that sufficient funds have been raised from the tax plus all other city funding sources authorized in this article to meet the city obligation for financing the public infrastructure projects contained in the development plan adopted under Minnesota Statutes, section 469.43 , including all financing costs. ROCHESTER SALES TAX SHARING. The city council may, after holding a public hearing and passing a resolution, use $5,000,000 of the $10,000,000 allocated to an economic development fund in Laws 1998, chapter 389, article 8, section 43, subdivision 3, as amended by Laws 2005, First Special Session chapter 3, article 5, section 28, and Laws 2011, First Special Session chapter 7, article 4, section 5, paragraph (c), clause (9), for grants to any or all of the cities of Byron, Chatfield, Dodge Center, Dover, Elgin, Eyota, Hayfield, Kasson, Mantorville, Oronoco, Pine Island, Plainview, Spring Valley, St. Charles, Stewartville, West Concord, and Zumbrota for economic development projects that these communities would fund through their economic development authority or housing and redevelopment authority. The public hearing may be part of a regular city council meeting. If the council does not pass the resolution by September 1, 2013, the $5,000,000 may not be used for grants to the other cities but shall instead be used to fund public infrastructure projects contained in the development plan under Minnesota Statutes, section 469.42. OLMSTED INTERREGIONAL PASSENGER RAIL STUDY. The study by the Olmsted County Regional Rail authority, in conjunction with the Minnesota Department of Transportation, on interregional passenger rail, and funded under Laws 2009, chapter 93, article 1, section 11, subdivision 5, must include analysis of the feasibility of a high-speed rail connection between Rochester and the Mall of America via Minnesota State Highway 77 with connections to the Minneapolis-St. Paul International Airport and the Union Depot in St. Paul; and, to the extent feasible, take into account available data, forecasts, available transportation demand modeling information, and transportation impacts of major economic initiatives and proposals including, but not limited to, expansion of the Mayo Clinic. EFFECTIVE DATE. This section is effective the day following final enactment. EFFECTIVE DATE. Except as otherwise provided, this article is effective the day after the governing body of the city of Rochester and its chief clerical officer timely comply with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. the sum of and the amount attributable to the same production year distributed to the cities and townships within the school district under section 298.28, subdivision 2 , paragraph (c) EFFECTIVE DATE. This section is effective for levies certified in 2013 and later. (a) (b) : (1) there is annually appropriated and credited to the mining environmental and regulatory account in the special revenue fund an amount equal to that which would have been generated by a two and one-half cent tax imposed by section 298.24 on each taxable ton produced in the preceding calendar year. Money in the mining environmental and regulatory account is appropriated annually to the commissioner of natural resources to fund agency staff to work on environmental issues and provide regulatory services for ferrous and nonferrous mining operations in this state. Payment to the mining environmental and regulatory account shall be made by July 1 annually. The commissioner of natural resources shall execute an interagency agreement with the pollution control agency to assist with the provision of environmental regulatory services such as monitoring and permitting required for ferrous and nonferrous mining operations; and (2) this section clause (2) (1) (i) (2) (ii) (c) EFFECTIVE DATE. This section is effective beginning for the 2013 production year. equal to the amount of the distribution of at least 50 percent of the distribution based on 14.7 cents per ton 2002 2014 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution. 2001, 2002, and 2003 2013 $2.103 $2.56 For concentrates produced in 2005, the tax rate is the same rate imposed for concentrates produced in 2004. For concentrates produced in 2009 and subsequent years, 2006 2014 $2.103 $2.56 EFFECTIVE DATE. This section is effective beginning for the 2013 production year. 23.15 32.15 15.72 24.72 (1) the second previous year 2011 (2) Districts qualifying under paragraph (c) must receive additional taconite aid each year equal to 22.5 percent of the amount obtained by subtracting: (i) 1.8 percent of the district's net tax capacity for 2011, from: (ii) the district's weighted average daily membership for fiscal year 2012 multiplied by the sum of: (A) $415, plus (B) the district's referendum revenue allowance for fiscal year 2013. or for outcome-based learning programs that enhance the academic quality of the district's curriculum. The outcome-based learning programs must be approved by the commissioner of education two 11 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution. 2002 2014 33.9 34.8 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution. Temporary 2007 through 2011 only 2013 and thereafter professional hockey organizations or in an amount at least equal to the amount of the distribution under this subdivision either any If the amount of the distribution authorized under this subdivision exceeds the total amount of donations for the support of the Hockey Hall of Fame during the 12-month period ending 30 days before the date of the distribution, the amount by which 0.20 cent per ton exceeds the donations shall be distributed to the Iron Range Resources and Rehabilitation Board. 2003 2015 EFFECTIVE DATE. This section is effective beginning for the 2014 distribution. IRON RANGE FISCAL DISPARITIES STUDY. The commissioner of revenue, in coordination with the commissioner of the Iron Range Resources and Rehabilitation Board, shall conduct a study of the tax relief area revenue distribution program contained in Minnesota Statutes, chapter 276A, commonly known as the Iron Range fiscal disparities program. By February 1, 2014, the commissioner of revenue shall submit a report to the chairs and ranking minority members of the house of representatives and senate tax committees consisting of the findings of the study and identification of issues for policy makers to consider. The study must analyze: (1) trends in population, property tax base, property tax rates, and contribution and distribution capacity across the region; (2) the volatility of the program's distribution and causes of the volatility; (3) the impact of state tax policy changes on the fiscal disparities program; and (4) the interaction between the program and the distribution of property tax aids and credits, taconite aid, and Iron Range Resources and Rehabilitation Board funding across the region. EFFECTIVE DATE. This section is effective June 1, 2013. 2013 DISTRIBUTION ONLY. For the 2013 distribution, a special fund is established to receive 38.7 cents per ton of any excess of the balance remaining after distribution of amounts required under Minnesota Statutes, section 298.28, subdivision 6 . The following amounts are allocated to St. Louis County acting as the fiscal agent for the recipients for the following specific purposes: (1) 5.1 cents per ton to the city of Hibbing for improvements to the city's water supply system; (2) 4.3 cents per ton to the city of Mountain Iron for the cost of moving utilities required as a result of actions undertaken by United States Steel Corporation; (3) 2.5 cents per ton to the city of Biwabik for improvements to the city's water supply system, payable upon agreement with ArcelorMittal to satisfy water permit conditions; (4) 2 cents per ton to the city of Tower for the Tower Marina; (5) 2.4 cents per ton to the city of Grand Rapids for an eco-friendly heat transfer system to replace aging effluent lines and for parking lot repaving; (6) 2.4 cents per ton to the city of Two Harbors for wastewater treatment plant improvements; (7) 0.9 cents per ton to the city of Ely for the sanitary sewer replacement project; (8) 0.6 cents per ton to the town of Crystal Bay for debt service of the Claire Nelson Intermodal Transportation Center; (9) 0.5 cents per ton to the Greenway Joint Recreation Board for the Coleraine hockey arena renovations; (10) 1.2 cents per ton for the West Range Regional Fire Hall and Training Center to merge the existing fire services of Coleraine, Bovey, Taconite Marble, Calumet, and Greenway Township; (11) 2.5 cents per ton to the city of Hibbing for the Memorial Building; (12) 0.7 cents per ton to the city of Chisholm for public works infrastructure; (13) 1.8 cents per ton to the Crane Lake Water and Sanitary District for sanitary sewer extension; (14) 2.5 cents per ton for the city of Buhl for the roof on the Mesabi Academy; (15) 1.2 cents per ton to the city of Gilbert for the New Jersey/Ohio Avenue project; (16) 1.5 cents per ton to the city of Cook for street improvements, business park infrastructure, and a maintenance garage; (17) 0.5 cents per ton to the city of Cook for a water line project; (18) 1.8 cents per ton to the city of Eveleth to be used for Jones Street reconstruction and the city auditorium; (19) 0.5 cents for the city of Keewatin for an electrical substation and water line replacements; (20) 3.3 cents for the city of Virginia for Fourth Street North infrastructure and Franklin Park improvement; and (21) 0.5 cents per ton to the city of Grand Rapids for an economic development project. EFFECTIVE DATE. This section is effective for the 2013 distribution, and all payments must be made separately and within ten days of the date of the August 2013 payment. This section supersedes article 5, section 46, of 2013 H.F. No. 729, if enacted in the 2013 regular session of the legislature. IRON RANGE RESOURCES AND REHABILITATION COMMISSIONER; BONDS AUTHORIZED. Subdivision 1. Issuance; purpose. Notwithstanding any provision of Minnesota Statutes, chapter 298, to the contrary, the commissioner of Iron Range resources and rehabilitation shall issue revenue bonds in a principal amount of $38,000,000 plus an amount sufficient to pay costs of issuance in one or more series, and thereafter may issue bonds to refund those bonds. The proceeds of the bonds must be used to pay costs of issuance and to make grants to school districts located in the taconite tax relief area defined inMinnesota Statutes, section 273.134 , or the taconite assistance area defined inMinnesota Statutes, section 273.1341 , to be used by the school districts to pay for building projects, such as energy efficiency, technology, infrastructure, health, safety, and maintenance improvements. Proceeds granted to School District No. 2142 must be used to reduce debt service on the building bond passed on December 8, 2009. Subd. 2. Appropriation. (a) There is annually appropriated from the distribution of taconite production tax revenues under Minnesota Statues, section 298.28 , prior to the calculation of the amount of the remainder under Minnesota Statutes, section 298.28, subdivision 11 , an amount sufficient to pay when due the principal and interest on the bonds issued pursuant to subdivision 1. The appropriation under this section must not exceed an amount equal to ten cents per taxable ton. (b) If in any year the amount available under paragraph (a) is insufficient to pay principal and interest due on the bonds in that year, an additional amount is appropriated from the Douglas J. Johnson fund to make up the deficiency. (c) The appropriation under this subdivision terminates upon payment or maturity of the last of the bonds issued under this section. Subd. 3. Credit enhancement. The bonds issued under this section are "debt obligations" and the commissioner of Iron Range resources and rehabilitation is a "district" for purposes of Minnesota Statutes, section 126C.55 , provided that advances made underMinnesota Statutes, section 126C.55, subdivision 2 , are not subject toMinnesota Statutes, section 126C.55 , subdivisions 4 to 7. EFFECTIVE DATE. This section is effective the day following final enactment and applies beginning with the 2014 distribution under Minnesota Statutes, section 298.28. with taxing powers and . ; and (4) any security which is an obligation of a school district with an original maturity not exceeding 13 months and (i) rated in the highest category by a national bond rating service or (ii) enrolled in the credit enhancement program pursuant to section 126C.55 . Agreements or contracts for guaranteed investment contracts with a term of 18 months or less may be entered into regardless of the credit quality of the issuer's or guarantor's long-term unsecured debt, provided that the credit quality of the issuer's short-term unsecured debt is rated in the highest category by a nationally recognized rating agency. benefited , provided that special assessments may be made payable in up to 20 equal annual installments EFFECTIVE DATE. This section is effective the day following final enactment. , together with application development services and training related to the use of the computer hardware or software public works facilities, fairground buildings, and records and data storage facilities, For purposes of this section, "capital improvement" includes expenditures for purposes described in this paragraph that have been incurred by a county before approval of a capital improvement plan, if such expenditures are included in a capital improvement plan approved on or before the date of the public hearing under subdivision 2 regarding issuance of bonds for such expenditures. county The commissioner of revenue shall prepare a suggested form of the question to be presented at the election. If the county elects not to submit the question to the voters, the county shall not propose the issuance of bonds under this section for the same purpose and in the same amount for a period of 365 days from the date of receipt of the petition. If the question of issuing the bonds is submitted and not approved by the voters, the provisions of section 475.58, subdivision 1 a, shall apply. Subd. 10. Housing improvement areas. (a) In addition to its other powers, the Dakota County Community Development Agency shall have all powers of a city under sections 428A.11 to 428A.21 in connection with housing improvement areas in Dakota County. (b) For purposes of the Dakota County Community Development Agency's exercise of the powers granted in this subdivision, references in sections428A.11 to 428A.21 to: (1) a "mayor" shall be references to the chair of the board of commissioners of the Dakota County Community Development Agency; (2) a "council" shall be references to the board of commissioners of the Dakota County Community Development Agency; and (3) a "city clerk" shall be references to an official of the Dakota County Community Development Agency designated by the executive director of the Dakota County Community Development Agency. (c) Notwithstanding sections 428A.11, subdivision 3 , and 428A.13 , subdivision 1, the governing body of the Dakota County Community Development Agency may adopt a resolution, rather than an ordinance, establishing one or more housing improvement areas, and "enabling ordinance" for purposes of sections 428A.11 to 428A.21 means a resolution under this clause. (d) The community development agency (1) shall send a copy of each petition for the establishment of a housing improvement area to the city in which the proposed housing improvement area is located, and (2) may not hold the public hearing required in section 428A.13, subdivision 2 , fewer than 30 days after the date on which the related application was sent pursuant to clause (1). The community development agency may not establish a housing improvement area if the applicable city council opposes the establishment by resolution adopted within 30 days after the petition required to be sent pursuant to clause (1). , together with application development services and training related to the use of the computer hardware and software , together with application development services and training related to the use of the computer hardware or software Subd. 1s. Obligations. After July 1, 2013, in addition to other authority in this section, the council may issue certificates of indebtedness, bonds, or other obligations under this section in an amount not exceeding $35,800,000 for capital expenditures as prescribed in the council's transit capital improvement program and for related costs, including the costs of issuance and sale of the obligations. EFFECTIVE DATE. This section is effective the day following final enactment and applies in the counties of Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington. This section is not effective if the legislature authorizes and enacts issuance authority of at least $35,800,000 in 2013 H.F. No. 1444. If the legislature authorizes and enacts issuance authority of less than $35,800,000 in 2013 H.F. No. 1444, this section prevails, regardless of order of enactment. : (a) Treasury bonds, certificates of indebtedness, bonds or notes of the United States of America, or bonds, notes or certificates of indebtedness of the state of Minnesota, all of which must mature not later than three years from the date of purchase. (b) Bonds, notes, debentures or other obligations issued by any agency or instrumentality of the United States or any securities guaranteed by the United States government, or for which the credit of the United States is pledged for the payment of the principal and interest thereof, all of which must mature not later than three years from date of purchase. (c) Commercial paper of prime quality, or rated among the top third of the quality categories, not applicable to defaulted paper, as defined by a nationally recognized organization which rates such securities as eligible for investment in the state employees retirement fund except that any nonbanking issuing corporation, or parent company in the case of paper issued by operating utility or finance subsidiaries, must have total assets exceeding $500,000,000. Such commercial paper may constitute no more than 30 percent of the book value of the fund at the time of purchase, and the commercial paper of any one corporation shall not constitute more than four percent of the book value of the fund at the time of such investment. (d) Any securities eligible under the preceding provisions, purchased with simultaneous repurchase agreement under which the securities will be sold to the particular dealer on a specified date at a predetermined price. In such instances, all maturities of United States government securities, or securities issued or guaranteed by the United States government or an agency thereof, may be purchased so long as any such securities which mature later than three years from the date of purchase have a current market value exceeding the purchase price by at least five percent on the date of purchase, and so long as such repurchase agreement involving securities extending beyond three years in maturity be limited to a period not exceeding 45 days. (e) Certificates of deposit issued by any official depository of the commission. The commission may purchase certificates of deposit from a depository bank in an amount exceeding that insured by federal depository insurance to the extent that those certificates are secured by collateral maintained by the bank in a manner as prescribed for investments of the State Board of Investment. (f) ; carryforward; deduction Any amount of bonding authority that an entitlement issuer carries forward under federal tax law that is not permanently issued or for which the governing body of the entitlement issuer has not enacted a resolution electing to use the authority for mortgage credit certificates and has not provided a notice of issue to the commissioner before 4:30 p.m. on the last business day in December of the succeeding calendar year shall be deducted from the entitlement allocation for that entitlement issuer in the next succeeding calendar year. Any amount deducted from an entitlement issuer's allocation under this subdivision shall be reallocated to other entitlement issuers, the housing pool, the small issue pool, and the public facilities pool on a proportional basis consistent with section 474A.03 . EFFECTIVE DATE. This section is effective the day following final enactment and applies to any bonding authority allocated in 2012 and subsequent years. into one successive calendar year EFFECTIVE DATE. This section is effective the day following final enactment and applies to any bonding authority allocated in 2012 and subsequent years. into the next succeeding calendaryear and is available until the last business day in December of that succeeding calendar year EFFECTIVE DATE. This section is effective the day following final enactment and applies to any bonding authority allocated in 2012 and subsequent years. For purposes of this section, "capital improvement" includes expenditures for purposes described in this paragraph that have been incurred by a municipality before approval of a capital improvement plan, if such expenditures are included in a capital improvement plan approved on or before the date of the public hearing under subdivision 2 regarding issuance of bonds for such expenditures. municipal The commissioner of revenue shall prepare a suggested form of the question to be presented at the election. If the municipality elects not to submit the question to the voters, the municipality shall not propose the issuance of bonds under this section for the same purpose and in the same amount for a period of 365 days from the date of receipt of the petition. If the question of issuing the bonds is submitted and not approved by the voters, the provisions of section 475.58, subdivision 1 a, shall apply. and bituminous overlays or bituminous overlays or overlaid or overlay or overlay or overlay If the municipality elects not to submit the question to the voters, the municipality shall not propose the issuance of bonds under this section for the same purpose and in the same amount for a period of 365 days from the date of receipt of the petition. If the question of issuing the bonds is submitted and not approved by the voters, the provisions of section 475.58, subdivision 1 a, shall apply. and bituminous overlays For purposes of this subdivision, "street reconstruction" includes expenditures for street reconstruction that have been incurred by a municipality before approval of a street reconstruction plan, if such expenditures are included in a street reconstruction plan approved on or before the date of the public hearing under paragraph (a), clause (1), regarding issuance of bonds for such expenditures. and bituminous overlays 2003 to to 2024 EFFECTIVE DATE. This section is effective the day after compliance by the governing body of the city of St. Paul with Minnesota Statutes, section 645.021 , subdivisions 2 and 3. CARRYFORWARD OF BONDING AUTHORITY FOR 2011; NO DEDUCTION FROM ENTITLEMENT ALLOCATION. Notwithstanding Minnesota Statutes, section 474A.04, subdivision 1 a, bonding authority that was allocated to an entitlement issuer in 2011 and that was carried forward under federal tax law, but for which the entitlement issuer did not provide a notice of issue to the commissioner of management and budget before 4:30 p.m. on the last business day of December 2012 must not be deducted from the entitlement allocation for that entitlement issuer in 2013. EFFECTIVE DATE. This section is effective the day following final enactment and applies retroactively to rescind any reallocation by the commissioner of management and budget under Minnesota Statues, section 474A.04, subdivision 1 a, of any amounts so deducted. LOCAL MATCH; INDEPENDENT SCHOOL DISTRICT NO. 435; WAUBUN-OGEMA-WHITE EARTH. (a) Independent School District No. 435, Waubun-Ogema-White Earth, may expand classroom space at its Ogema Elementary site using a grant of $551,532 that was awarded to the district by the Department of Human Services on August 12, 2012, pursuant to a grant agreement as provided by Minnesota Statutes, section 16A.695, subdivision 9 . Notwithstanding Minnesota Statutes, section 16A.695, subdivision 6 , to satisfy the match requirements of the grant agreement, the district may use a lease-purchase agreement. Notwithstanding Minnesota Statutes, section 465.71 , the lease-purchase agreement must provide that the title to the lease-purchased property must be held by the district. (b) Notwithstanding Minnesota Statutes, section 126C.13, subdivision 4 , if the school district enters a lease-purchase agreement to satisfy the local match under paragraph (a), but fails to make a lease-purchase payment, the commissioner of education shall reduce its general education aid under Minnesota Statutes, section 126C.13, subdivision 4 , by the amount of the lease-purchase payment. EFFECTIVE DATE. This section is effective the day following final enactment. LEGISLATIVE OFFICE FACILITIES. (a) The commissioner of administration may enter into a long-term lease-purchase agreement for a term of up to 25 years, to predesign, design, construct, and equip offices, hearing rooms, and parking facilities for legislative and other functions. The facility must be located on the block bounded by Sherburne Avenue on the north, Park Street on the west, University Avenue on the south, and North Capitol Boulevard on the east. The legislative office facility must provide office accommodations for all senators and senate staff who do not have offices in the Capitol building and on-site parking facilities for all members and staff and disabled visitors to senate offices. A parking structure may also be built on the state-owned land located in the block bounded by Sherburne Avenue on the north, Park Street on the east, University Avenue on the south, and Rice Street on the west. The commissioner of management and budget may issue lease revenue bonds or certificates of participation associated with the lease-purchase agreement. The lease-purchase agreements must not be terminated, except for nonappropriation of money. The lease-purchase agreements must provide the state with a unilateral right to purchase the leased premises at specified times for specified amounts. The lease-purchase agreements are exempt from Minnesota Statutes, section 16B.24 , subdivisions 6 and 6a. (b) The facilities under the lease-purchase agreement are exempt from the design competition requirement under Minnesota Statutes, section 15B.10. Notwithstanding anything to the contrary under Minnesota Statutes, sections 16C.32 and 16C.33, if the commissioner of administration elects to use a design-build delivery method to design and construct one or more facilities under this appropriation, the Capitol Area Architectural and Planning Board, in cooperation with the commissioner, shall create a selection committee to act as the board under Minnesota Statutes, sections 16C.32 and 16C.33, for the design and construction of the facilities. Notwithstanding Minnesota Statutes, section 16B.33 , if the commissioner elects to contract with a primary designer to design one or more facilities under this appropriation, the Capitol Area Architectural and Planning Board, in cooperation with the commissioner, shall create a selection committee to conduct the selection process in accordance with standards under Minnesota Statutes, chapters 15B, 16B, and 16C. A selection committee created under this section must contain no more than seven members, including at least three representatives designated by the senate Committee on Rules and Administration and three representatives designated by the speaker of the house. (c) Notwithstanding any provision to the contrary in Minnesota Statutes, sections 16C.32 and 16C.33, if the commissioner of administration elects to use a design-build delivery method to design, construct, and equip one or more facilities and associated infrastructure to provide audio and video broadcast services for the Capitol building, State Office Building, and a new legislative office building, if applicable, the commissioner shall create a selection committee to act as the board under Minnesota Statutes, sections 16C.32 and 16C.33, to design, build, and equip the facilities. The selected design-builder may self-perform trade work or name an audio and video subcontractor as a member of the design-builder's team. If an audio and video subcontractor is named as a member of the design-builder's team, the design-builder is not required to competitively bid the trade work. Notwithstanding Minnesota Statutes, section 16C.33, subdivision 5 , paragraph (b), after obtaining and evaluating qualifications from each design-builder, in accordance with the weighted criteria and subcriteria and procedures provided in the request for qualifications, the selection committee shall select a short list of up to five proposals. If the commissioner does not receive any proposals, the commissioner may either: (1) solicit new proposals; (2) revise the request for qualifications and thereafter solicit new proposals using the revised request for qualifications; or (3) request selection of a primary designer under Minnesota Statutes, section 16B.33 , 16C.08, or 16C.095, and proceed with competitive bidding pursuant to Minnesota Statutes, sections 16C.25 to 16C.29. (d) The commissioner of administration may enter into a ground lease for state-owned property in the capitol area in conjunction with the execution of a lease-purchase agreement entered into under this section for any improvements constructed on that site. Notwithstanding the requirements of Minnesota Statutes, section 16A.695, subdivision 2 , paragraph (b), the ground lease must be for a term equal to the term of the lease-purchase agreement, and must include an option to purchase the land at its then fair market value, if the improvements are not purchased by the state at the end of the term of the lease-purchase agreement, or at any earlier time that the lease-purchase agreement is terminated. (e) The commissioner of administration must not prepare final plans and specifications for any construction authorized under this section until the program plan and cost estimates for all elements necessary to complete the project have been approved by the senate Committee on Rules and Administration. (f) $3,000,000 is appropriated in fiscal year 2014 from the general fund to the commissioner of administration for predesign and design of facilities authorized under paragraph (a). This appropriation is available for expenditure the day following final enactment and until June 30, 2015. (g) The commissioner of administration may reserve a portion of money from appropriations for office space costs of the legislature to fund future repairs for facilities constructed under the authority provided in this section. Money reserved under this paragraph must be credited to a segregated account for each building in the special revenue fund and is appropriated to the commissioner to make the repairs. When the state acquires title to a building with an account established under this paragraph, the account for that building must be abolished and the balance remaining in the account must be transferred to the appropriate asset preservation and replacement account. EFFECTIVE DATE. This section is effective the day following final enactment. APPROPRIATION; RELOCATION EXPENSES. $1,860,000 is appropriated from the general fund to the commissioner of administration for rent loss and relocation expenses related to the Capitol renovation project for fiscal year 2014. Notwithstanding Minnesota Statutes, section 16A.642 , this appropriation is available until June 30, 2015. The base for this appropriation is $1,380,000 in fiscal year 2016, $960,000 in fiscal year 2017, and $0 after that. , plus $20,000,000, paragraph (a), EFFECTIVE DATE. This section is effective the day following final enactment. [116V.03 ] APPROPRIATION. $1,000,000 in fiscal year 2014 and each year thereafter is appropriated from the general fund to the commissioner of revenue for transfer to the agricultural project utilization account in the special revenue fund for the Agricultural Utilization Research Institute established under section 116V.01 . , except as provided in subdivision 3a, EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 3a. Fee for prepaid wireless telecommunications service. The fee established in subdivision 2 does not apply to prepaid wireless telecommunications services as defined in section 403.02, subdivision 17 b, which are instead subject to the prepaid wireless telecommunications access Minnesota fee established in section 403.161, subdivision 1 , paragraph (b). Collection, remittance, and deposit of prepaid wireless telecommunications access Minnesota fees are governed by sections 403.161 and 403.162 . EFFECTIVE DATE. This section is effective January 1, 2014. and and 403, EFFECTIVE DATE. This section is effective January 1, 2014. section sections and 403.16 to 403.162 EFFECTIVE DATE. This section is effective January 1, 2014. authorize the participation in audits performed by the Multistate Tax Commission. For the purposes of chapter 270B, the Multistate Tax Commission will be considered to be a state for the purposes of auditing corporate sales, excise, and income tax returns. (10) (10) (11) EFFECTIVE DATE. This section is effective the day following final enactment. mail in the mail , within the time prescribed by subdivision 2, mail in mail EFFECTIVE DATE. This section is effective for filings delivered by the United States Postal Service with a postmark date after August 1, 2013. , plus up to $20,000,000 each fiscal year from the taxes imposed under section 290.06, subdivision 1 EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 17b. Prepaid wireless telecommunications service. " Prepaid wireless telecommunications service" means a wireless telecommunications service that allows the caller to dial 911 to access the 911 system, which service must be paid for in advance and is: (1) sold in predetermined units or dollars of which the number declines with use in a known amount; or (2) provides unlimited use for a predetermined time period. The inclusion of nontelecommunications services, including the download of digital products delivered electronically, content, and ancillary services, with a prepaid wireless telecommunications service does not preclude that service from being considered a prepaid wireless telecommunications service under this chapter. EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 20a. Wireless telecommunications service. Wireless telecommunications service means a commercial mobile radio service, as that term is defined in United States Code, title 47, section 332, subsection (d), including all broadband personal communication services, wireless radio telephone services, and geographic area specialized mobile radio licensees, that offer real-time, two-way voice service interconnected with the public switched telephone network. EFFECTIVE DATE. This section is effective January 1, 2014. commercial mobile radio services, as that term is defined in United States Code, title 47, section 332, subsection (d), including all broadband personal communications services, wireless radio telephone services, geographic area specialized and enhanced specialized mobile radio services, and incumbent wide area specialized mobile radio licensees, that offers real-time, two-way voice service interconnected with the public switched telephone network and that is doing business in the state of Minnesota wireless telecommunications service EFFECTIVE DATE. This section is effective January 1, 2014. and , and the most recent forecast of revenues and expenditures for the 911 emergency telecommunications service account, including a separate projection of E911 fees from prepaid wireless customers and projections of year-end fund balances EFFECTIVE DATE. This section is effective the day following final enactment. , except that the fee imposed under this subdivision does not apply to prepaid wireless telecommunications service, which is instead subject to the fee imposed under section 403.161, subdivision 1 , paragraph (a) EFFECTIVE DATE. This section is effective January 1, 2014. Subd. 3d. Eligible telecommunications carrier; requirement. No wireless communications provider may provide telecommunications services under a designation of eligible telecommunications carrier, as provided underMinnesota Rule 7811.1400 , until and unless the commissioner of public safety certifies to the chair of the public utilities commission that the wireless telecommunications provider is not in arrears in amounts owed to the 911 emergency telecommunications service account in the special revenue fund. EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 6. Report. (a) Beginning September 1, 2013, and continuing semiannually thereafter, each wireless telecommunications service provider shall report to the commissioner, based on the mobile telephone number, both the total number of prepaid wireless telecommunications subscribers sourced to Minnesota and the total number of wireless telecommunications subscribers sourced to Minnesota. The report must be filed on the same schedule as Federal Communications Commission Form 477. (b) The commissioner shall make a standard form available to all wireless telecommunications service providers for submitting information required to compile the report required under this subdivision. (c) The information provided to the commissioner under this subdivision is considered trade secret information under section 13.37 and may only be used for purposes of administering this chapter. EFFECTIVE DATE. This section is effective January 1, 2014. [403.16 ] DEFINITIONS. Subdivision 1. Scope. For the purposes of sections 403.16 to 403.164 , the terms defined in this section have the meanings given them. Subd. 2. Consumer. " Consumer" means a person who purchases prepaid wireless telecommunications service in a retail transaction. Subd. 3. Department. " Department" means the Department of Revenue. Subd. 4. Prepaid wireless E911 fee. " Prepaid wireless E911 fee" means the fee that is required to be collected by a seller from a consumer as established in section 403.161, subdivision 1 , paragraph (a). Subd. 5. Prepaid wireless telecommunications access Minnesota fee. " Prepaid wireless telecommunications access Minnesota fee" means the fee that is required to be collected by a seller from a consumer as established in section 403.161, subdivision 1 , paragraph (b). Subd. 6. Provider. " Provider" means a person that provides prepaid wireless telecommunications service under a license issued by the Federal Communications Commission. Subd. 7. Retail transaction. " Retail transaction" means the purchase of prepaid wireless telecommunications service from a seller for any purpose other than resale. Subd. 8. Seller. " Seller" means a person who sells prepaid wireless telecommunications service to another person. EFFECTIVE DATE. This section is effective January 1, 2014. [403.161 ] PREPAID WIRELESS FEES IMPOSED; COLLECTION; REMITTANCE. Subdivision 1. Fees imposed. (a) A prepaid wireless E911 fee of 80 cents per retail transaction is imposed on prepaid wireless telecommunications service until the fee is adjusted as an amount per retail transaction under subdivision 7. (b) A prepaid wireless telecommunications access Minnesota fee, in the amount of the monthly charge provided for in section 237.52, subdivision 2 , is imposed on each retail transaction for prepaid wireless telecommunications service until the fee is adjusted as an amount per retail transaction under subdivision 7. Subd. 2. Exemption. The fees established under subdivision 1 are not imposed on a minimal amount of prepaid wireless telecommunications service that is sold with a prepaid wireless device and is charged a single nonitemized price, and a seller may not apply the fees to such a transaction. For purposes of this subdivision, a minimal amount of service means an amount of service denominated as either ten minutes or less or $5 or less. Subd. 3. Fee collected. The prepaid wireless E911 and telecommunications access Minnesota fees must be collected by the seller from the consumer for each retail transaction occurring in this state. The amount of each fee must be combined into one amount, which must be separately stated on an invoice, receipt, or other similar document that is provided to the consumer by the seller. Subd. 4. Sales and use tax treatment. For purposes of this section, a retail transaction conducted in person by a consumer at a business location of the seller must be treated as occurring in this state if that business location is in this state, and any other retail transaction must be treated as occurring in this state if the retail transaction is treated as occurring in this state for purposes of the sales and use tax as specified in section 297A.669, subdivision 3 , paragraph (c). Subd. 5. Remittance. The prepaid wireless E911 and telecommunications access Minnesota fees are the liability of the consumer and not of the seller or of any provider, except that the seller is liable to remit all fees as provided in section 403.162 . Subd. 6. Exclusion for calculating other charges. The combined amount of the prepaid wireless E911 and telecommunications access Minnesota fees collected by a seller from a consumer must not be included in the base for measuring any tax, fee, surcharge, or other charge that is imposed by this state, any political subdivision of this state, or any intergovernmental agency. Subd. 7. Fee changes. (a) The prepaid wireless E911 and telecommunications access Minnesota fee must be proportionately increased or reduced upon any change to the fee imposed under section 403.11, subdivision 1 , paragraph (c), after July 1, 2013, or the fee imposed under section 237.52, subdivision 2 , as applicable. (b) The department shall post notice of any fee changes on its Web site at least 30 days in advance of the effective date of the fee changes. It is the responsibility of sellers to monitor the department's Web site for notice of fee changes. (c) Fee changes are effective 60 days after the first day of the first calendar month after the commissioner of public safety or the Public Utilities Commission, as applicable, changes the fee. EFFECTIVE DATE. This section is effective January 1, 2014. [403.162 ] ADMINISTRATION OF PREPAID WIRELESS E911 FEES. Subdivision 1. Remittance. Prepaid wireless E911 and telecommunications access Minnesota fees collected by sellers must be remitted to the commissioner of revenue at the times and in the manner provided by chapter 297A with respect to the general sales and use tax. The commissioner of revenue shall establish registration and payment procedures that substantially coincide with the registration and payment procedures that apply in chapter 297A. Subd. 2. Seller's fee retention. A seller may deduct and retain three percent of prepaid wireless E911 and telecommunications access Minnesota fees collected by the seller from consumers. Subd. 3. Department of Revenue provisions. The audit, assessment, appeal, collection, refund, penalty, interest, enforcement, and administrative provisions of chapters 270C and 289A that are applicable to the taxes imposed by chapter 297A apply to any fee imposed under section 403.161 . Subd. 4. Procedures for resale transactions. The commissioner of revenue shall establish procedures by which a seller of prepaid wireless telecommunications service may document that a sale is not a retail transaction. These procedures must substantially coincide with the procedures for documenting sale for resale transactions as provided in chapter 297A. Subd. 5. Fees deposited. (a) The commissioner of revenue shall, based on the relative proportion of the prepaid wireless E911 fee and the prepaid wireless telecommunications access Minnesota fee imposed per retail transaction, divide the fees collected in corresponding proportions. Within 30 days of receipt of the collected fees, the commissioner shall: (1) deposit the proportion of the collected fees attributable to the prepaid wireless E911 fee in the 911 emergency telecommunications service account in the special revenue fund; and (2) deposit the proportion of collected fees attributable to the prepaid wireless telecommunications access Minnesota fee in the telecommunications access fund established in section 237.52, subdivision 1 . (b) The department may deduct and retain an amount, not to exceed two percent of collected fees, to reimburse its direct costs of administering the collection and remittance of prepaid wireless E911 fees and prepaid wireless telecommunications access Minnesota fees. EFFECTIVE DATE. This section is effective January 1, 2014. [403.163 ] LIABILITY PROTECTION FOR SELLERS AND PROVIDERS. (a) A provider or seller of prepaid wireless telecommunications service is not liable for damages to any person resulting from or incurred in connection with providing any lawful assistance in good faith to any investigative or law enforcement officer of the United States, this or any other state, or any political subdivision of this or any other state. (b) In addition to the protection from liability provided by paragraph (a),section 403.08, subdivision 11 , applies to sellers and providers. EFFECTIVE DATE. This section is effective the day following final enactment. [403.164 ] EXCLUSIVITY OF PREPAID WIRELESS E911 FEE. The prepaid wireless E911 fee imposed by section 403.161 is the only E911 funding obligation imposed with respect to prepaid wireless telecommunications service in this state, and no tax, fee, surcharge, or other charge may be imposed by this state, any political subdivision of this state, or any intergovernmental agency, for E911 funding purposes, upon any provider, seller, or consumer with respect to the sale, purchase, use, or provision of prepaid wireless telecommunications service. EFFECTIVE DATE. This section is effective January 1, 2014. PURPOSE STATEMENTS; TAX EXPENDITURES. Subdivision 1. Authority. This section is intended to fulfill the requirement under Minnesota Statutes, section 3.192 , that a bill creating, renewing, or continuing a tax expenditure provide a purpose for the tax expenditure and a standard or goal against which its effectiveness may be measured. Subd. 2. Federal conformity. The provisions of article 6 conforming Minnesota individual income tax to changes in federal law related to bonus depreciation and section 179 expensing are intended to simplify compliance with and administration of the individual income tax. Subd. 3. Sales tax exemption for certain aircraft parts and labor. The provisions of article 5 exempting parts and labor for certain aircraft, is intended to encourage the growth of the aviation services industry in the state. Subd. 4. Railroad track maintenance subtraction. The provisions of article 6 allowing an individual income and corporate franchise tax subtraction for the amount allowed under the federal credit for railroad maintenance expenses, are intended to increase the combined federal and state tax incentives available to Class II and Class III railroads for maintaining and upgrading track in Minnesota. The standard against which effectiveness is to be measured is the additional miles of track maintained or upgraded following allowance of the state tax subtraction in addition to the existing federal tax credit. Subd. 5. Historic structure rehabilitation credit. The provisions of article 6 extending the sunset date of the historic structure rehabilitation credit and modifying the effective date of the credit, are intended to encourage the preservation of historic structures in Minnesota and to create and retain jobs related to rehabilitation of historic structures in the state. The standard against which the effectiveness of the extension of the credit and modification of the effective date is to be measured is the number of jobs created through the rehabilitation of historic structures and the number of historic structures rehabilitated and placed in service. Subd. 6. Greater Minnesota internship credit. The provisions of article 6 providing a tax credit to employers of qualified interns, are intended to encourage Minnesota businesses to employ and provide valuable education and work experience to Minnesota students and foster long-term relationships between students and greater Minnesota employers. The standard against which the effectiveness of the extension of the credit is the number of students who participated in the program who were subsequently employed full time by the employer. Subd. 7. Sales tax exemption for greater Minnesota business expansion. The provisions of article 8 are intended to induce existing businesses in greater Minnesota to increase investment and expand employment in greater Minnesota. Subd. 8. Expansion of sales tax exemption on durable medical products and prosthetics. The provisions of article 8 expanding the definition of items included in repair and replacement parts of durable medical equipment and prosthetics and exempting Medicare and medicaid purchases is intended to simplify sales tax administration in this area and provide relief for sellers who cannot collect the tax under these programs. Subd. 9. Sales tax exemption for established religious orders. The provisions of article 8 exempting certain sales between a religious order and an affiliated institute of higher education, is intended to retain an existing sales tax exemption that exists between St. John's Abbey and St. John's University after a governing restructure between the two entities. Subd. 10. Sales tax exemption for certain dental providers. The provisions of article 8 exempting certain purchases by qualifying critical access dental providers, is intended to assist critical access dental providers in defraying the overall cost of the services they provide to underserved communities. Subd. 11. Sales tax exemption for nursing homes and boarding care homes. The provisions of article 8 exempting certain nursing homes and boarding care homes is intended to clarify that an existing exemption for these facilities is not affected by a recent property tax case related to defining nonprofit organizations engaged in charitable activities. Subd. 12. Construction sales tax exemptions. The provisions of article 8 exempting from sales tax construction materials for various entities, are intended to increase jobs and reduce tax pyramiding by reducing the tax on inputs used to provide taxable goods and services. Subd. 13. Sales tax exemption on certain public infrastructure. The provisions of article 10 exempting construction materials used in public infrastructure projects related to the destination medical center plan is intended to reduce city costs for those projects. EFFECTIVE DATE. This section is effective the day following final enactment. APPROPRIATIONS. (a) $950,000 is appropriated from the general fund to the commissioner of revenue in fiscal year 2014 for administering this act. This appropriation does not cancel but is available until June 30, 2015. $300,000 of this amount is added to the annual base budget. (b) $25,000 in fiscal year 2014 and $25,000 in fiscal year 2015 are appropriated from the general fund to the commissioner of employment and economic development for administering the provisions of article 10. EFFECTIVE DATE. This section is effective the day following final enactment. REPEALER. REPEAL Minnesota Statutes 2012, sections 290.171 ;REPEAL 290.173 ; andREPEAL 290.174 , are repealed.Any Each now or hereafter at any time a an estimated, exclusive of money and credits, is hereby authorized to aid in defraying maypay any such the , by appropriating and paying over such sum of money for each of the political subdivisions, the its of the town, statutory city, or school district may determine determines , . sums so appropriated to amounts paid to the county must for the purpose of aiding in the improvement of to improvesuch the as of the county shall determine determines taxable estimated Estimated estimated estimated estimated estimated estimated estimated estimated estimated estimated estimated estimated estimated estimated estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated assessor's taxable estimated county, city, town, and aggregate taxing the aggregate of tax capacity shall be is The adjusted net tax capacity must be reduced by the captured tax capacity of tax increment districts under section 469.177, subdivision 2 , fiscal disparities contribution tax capacities under sections 276A.06 and 473F.08 , and the tax capacity of transmission lines required to be subtracted from the local tax base under section 273.425 ; and increased by fiscal disparities distribution tax capacities under sections 276A.06 and 473F.08 . for school districts for school districts school school school EFFECTIVE DATE. This section is effective the day following final enactment. taxable estimated taxable estimated taxable estimated taxable estimated estimated a an estimated exclusive of money and credits, or unorganized township town or unorganized territory estimated exclusive of money and credits Subd. 14. Estimated market value. " Estimated market value" means the assessor's determination of market value, including the effects of any orders made under section 270.12 or chapter 274, for the parcel. The provisions of section 273.032 apply for certain uses in determining the total estimated market value for the taxing jurisdiction. Subd. 15. Taxable market value. " Taxable market value" means estimated market value for the parcel as reduced by market value exclusions, deferments of value, or other adjustments required by law, that reduce market value before the application of class rates. (a) Unless otherwise provided, or any limit on net debt, the issuance of bonds, certificates of indebtedness, or capital notes based on market value taxable estimated total taxable estimated taxable of the following or similar : (1) the market value exclusions under: (i) section 273.11 , subdivisions 14a and 14c (vacant platted land); (ii) section 273.11, subdivision 16 (certain improvements to homestead property); (iii) section 273.11 , subdivisions 19 and 20 (certain improvements to business properties); (iv) section 273.11, subdivision 21 (homestead property damaged by mold); (v) section 273.11, subdivision 22 (qualifying lead hazardous reduction projects); (vi) section 273.13, subdivision 34 (homestead of a disabled veteran or family caregiver); (vii) section 273.13, subdivision 35 (homestead market value exclusion); or (2) the deferment of value under: (i) the Minnesota Agricultural Property Tax Law, section 273.111 ; (ii) the Aggregate Resource Preservation Law, section 273.1115 ; (iii) the Minnesota Open Space Property Tax Law, section 273.112 ; (iv) the rural preserves property tax program, section 273.114 ; or (v) the Metropolitan Agricultural Preserves Act, section 473H.10 ; or (3) the adjustments to tax capacity for: (i) , financing under sections 469.174 to 469.1794; (ii) disparity, disparities under chapter 276A or 473F; or (iii) , or wind energy values, but after the limited market adjustments under section 273.11, subdivision 1 a , and after the market value exclusions of certain improvements to homestead property undersection 273.11, subdivision 16 under section 273.425 (b) Estimated market value under paragraph (a) also includes the market value of tax-exempt property if the applicable law specifically provides that the limitation, qualification, or aid calculation includes tax-exempt property. (c) taxable estimated this paragraph property tax levy limitations and calculation of state aid taxable estimated and for purposes of limits on net debt, the issuance of bonds, certificates of indebtedness, or capital notes refer to the estimated market value as last finally equalized For the purpose of determining any net debt limit based on market value, or any limit on the issuance of bonds, certificates of indebtedness, or capital notes based on market value, the terms "market value," "taxable market value," and "market valuation," whether equalized or unequalized, mean the total taxable market value of property within the local unit of government before any adjustments for tax increment, fiscal disparity, powerline credit, or wind energy values, but after the limited market value adjustments under section273.11 , subdivision 1a, and after the market value exclusions of certain improvements to homestead property under section 273.11 , subdivision 16. Unless otherwise provided, "market value," "taxable market value," and "market valuation" for purposes of this paragraph, mean the taxable market value as last finally equalized. (d) For purposes of a provision of a home rule charter or of any special law that is not codified in the statutes and that imposes a levy limitation based on market value or any limit on debt, the issuance of bonds, certificates of indebtedness, or capital notes based on market value, the terms "market value," "taxable market value," and "market valuation," whether equalized or unequalized, mean "estimated market value" as defined in paragraph (a). subdivision 14 subdivisions 14a and 14c credit exclusion 273.1384 273.13 , subdivision 35, EFFECTIVE DATE. This section is effective for taxes payable in 2013 and thereafter. and the homestead market value exclusion residential homestead and credits credit EFFECTIVE DATE. This section is effective for taxes payable in 2013 and thereafter. Net (a) Gross tax capacity means the product of the appropriate gross class rates in this section and market values. (b) taxable EFFECTIVE DATE. This section is effective the day following final enactment. taxable taxable taxable taxable 1988 2014 total estimated valuation value without valuation adjustments for fiscal disparities (chapters 276A and 473F), tax increment financing (sections 469.174 to 469.179 ), or powerline credit (section 273.425 ) as provided under section 273.032 taxable estimated taxable estimated taxable estimated after reductions sections 273.11 , subdivisions 1a and 16, and 273.13 , subdivision 35 section 272.03, subdivision 15 Adjusted Adjusted assessor's estimated taxable , as defined in section 272.03, . For purposes of sections 276A.01 to 276A.09 , the commissioner of revenue shall annually make determinations and reports with respect to each municipality which are comparable to those it makes for school districts , adjusted for sales ratios in a manner similar to the adjustments made to city and town net tax capacities , in the same manner and at the same times prescribed by the subdivision. The commissioner of revenue shall annually determine, for each municipality, information comparable to that required by section 475.53, subdivision 4 , for school districts, as soon as practicable after it becomes available. The commissioner of revenue shall then compute the equalized market value of property within each municipality EFFECTIVE DATE. This section is effective the day following final enactment. valuation adjusted market value valuations adjusted market values taxable for other computations the amount or rate of any salary, aid, tax, or debt authorized, required, or limited by any provision of any law or charter, where the authorization, requirement, or limitation is related to any value or valuation of taxable property within any governmental unit, the value or net tax capacity fiscal capacity under section 276A.01, subdivision 12 , a municipality's taxable market value adjustments reductions clause (a), : (1) taxable governmental unit for any purpose other than section 276A.05 municipality (a) governmental unit's municipality's taxable governmental unit municipality governmental unit, and (b) the increase required by this subdivision is that amount which bears the same proportion to the amount added to the governmental unit's net tax capacity pursuant to subdivision 2, clause (b), as the market value of commercial-industrial property, or such class thereof, located within the governmental unit bears to the net tax capacity of commercial-industrial property, or such class thereof, located within the governmental unit; and (2) in determining the market value of real property within a municipality for purposes of section 276A.05 , the adjustment prescribed by clause (1)(a) must be made and that prescribed by clause (1)(b) must not be made municipality. No adjustment shall be made to taxable market value for the increase in net tax capacity under subdivision 2, clause (b) estimated estimated estimated estimated valuation value estimated estimated estimated estimated valuation value estimated estimated estimated taxable estimated estimated excluding money and credits, estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated (f) "Tax capacity" means total taxable market value, but does not include captured market value. taxable the estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated estimated estimated taxable estimated taxable estimated a an estimated, exclusive of money and credits, estimated estimated estimated estimated estimated estimated estimated taxable estimated taxable estimated taxable estimated estimated estimated taxable estimated aan estimated exclusive of money and credits, taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated taxable estimated estimated a an estimated taxable estimated taxable estimated 2500 2,500 taxable estimated more than 2500 2,500 or more taxable estimated section a an estimated , as defined in section 471.72 , a an estimated , as defined in section 471.72 , a an estimated a an estimated , as defined in section 471.72 , estimated to be the provisions hereof section 473.625 such prospective the estimated market such the detached the net tax capacity of now therein or thereon shall be and on the lands on the date of the detachment from and after the date of the enactment hereof estimated market upon the basis of which such used to calculate the net debt limit of the may issue its bonds, . such the for such purpose to be and other taxable properties for purposes of the school district's net debt limit are estimated said the said the it shall be the duty of such the from and after the passage hereof, to so of each year, shall that value such the such estimated market constituting and making up the basis aforesaid used to calculate the net debt limit of the school district estimated estimated taxable estimated estimated valuation value estimated valuation value (c) For the purpose of determining the commission's property tax levy limitation under this subdivision, "total market valuation" means the total market valuation of all taxable property within the district without valuation adjustments for fiscal disparities (chapter 473F), tax increment financing (sections 469.174 to 469.179 ), and high voltage transmission lines (section273.425 ). Adjusted Adjusted assessor's estimated taxable , as defined in section 272.03, , adjusted for sales ratios in a manner similar to the adjustments made to city and town net tax capacities . For purposes of sections 473F.01 to 473F.13 , the commissioner of revenue shall annually make determinations and reports with respect to each municipality which are comparable to those it makes for school districts , in the same manner and at the same times as are prescribed by the subdivisions. The commissioner of revenue shall annually determine, for each municipality, information comparable to that required by section 475.53, subdivision 4 , for school districts, as soon as practicable after it becomes available. The commissioner of revenue shall then compute the equalized market value of property within each municipality using the aggregate sales ratios from the Department of Revenue's sales ratio study valuation adjusted market value valuations adjusted market values taxable or net tax capacity the amount or rate of any salary, aid, tax, or debt authorized, required, or limited by any provision of any law or charter, where such authorization, requirement, or limitation is related in any manner to any value or valuation of taxable property within any governmental unit, such value or net tax capacity fiscal capacity under section 473F.02, subdivision 14 , a municipality's taxable market value adjustments reductions clause (a), : (1) taxable governmental unit for any purpose other than section 473F.07 municipality (a) governmental unit's municipality's taxable governmental unit municipality governmental unit, and (b) the increase required by this subdivision shall be that amount which bears the same proportion to the amount added to the governmental unit's net tax capacity pursuant to subdivision 2, clause (b), as the market value of commercial-industrial property, or such class thereof, located within the governmental unit bears to the net tax capacity of commercial-industrial property, or such class thereof, located within the governmental unit; and (2) in determining the market value of real property within a municipality for purposes of section 473F.07 , the adjustment prescribed by clause (1)(a) hereof shall be made and that prescribed by clause (1)(b) hereof shall not be made municipality No adjustment shall be made to taxable market value for the increase in net tax capacity under subdivision 2, clause (b). taxable estimated taxable estimated estimated estimated estimated estimated actual estimated estimated net tax capacity of any district furnished by county auditors is not based upon the adjusted exceeds the estimated market value of property within the district such the estimated market actual adjusted . , and actual market value of property within a district, onwhich its is will be , is (a) the value certified by the county auditors, or (b) this on the estimated market , whichever results in a higher value estimated estimated (1) the net tax capacity computed using the net tax capacity rates in section 273.13 for taxes payable in the year of the aid distribution, and the market values, after the exclusion in section 273.13, subdivision 35 , for taxes payable in the year prior to the aid distribution plus (2) a city's fiscal disparities distribution tax capacity under section 276A.06, subdivision 2 , paragraph (b), or 473F.08 , subdivision 2 , paragraph (b), for taxes payable in the year prior to that for which aids are being calculated. The market value utilized in computing city net tax capacity shall be reduced by the sum of (1) a city's market value of commercial industrial property as defined in section 276A.01, subdivision 3 , or 473F.02 , subdivision 3 , multiplied by the ratio determined pursuant to section 276A.06, subdivision 2 , paragraph (a), or 473F.08 , subdivision 2 , paragraph (a), (2) the market value of the captured value of tax increment financing districts as defined in section 469.177, subdivision 2 , and (3) the market value of transmission lines deducted from a city's total net tax capacity under section 273.425 . The city net tax capacity will be computed using equalized market values the city's adjusted net tax capacity under section 273.1325 EFFECTIVE DATE. This section is effective the day following final enactment. net tax capacity of the county, computed analogously to city net tax capacity under section 477A.011, subdivision 20 county's adjusted net tax capacity under section 273.1325 EFFECTIVE DATE. This section is effective the day following final enactment. estimated estimated Subd. 20. Estimated market value. When used in determining or calculating a limit on taxation, spending, state aid amounts, or debt, bond, certificate of indebtedness, or capital note issuance by or for a local government unit, "estimated market value" has the meaning given in section 273.032 . REVISOR'S INSTRUCTION. The revisor of statutes shall recodify RECOD Minnesota Statutes, section 127A.48, subdivisions 1 to 6 , as section 273.1325 , subdivisions 1 to 6, and change all cross-references to the affected subdivisions accordingly.EFFECTIVE DATE. This section is effective the day following final enactment. REPEALER. AMEND Minnesota Statutes 2012, sections 276A.01, subdivision 11 ;AMEND 473F.02 , subdivision 13 ; andAMEND 477A.011 , subdivision 21 , are repealed.EFFECTIVE DATE. Unless otherwise specifically provided, this article is effective the day following final enactment for purposes of limits on net debt, the issuance of bonds, certificates of indebtedness, and capital notes and is effective beginning for taxes payable in 2014 for all other purposes. Subd. 1a. Recapture tax return required. If a disposition or cessation as provided by section 291.03, subdivision 11 , paragraph (a), has occurred, the qualified heir, as defined under section 291.03, subdivision 8 , paragraph (c), or personal representative of the decedent's estate must submit a recapture tax return to the commissioner. EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. (b) This subdivision applies to regulated investment companies required to register under chapter 80A. (c) (b) EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 18. Returns by qualified heirs. A qualified heir, as defined in section 291.03, subdivision 8 , paragraph (c), must file two returns with the commissioner attesting that no disposition or cessation as provided by section 291.03, subdivision 11 , paragraph (a), occurred. The first return must be filed no earlier than 24 months and no later than 26 months after the decedent's death. The second return must be filed no earlier than 36 months and no later than 39 months after the decedent's death. EFFECTIVE DATE. This section is effective for returns required to be filed after December 31, 2013. Subd. 3a. Recapture tax return. A recapture tax return must be filed with the commissioner within six months after the date of the disposition or cessation as provided by section 291.03, subdivision 11 , paragraph (a). EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. chapter 291 section 291.03, subdivision 1, EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. Subd. 3a. Recapture tax. The additional estate tax imposed by section 291.03, subdivision 11 , paragraph (b), is due and payable on or before the expiration of the date provided bysection 291.03, subdivision 11 , paragraph (c). EFFECTIVE DATE. This section is effective for estates of decedents dying after June 30, 2011. A corporation or A corporation or EFFECTIVE DATE. This section is effective the day following final enactment. or an entity or an entity is subject to the tax imposed under section 290.05, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. corporation or corporation or or entity or entities corporation or EFFECTIVE DATE. This section is effective the day following final enactment. a corporation or EFFECTIVE DATE. This section is effective the day following final enactment. , as defined in Minnesota Statutes 1986, section 290.01, subdivision 5 , cumulative calendar year made which exceed if the value of the contract exceeds EFFECTIVE DATE. This section is effective for payments made to contractors after December 31, 2013. Subd. 11. Partition. "Partition" means the division by conveyance of real property that is held jointly or in common by two or more persons into individually owned interests. If one of the co-owners gives consideration for all or a part of the individually owned interest conveyed to them, that portion of the conveyance is not a part of the partition. EFFECTIVE DATE. This section is effective the day following final enactment. : (1) ; and . (2) except as provided in paragraph (f), for a vendor having a liability of $120,000 or more during a fiscal year ending June 30, 2009, and fiscal years thereafter, the taxes imposed by chapter 297A, except as provided in paragraph (b), are due and payable to the commissioner monthly in the following manner: (i) On or before the 14th day of the month following the month in which the taxable event occurred, the vendor must remit to the commissioner 90 percent of the estimated liability for the month in which the taxable event occurred. (ii) On or before the 20th day of the month in which the taxable event occurs, the vendor must remit to the commissioner a prepayment for the month in which the taxable event occurs equal to 67 percent of the liability for the previous month. (iii) On or before the 20th day of the month following the month in which the taxable event occurred, the vendor must pay any additional amount of tax not previously remitted under either item (i) or (ii ) or, if the payment made under item (i) or (ii) was greater than the vendor's liability for the month in which the taxable event occurred, the vendor may take a credit against the next month's liability in a manner prescribed by the commissioner. (iv) Once the vendor first pays under either item (i) or (ii), the vendor is required to continue to make payments in the same manner, as long as the vendor continues having a liability of $120,000 or more during the most recent fiscal year ending June 30. (v) Notwithstanding items (i), (ii), and (iv), if a vendor fails to make the required payment in the first month that the vendor is required to make a payment under either item (i) or (ii), then the vendor is deemed to have elected to pay under item (ii) and must make subsequent monthly payments in the manner provided in item (ii). (vi) For vendors making an accelerated payment under item (ii), for the first month that the vendor is required to make the accelerated payment, on the 20th of that month, the vendor will pay 100 percent of the liability for the previous month and a prepayment for the first month equal to 67 percent of the liability for the previous month. Notwithstanding paragraph (a), , clause (2), (e) Whenever the liability is $120,000 or more separately for: (1) the tax imposed under chapter 297A; (2) a fee that is to be reported on the same return as and paid with the chapter 297A taxes; or (3) any other tax that is to be reported on the same return as and paid with the chapter 297A taxes, then the payment of all the liabilities on the return must be accelerated as provided in this subdivision. (f) At the start of the first calendar quarter at least 90 days after the cash flow account established in section 16A.152, subdivision 1 , and the budget reserve account established in section 16A.152, subdivision 1 a , reach the amounts listed in section 16A.152, subdivision 2 , paragraph (a), the remittance of the accelerated payments required under paragraph (a), clause (2), must be suspended. The commissioner of management and budget shall notify the commissioner of revenue when the accounts have reached the required amounts. Beginning with the suspension of paragraph (a), clause (2), for a vendor with a liability of $120,000 or more during a fiscal year ending June 30, 2009, and fiscal years thereafter, the taxes imposed by chapter 297A are due and payable to the commissioner on the 20th day of the month following the month in which the taxable event occurred. Payments of tax liabilities for taxable events occurring in June under paragraph (b) are not changed. EFFECTIVE DATE. This section is effective the day following final enactment. in good faith from the purchaser from the purchaser taken in good faith which means that the exemption certificate claims an exemption that (A) was statutorily available on the date of the transaction, (B) could be applicable to the item for which the exemption is claimed, and (C) is reasonable for the purchaser's type of business (d) Notwithstanding paragraph (b), relief from liability does not apply to a seller who has obtained information under paragraph (b), clause (2), if through the audit process the commissioner finds the following: (1) that at the time the information was provided the seller had knowledge or had reason to know that the information relating to the exemption was materially false; or (2) that the seller knowingly participated in activity intended to purposefully evade the sales tax due on the transaction. (d) (e) (e) (f) (f) (g) EFFECTIVE DATE. This section is effective retroactively from January 1, 2013. stated on the price list in effect at the time of sale for which a manufacturer or person sells a tobacco product to a distributor, exclusive of any discount, promotional offer, or other reduction. For purposes of this subdivision, "price list" means the manufacturer's price at which tobacco products are made available for sale to all distributors on an ongoing basis at which a distributor purchases a tobacco product. Wholesale sales price includes the applicable federal excise tax, freight charges, or packaging costs, regardless of whether they were included in the purchase price EFFECTIVE DATE. This section is effective for purchases made after December 31, 2013. calendar fiscal EFFECTIVE DATE. This section is effective the day following final enactment. persons, firms, or corporations a person, firm, corporation, or purchasing group as defined in section 60E.02, or any member of a purchasing group, procure procures EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013. , ; , ; , 6, and ; ; and 14 EFFECTIVE DATE. This section is effective the day following final enactment. and ; and . (5) gross premiums less return premiums paid to an insurer other than a licensed insurance company or a surplus lines broker for coverage of risks resident or located in Minnesota by a purchasing group or any members of the purchasing group to a broker or agent for the purchasing group. EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013. , ; , ; , paragraphs (a), clauses (1) to (4), (b), (c), and (d), ; EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013. and purchasing groups and every purchasing group or member of a purchasing group subject to tax under section 297I.05, subdivision 12 , paragraph (a), clause (5), EFFECTIVE DATE. This section is effective for premiums received after December 31, 2013. REPEALER. AMEND Minnesota Statutes 2012, section 289A.60, subdivision 31 , is repealed.EFFECTIVE DATE. This section is effective the day following final enactment. , clause (1) EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. collected by the commissioner and EFFECTIVE DATE. This section is effective the day following final enactment. land exchanges, EFFECTIVE DATE. This section is effective the day following final enactment. or 270.075, subdivision 2, EFFECTIVE DATE. This section is effective the day following final enactment. federal government, the by , loaned, or otherwise made available to EFFECTIVE DATE. This section is effective the day following final enactment. or direct reduced ore EFFECTIVE DATE. This section is effective the day following final enactment. includes means an individual, association, estate, trust, partnership, EFFECTIVE DATE. This section is effective the day following final enactment. (a) is sold, transferred, or sold, transferred, or taxes payable in provided (b) In the case of a sale or transfer, the additional taxes under paragraph (a) shall not be extended against the property if the new owner submits a successful application under this section by the later of May 1 of the current year or 30 days after the sale or transfer. (c) For the purposes of this section, the following events do not constitute a sale or transfer for property that qualified under subdivision 2 prior to the event: (1) death of a property owner when the surviving owners retain ownership of the property; (2) divorce of a married couple when one of the spouses retains ownership of the property; (3) marriage of a single property owner when that owner retains ownership of the property in whole or in part; (4) the organization or reorganization of a farm ownership entity that is not prohibited from owning agricultural land in this state under section500.24 , if all owners maintain the same beneficial interest both before and after the organization or reorganization; and (5) transfer of the property to a trust or trustee, provided that the individual owners of the property are the grantors of the trust and they maintain the same beneficial interest both before and after placement of the property in trust. EFFECTIVE DATE. This section is effective the day following final enactment. : (1) . ; or (2) contiguous acreage used during the preceding year for an intensive livestock or poultry confinement operation, provided that land used only for pasturing or grazing does not qualify under this clause. the assessment year 2002 taxes payable in 2003 because of its enrollment in a qualifying program and the land remains enrolled "Contiguous acreage," for purposes of this paragraph, means all of, or a contiguous portion of, a tax parcel as described in section 272.193 , or all of, or a contiguous portion of, a set of contiguous tax parcels under that section that are owned by the same person. Real estate of Agricultural land under this section also includes: (1) contiguous acreage that is , which is in size and or intensively in the preceding year , shall be considered as agricultural land. To qualify under this paragraph, property that includes a residential structure must be used intensively for one of the following purposes: ; or (2) contiguous acreage that contains a residence and is less than 11 acres in size, if the contiguous acreage exclusive of the house, garage, and surrounding one acre of land was used in the preceding year for one or more of the following three uses: an intensive grain of grain operation, for intensive machinery or equipment of machinery or equipment activities intensively or (iii) for livestock or poultry confinement, provided that land that is used only for pasturing and grazing does not qualify; or (iv) (iii) intensive "Contiguous acreage," for purposes of this paragraph, means all of a tax parcel as described in section 272.193 , or all of a set of contiguous tax parcels under that section that are owned by the same person. EFFECTIVE DATE. This section is effective for taxes payable in 2014 and thereafter. or any of its political subdivisions EFFECTIVE DATE. This section is effective the day following final enactment. by submitting . (b) Companies that must submit reports under section 270.82 must submit with to May June (c) Companies that submit reports under section 273.371 must submit a written request to the commissioner for a conference within ten days after the date of the commissioner's valuation certification or notice to the company, or by July 1, whichever is earlier. (d) (b) (e) EFFECTIVE DATE. This section is effective beginning with assessment year 2014. incorporatedstatutory city or home rule charterEFFECTIVE DATE. This section is effective the day following final enactment. The period of redemption for all lands sold to the state at a tax judgment sale shall be three years from the date of sale to the state of Minnesota if the land is within an incorporated area unless it is: (a) nonagricultural homesteaded land as defined in section 273.13, subdivision 22 ; (b) homesteaded agricultural land as defined in section 273.13, subdivision 23 , paragraph (a); (c) seasonal residential recreational land as defined in section 273.13 , subdivisions 22, paragraph (c) , and 25, paragraph (d), clause (1), in which event the period of redemption is five years from the date of sale to the state of Minnesota; (d) abandoned property and pursuant to section 281.173 a court order has been entered shortening the redemption period to five weeks; or (e) vacant property as described under section 281.174, subdivision 2 , and for which a court order is entered shortening the redemption period under section 281.174 . The period of redemption for all other lands sold to the state at a tax judgment sale shall be five years from the date of sale. The notice must contain a narrative description of the various periods to redeem specified in sections 281.17 , 281.173 , and 281.174 , in the manner prescribed by the commissioner of revenue under subdivision 2. EFFECTIVE DATE. This section is effective for lists and notices required after December 31, 2013. The commissioner shall prescribe the form of the notice. Execution of the notice by the original or facsimile signature of the commissioner or a delegate entitles them to be recorded, and no other attestation, certification, or acknowledgment is necessary. EFFECTIVE DATE. This section is effective for notices that are both executed and recorded after June 30, 2013. Hydrometallurgical processes are processes that extract the ores, metals, or minerals, by use of aqueous solutions that leach, concentrate, and recover the ore, metal, or mineral. EFFECTIVE DATE. This section is effective the day following final enactment. ores,metals, or and energy resources ores,metals, or and energy resources EFFECTIVE DATE. This section is effective the day following final enactment. For the purpose of determining for the county the estimated values of parcels proposed to be exchanged, the county assessor need not be licensed under chapter 82B. EFFECTIVE DATE. This section is effective the day following final enactment. REPEALER. AMEND Minnesota Statutes 2012, sections 272.69 ; andAMEND 273.11 , subdivisions 1a and 22, are repealed.EFFECTIVE DATE. This section is effective the day following final enactment. Subdivision 1. Duplicate warrant. The commissioner may refuse to issue a duplicate of an unpaid state warrant. If the commissioner acts in good faith, the commissioner is not liable, whether the application is granted or denied. Subd. 2. Original warrant is void. may refuse to issue a duplicate of an unpaid state warrant. If the commissioner acts in good faith the commissioner is not liable, whether the application is granted or denied is not liable to any holder who took the void original warrant for value, whether or not the commissioner required an indemnity bond from the applicant Subd. 3. Unpaid refund or rebate. EFFECTIVE DATE. This section is effective the day following final enactment. (a) (b) If a taxpayer or other person agrees to accept notification by electronic means, notice of a determination or action of the commissioner sent by electronic mail to the taxpayer's or person's last known electronic mailing address as provided for in section 325L.08 is sufficient. EFFECTIVE DATE. This section is effective the day following final enactment. due of the payment of the tax provided in section 270C.40, subdivision 3, EFFECTIVE DATE. This section is effective the day following final enactment. payment was required to be paid, including any extensions, provided in section 270C.40, subdivision 3 , EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. at the rate asfrom the time the tax should have been paid EFFECTIVE DATE. This section is effective the day following final enactment. D910-07a D910-11 EFFECTIVE DATE. This section is effective the day following final enactment. D1655-08a D1655-12 EFFECTIVE DATE. This section is effective the day following final enactment. Subd. 8b. Biobutanol. "Biobutanol" means isobutyl alcohol produced by fermenting agriculturally generated organic material that is to be blended with gasoline and meets either: (1) the initial ASTM Standard Specification for Butanol for Blending with Gasoline for use as an Automotive Spark-Ignition Engine Fuel once it has been released by ASTM for general distribution; or (2) in the absence of an ASTM Standard Specification, the following list of requirements: (i) visually free of sediment and suspended matter; (ii) clear and bright at the ambient temperature of 21 degrees Celsius or the ambient temperature whichever is higher; (iii) free of any adulterant or contaminant that can render it unacceptable for its commonly used applications; (iv) contains not less than 96 volume percent isobutyl alcohol; (v) contains not more than 0.4 volume percent methanol; (vi) contains not more than 1.0 volume percent water as determined by ASTM standard test method E203 or E1064; (vii) acidity (as acetic acid) of not more than 0.007 mass percent as determined by ASTM standard test method D1613; (viii) solvent washed gum content of not more than 5.0 milligrams per 100 milliliters as determined by ASTM standard test method D381; (ix) sulfur content of not more than 30 parts per million as determined by ASTM standard test method D2622 or D5453; and (x) contains not more than 4 parts per million total inorganic sulfate. D975-07b D975-11b EFFECTIVE DATE. This section is effective the day following final enactment. typically not more than 60 greater than 50 D5798-07 D5798-11 EFFECTIVE DATE. This section is effective the day following final enactment. D4806-08 D4806-11a EFFECTIVE DATE. This section is effective the day following final enactment. D4814-08b D4814-11b D4814-08b D4814-11b EFFECTIVE DATE. This section is effective the day following final enactment. D4814-08b D4814-11b EFFECTIVE DATE. This section is effective the day following final enactment. D396-08b D396-12 EFFECTIVE DATE. This section is effective the day following final enactment. until paid EFFECTIVE DATE. This section is effective the day following final enactment. , and , and penalty The penalty imposed in this subdivision shall bear interest from the date provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. from the date provided in section 270C.40, subdivision 3, until paid EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. , together with any penalty imposed in this section, The penalty imposed in this section bears interest at the rate specified in section 270C.40 from the date provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. , together with any penalty imposed by this chapter, Any penalty imposed by this chapter bears interest from the date provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or paid, including any extensions provided in section 270C.40, subdivision 3 EFFECTIVE DATE. This section is effective the day following final enactment. the return or payment was required to be filed or paid provided in section 270C.40, subdivision 3 , EFFECTIVE DATE. This section is effective the day following final enactment. , . The additional tax shall bear interest Any penalty imposed pursuant to this section shall bear interest from the date provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. , . The additional tax shall bear interest Any penalty imposed pursuant to this section shall bear interest from the date provided in section 270C.40, subdivision 3 , to the date of payment of the penalty. EFFECTIVE DATE. This section is effective the day following final enactment. CHAPTER 205 TAXATION > MULTISTATE TAX COMPACT § 205.581. Multistate tax compact; enactment. Sec. 1. The multistate tax compact is enacted into law and entered into with all jurisdictions legally joining therein, in the form substantially as follows: MULTISTATE TAX COMPACT Article I. Purposes. The purposes of this compact are to: (1) Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes. (2) Promote uniformity or compatibility in significant components of tax systems. (3) Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration. (4) Avoid duplicative taxation. Article II. Definitions. As used in this compact: (1) ″State″ means a state of the United States, the district of Columbia, the commonwealth of Puerto Rico, or any territory or possession of the United States. (2) ″Subdivision″ means any governmental unit or special district of a state. (3) ″Taxpayer″ means any corporation, partnership, firm, association, governmental unit or agency or person acting as a business entity in more than 1 state. (4) ″Income tax″ means a tax imposed on or measured by net income including any tax imposed on or measured by an amount arrived at by deducting expenses from gross income, 1 or more forms of which expenses are not specifically and directly related to particular transactions. (5) ″Capital stock tax″ means a tax measured in any way by the capital of a corporation considered in its entirety. (6) ″Gross receipts tax″ means a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax. (7) ″Sales tax″ means a tax imposed with respect to the transfer for a consideration of EDWARD BEEBY Page 2 of 14 2011 MCLS § 205.581 ownership, possession or custody of tangible personal property or the rendering of services measured by the price of the tangible personal property transferred or services rendered and which is required by state or local law to be separately stated from the sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles. (8) ″Use tax″ means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession or custody of that property or the leasing of that property from another including any consumption, keeping, retention, or other use of tangible personal property and (b) is complementary to a sales tax. (9) ″Tax″ means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which has a multistate impact, except that the provisions of articles III, IV and V of this compact shall apply only to the taxes specifically designated therein and the provisions of article IX of this compact shall apply only in respect to determinations pursuant to article IV. Article III. Elements of Income Tax Laws. Taxpayer Option, State and Local Taxes. (1) Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in 2 or more party states may elect to apportion and allocate his income in the manner provided by the laws of such state or by the laws of such states and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with article IV except that beginning January 1, 2011 any taxpayer subject to the Michigan business tax act, 2007 PA 36, MCL 208.1101 to 208.1601, or the income tax act of 1967, 1967 PA 281, MCL 206.1 to 206.697, shall, for purposes of that act, apportion and allocate in accordance with the provisions of that act and shall not apportion or allocate in accordance with article IV . This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this paragraph, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also may be applied to the entire tax base. In no instance wherein article IV is employed for all subdivisions of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a state income tax. Taxpayer Option, Short Form. (2) Each party state or any subdivision thereof which imposes an income tax shall provide by law that any taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year within EDWARD BEEBY Page 3 of 14 2011 MCLS § 205.581 the state or subdivision, is not in excess of $100,000.00 may elect to report and pay any tax due on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The multistate tax commission, not more than once in 5 years, may adjust the $100,000.00 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption by the commission, shall replace the $100,000.00 figure specifically provided herein. Each party state and subdivision thereof may make the same election available to taxpayers additional to those specified in this paragraph. Coverage. (3) Nothing in this article relates to the reporting or payment of any tax other than an income tax. Article IV. Division of Income. (1) As used in this article, unless the context otherwise requires: (a) ″Business income″ means income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations. (b) ″Commercial domicile″ means the principal place from which the trade or business of the taxpayer is directed or managed. (c) ″Compensation″ means wages, salaries, commissions and any other form of remuneration paid to employees for personal services. (d) ″Financial organization″ means any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company, investment company, or any type of insurance company. (e) ″Nonbusiness income″ means all income other than business income. (f) ″Public utility″ means any business entity (1) which owns or operates any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, except by pipe line, or the production, transmission, sale, delivery, or furnishing of electricity, water or steam; and (2) whose rates of charges for goods or services have been established or approved by a federal, state or local government or governmental agency. (g) ″Sales″ means all gross receipts of the taxpayer not allocated under paragraphs of this article. (h) ″State″ means any state of the United States, the district of Columbia, the commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof. (i) ″This state″ means the state in which the relevant tax return is filed or, in the case of application of this article to the apportionment and allocation of income for local tax EDWARD BEEBY Page 4 of 14 2011 MCLS § 205.581 purposes, the subdivision or local taxing district in which the relevant tax return is filed. (2) Any taxpayer having income from business activity which is taxable both within and without this state, other than activity as a financial organization or public utility or the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in this article. If a taxpayer has income from business activity as a public utility but derives the greater percentage of his income from activities subject to this article, the taxpayer may elect to allocate and apportion his entire net income as provided in this article. (3) For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax, or (2) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not. (4) Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in paragraphs 5 through 8 of this article. (5) (a) Net rents and royalties from real property located in this state are allocable to this state. (b) Net rents and royalties from tangible personal property are allocable to this state: (1) If and to the extent that the property is utilized in this state, or (2) in their entirety if the taxpayer’s commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized. (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession. (6) (a) Capital gains and losses from sales of real property located in this state are allocable to this state. (b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the property had a situs in this state at the time of the sale, or (2) the taxpayer’s commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs. (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer’s commercial domicile is in this state. (7) Interest and dividends are allocable to this state if the taxpayer’s commercial domicile is in EDWARD BEEBY Page 5 of 14 2011 MCLS § 205.581 this state. (8) (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or copyright is utilized by the payer in this state, or (2) if and to the extent that the patent copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer’s commercial domicile is in this state. (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer’s commercial domicile is located. (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer’s commercial domicile is located. (9) All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is 3. (10) The property factor is a fraction, the numerator of which is the average value of the taxpayer’s real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer’s real and tangible personal property owned or rented and used during the tax period. (11) Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at 8 times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. (12) The average value of property shall be determined by averaging the values at the beginning and ending of the tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer’s property. (13) The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the tax period. (14) Compensation is paid in this state if: (a) The individual’s service is performed entirely within the state; (b) The individual’s service is performed both within and without the state, but the service performed without the state is incidental to the individual’s service within the state; or (c) Some of the service is performed in the state and (1) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state, or (2) the base of operations or the place from which the service is directed EDWARD BEEBY Page 6 of 14 2011 MCLS § 205.581 or controlled is not in any state in which some part of the service is performed, but the individual’s residence is in this state. (15) The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period. (16) Sales of tangible personal property are in this state if: (a) The property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or (b) The property is shipped from an office, store, warehouse, factory, or other place of storage in this state and (1) the purchaser is the United States government or (2) the taxpayer is not taxable in the state of the purchaser. (17) Sales, other than sales of tangible personal property, are in this state if: (a) The income-producing activity is performed in this state; or (b) The income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance. (18) If the allocation and apportionment provisions of this article do not fairly represent the extent of the taxpayer’s business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer’s business activity, if reasonable: (a) Separate accounting; (b) The exclusion of any one or more of the factors; (c) The inclusion of 1 or more additional factors which will fairly represent the taxpayer’s business activity in this state; or (d) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income. Article V. Elements of Sales and Use Tax Laws. Tax Credit. (1) Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined amount or amounts of legally imposed sales or use taxes paid by him with respect to the same property to another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any unused portion of the credit shall then be applied against the amount of any use tax due a subdivision. Tax Credit Exemption Certificates, Vendors May Rely. EDWARD BEEBY Page 7 of 14 2011 MCLS § 205.581 (2) Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction. Article VI. The Commission. Organization and Management. (1) (a) The multistate tax commission is hereby established. It shall be composed of 1 ″member″ from each party state who shall be the head of the state agency charged with the administration of the types of taxes to which this compact applies. If there is more than 1 such agency, the state shall provide by law for the selection of the commission member from the heads of the relevant agencies. State law may provide that a member of the commission be represented by an alternate but only if there is on file with the commission written notification of the designation and identity of the alternate. The attorney general of each party state or his designee, or other counsel if the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission, but shall not vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under paragraph 1 (e) of this article. (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by this compact to consult with the commission member from that state. (c) Each member shall be entitled to 1 vote. The commission shall not act unless a majority of the members are present, and no action shall be binding unless approved by a majority of the total number of members. (d) The commission shall adopt an official seal to be used as it may provide. (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the annual and any other regular meetings, and shall provide for the giving of notice of annual, regular and special meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered. (f) The commission shall elect annually, from among its members, a chairman, a vice chairman and a treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix his duties and compensation. The executive director shall be secretary of the commission. The commission shall make provision for the bonding of such of its officers and employees as it may deem appropriate. (g) Irrespective of the civil service, personnel or other merit system laws of any party state, the executive director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies and EDWARD BEEBY Page 8 of 14 2011 MCLS § 205.581 programs. (h) The commission may borrow, accept or contract for the services of personnel from any state, the United States, or any other governmental entity. (i) The commission may accept for any of its purposes and functions any and all donations and grants of money, equipment, supplies, materials and services, conditional or otherwise, from any governmental entity, and may utilize and dispose of the same. (j) The commission may establish 1 or more offices for the transacting of its business. (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or officer in each of the party states. (l) The commission annually shall make to the governor and legislature of each party state a report covering its activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be reported in the annual report of the commission, and shall include the nature, amount and conditions, if any, of the donation, gift, grant or services borrowed and the identity of the donor or lender. The commission may make additional reports as it may deem desirable. Committees. (2) (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have an executive committee of 7 members, including the chairman, vice chairman, treasurer and 4 other members elected annually by the commission. The executive committee, subject to the provisions of this compact and consistent with the policies of the commission, shall function as provided in the bylaws of the commission. (b) The commission may establish advisory and technical committees, membership on which may include private persons and public officials, in furthering any of its activities. Such committees may consider any matter of concern to the commission, including problems of special interest to any party state and problems dealing with particular types of taxes. (c) The commission may establish such additional committees as its bylaws may provide. Powers. (3) In addition to powers conferred elsewhere in this compact, the commission shall have power to: (a) Study state and local tax systems and particular types of state and local taxes. (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws with a view toward encouraging the simplification and improvement of state and local tax law and administration. (c) Compile and publish information as in its judgment would assist the party states in implementation of the compact and taxpayers in complying with state and local tax EDWARD BEEBY Page 9 of 14 2011 MCLS § 205.581 laws. (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact. Finance. (4) (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature thereof. (b) Each of the commission’s budgets of estimated expenditures shall contain specific recommendations of the amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such available public sources of information as, in its judgment, present the most equitable and accurate comparisons among the party states. Each of the commission’s budgets of estimated expenditures and requests for appropriations shall indicate the sources used in obtaining information employed in applying the formula contained in this paragraph. (c) The commission shall not pledge the credit of any party state. The commission may meet any of its obligations in whole or in part with funds available to it under paragraph (1) (i) of this article: provided that the commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part in such manner. Except where the commission makes use of funds available to it under paragraph (1) (i), the commission shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same. (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws. All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed public accountant and the report of the audit shall be included in and become part of the annual report of the commission. (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted officers of the party states and by any persons authorized by the commission. (f) Nothing contained in this article shall be construed to prevent commission compliance with laws relating to audit or inspection of accounts by or on behalf of any government contributing to the support of the commission. Article VII. Uniform Regulations and Forms. (1) Whenever any 2 or more party states, or subdivisions of party states, have uniform or EDWARD BEEBY Page 10 of 14 2011 MCLS § 205.581 similar provisions of law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt uniform regulations for any phase of the administration of such law, including assertion of jurisdiction to tax, or prescribing uniform tax forms. The commission may also act with respect to the provisions of article IV of this compact. (2) Prior to the adoption of any regulation, the commission shall: (a) As provided in its bylaws, hold at least 1 public hearing on due notice to all affected party states and subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for advance notice of its regulation-making proceedings. (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant written data and views, which shall be considered fully by the commission. (3) The commission shall submit any regulations adopted by it to the appropriate officials of all party states and subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption in accordance with its own laws and procedures. Article VIII. Interstate Audits. (1) This article shall be in force only in those party states that specifically provide therefor by statute. (2) Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records or other documents may request the commission to perform the audit on its behalf. In responding to the request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records, and other documents and any relevant property or stock of merchandise. The commission may enter into agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to be paid by the state or local government or governments for which it performs the service, for any audits performed by it in order to reimburse itself for the actual costs incurred in making the audit. (3) The commission may require the attendance of any person within the state where it is conducting an audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account, book, paper, document, other record, property or stock of merchandise being examined in connection with the audit. If the person is not within the jurisdiction, he may be required to attend for such purpose at any time and place fixed by the commission within the state of which he is a resident: provided that such state has adopted this article. (4) The commission may apply to any court having power to issue compulsory process for orders in aid of its powers and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to issue such orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject matter on account of which the commission seeks an order is within the jurisdiction of the court to EDWARD BEEBY Page 11 of 14 2011 MCLS § 205.581 which application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a court in the state in which the object of the order being sought is situated. The provisions of this paragraph apply only to courts in a state that has adopted this article. (5) The commission may decline to perform any audit requested if it finds that its available personnel or other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as determined by the commission. (6) Information obtained by any audit pursuant to this article shall be confidential and available only for tax purposes to party states, their subdivisions or the United States. Availability of information shall be in accordance with the laws of the states or subdivisions on whose account the commission performs the audit, and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any taxpayer to keep records for any period not otherwise required by law. (7) Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states or any of their subdivisions are not superseded or invalidated by this article. (8) In no event shall the commission make any charge against a taxpayer for an audit. (9) As used in this article, ″tax,″ in addition to the meaning ascribed to it in article II, means any tax or license fee imposed in whole or in part for revenue purposes. Article IX. Arbitration. (1) Whenever the commission finds a need for settling disputes concerning apportionments and allocations by arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of article VII. (2) The commission shall select and maintain an arbitration panel composed of officers and employees of state and local governments and private persons who shall be knowledgeable and experienced in matters of tax law and administration. (3) Whenever a taxpayer who has elected to employ article IV, or whenever the laws of the party state or subdivision thereof are substantially identical with the relevant provisions of article IV, the taxpayer, by written notice to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an apportionment or allocation, if he is dissatisfied with the final administrative determination of the tax agency of the state or subdivision with respect thereto on the ground that it would subject him to double or multiple taxation by 2 or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as provided herein, and agrees to be bound thereby. (4) The arbitration board shall be composed of 1 person selected by the taxpayer, 1 by the agency or agencies involved, and 1 member of the commission’s arbitration panel. If the EDWARD BEEBY Page 12 of 14 2011 MCLS § 205.581 agencies involved are unable to agree on the person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel. The 2 persons selected for the board in the manner provided by the foregoing provisions of this paragraph shall jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding. Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the meaning of this paragraph. (5) The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer’s incorporation, residence or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for gaining access to evidence relevant to the matter before it. (6) The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote. (7) The board shall have power to administer oaths, take testimony, subpoena and require the attendance of witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in which the person to whom the subpoena is directed may be found may make an order requiring compliance with the subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this paragraph apply only in states that have adopted this article. (8) Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a state or local government who serves as a member of a board shall be entitled to compensation therefor unless he is required on account of his service to forego the regular compensation attaching to his public employment, but any such board member shall be entitled to expenses. (9) The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other purpose. (10) The board shall file with the commission and with each tax agency represented in the proceeding: the determination of the board; the board’s written statement of its reasons therefor; the record of the board’s proceedings; and any other documents required by the arbitration rules of the commission to be filed. (11) The commission shall publish the determinations of boards together with the statements of the reasons therefor. (12) The commission shall adopt and publish rules of procedure and practice and shall file a EDWARD BEEBY Page 13 of 14 2011 MCLS § 205.581 copy of such rules and of any amendment thereto with the appropriate agency or officer in each of the party states. (13) Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if otherwise lawful, by the parties to the arbitration proceeding. Article X. Entry Into Force and Withdrawal. (1) This compact shall enter into force when enacted into law by any 7 states. Thereafter, this compact shall become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all party states whenever there is a new enactment of the compact. (2) Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal. (3) No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination therein. Article XI. Effect on Other Laws and Jurisdiction. Nothing in this compact shall be construed to: (a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement article III (2) of this compact. (b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other than a sales tax: provided that the definition of ″tax″ in article VIII (9) may apply for the purposes of that article and the commission’s powers of study and recommendation pursuant to article VI (3) may apply. (c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to any person, corporation or other entity or subject matter, except to the extent that such jurisdiction is expressly conferred by or pursuant to this compact upon another agency or body. (d) Supersede or limit the jurisdiction of any court of the United States. Article XII. Construction and Serverability. This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact shall be severable and if any phrase, clause, sentence or provision of this compact is declared to be contrary to the constitution of any state or of the United States or the applicability thereof to any government, agency, person or circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any government, agency, person or circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party states and in full force and effect as to the state affected as to all severable matters. EDWARD BEEBY Page 14 of 14 2011 MCLS § 205.581 History Act 343, 1969, p 770; eff July 1, 1970. Pub Acts 1969, No. 343, § 1, by § 9 eff July 1, 1970. Amended by Pub Acts 2011, No. 40, imd eff May 25, 2011. MICHIGAN COMPILED LAWS SERVICE Copyright © 2015 Matthew Bender & Company, Inc. a member of the LexisNexis Group. All rights reserved. EDWARD BEEBY Page 1 LEXISNEXIS (TM) MISSOURI ANNOTATED STATUTES Copyright © 2014 by Matthew Bender & Company, Inc., a member of the LexisNexis Group. All rights reserved. *** CURRENT THROUGH THE 97TH GENERAL ASSEMBLY, 2ND REGULAR SESSION *** TITLE 4. EXECUTIVE BRANCH (Chs. 26-37) CHAPTER 32. STATE DEPARTMENT OF REVENUE MULTISTATE TAX COMPACT GO TO CODE ARCHIVE DIRECTORY FOR THIS JURISDICTION § 32.200 R.S.Mo. (2014) § 32.200. Multistate tax compact The "Multistate Tax Compact" is hereby enacted into law and entered into with all jurisdictions legally joining therein, in the form substantially as follows: MULTISTATE TAX COMPACT Article I The purposes of this compact are to: 1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes. 2. Promote uniformity or compatibility in significant components of tax systems. 3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration. 4. Avoid duplicative taxation. Page 2 § 32.200 R.S.Mo. Article II As used in this compact: 1. "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States. 2. "Subdivision" means any governmental unit or special district of a state. 3. "Taxpayer" means any corporation, partnership, firm, association, governmental unit or agency or person acting as a business entity in more than one state. 4. "Income tax" means a tax imposed on or measured by net income including any tax imposed on or measured by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions. 5. "Capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety. 6. "Gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax. 7. "Sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession or custody of tangible personal property or the rendering of services measured by the price of the tangible personal property transferred or services rendered and which is required by state or local law to be separately stated from the sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles. 8. "Use tax" means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession or custody of that property or the leasing of that property from another including any consumption, keeping, retention, or other use of tangible personal property; and (b) is complementary to a sales tax. 9. "Tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which has a multistate impact, except that the provisions of articles III, IV and V of this compact shall apply only to the taxes specifically designated therein and the provisions of article IX of this compact shall apply only in respect to determinations pursuant to article IV. Article III 1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to apportion and allocate his income in the manner provided by the laws of such state or by the laws of such states and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with article IV. Page 3 § 32.200 R.S.Mo. This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this paragraph, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also may be applied to the entire tax base. In no instance wherein article IV is employed for all subdivisions of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a state income tax. 2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year within the state or subdivision, as the case may be, is not in excess of $ 100,000 may elect to report and pay any tax due on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The multistate tax commission, not more than once in five years, may adjust the $ 100,000 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption by the commission, shall replace the $ 100,000 figure specifically provided herein. Each party state and subdivision thereof may make the same election available to taxpayers additional to those specified in this paragraph. 3. Nothing in this article relates to the reporting or payment of any tax other than an income tax. Article IV 1. As used in this article, unless the context otherwise requires: (1) "Business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. (2) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed. (3) "Compensation" means wages, salaries, commissions and any other form of remuneration paid to employees for personal services. (4) "Financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company, investment company, or any type of insurance company. (5) "Nonbusiness income" means all income other than business income. (6) "Public utility" means any business entity (a) which owns or operates any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, except by pipeline, or the production, transmission, sale, delivery, or furnishing of electricity, water or steam; and (b) whose rates of charges for goods or services have been established or approved by a federal, state or local government or governmental agency. Page 4 § 32.200 R.S.Mo. (7) "Sales" means all gross receipts of the taxpayer not allocated under paragraphs of this article. (8) "State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof. (9) "This state" means the state in which the relevant tax return is filed or, in the case of application of this article, to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in which the relevant tax return is filed. 2. Any taxpayer having income from business activity which is taxable both within and without this state, other than activity as a financial organization or public utility or the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in this article. If a taxpayer has income from business activity as a public utility but derives the greater percentage of his income from activities subject to this article, the taxpayer may elect to allocate and apportion his entire net income as provided in this article. 3. For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not. 4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in paragraphs 5 through 8 of this article. 5. (1) Net rents and royalties from real property located in this state are allocable to this state. (2) Net rents and royalties from tangible personal property are allocable to this state: (a) if and to the extent that the property is utilized in this state; or (b) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized. (3) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession. 6. (1) Capital gains and losses from sales of real property located in this state are allocable to this state. (2) Capital gains and losses from sales of tangible personal property are allocable to this state if (a) the property had a situs in this state at the time of the sale; or (b) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs. Page 5 § 32.200 R.S.Mo. (3) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state. 7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state. 8. (1) Patent and copyright royalties are allocable to this state: (a) if and to the extent that the patent or copyright is utilized by the payer in this state; or (b) if and to the extent that the patent copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state. (2) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located. (3) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located. 9. All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. 10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period. 11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. 12. The average value of property shall be determined by averaging the values at the beginning and ending of the tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer's property. 13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the tax period. 14. Compensation is paid in this state if: (1) the individual's service is performed entirely within the state; (2) the individual's service is performed both within and without the state, but the service performed without the state is incidental to the individual's service within the state; or (3) some of the service is performed in the state; and (a) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state; or Page 6 § 32.200 R.S.Mo. (b) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this state. 15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period. 16. Sales of tangible personal property are in this state if: (1) the property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or (2) the property is shipped from an office, store, warehouse, factory, or other place of storage in this state; and (a) the purchaser is the United States government; or (b) the taxpayer is not taxable in the state of the purchaser. 17. Sales, other than sales of tangible personal property, are in this state if: (1) the income-producing activity is performed in this state; or (2) the income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance. 18. If the allocation and apportionment provisions of this article do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer's business activity, if reasonable: (1) separate accounting; (2) the exclusion of any one or more of the factors; (3) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (4) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. Article V 1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined amount or amounts of legally imposed sales or use taxes paid by him with respect to the same property to another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any unused portion of the credit shall then be applied against the amount of any use tax due a subdivision. 2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction. Page 7 § 32.200 R.S.Mo. Article VI 1. (a) The multistate tax commission is hereby established. It shall be composed of one "member" from each party state who shall be the head of the state agency charged with the administration of the types of taxes to which this compact applies. If there is more than one such agency the state shall provide by law for the selection of the commission member from the heads of the relevant agencies. State law may provide that a member of the commission be represented by an alternate but only if there is on file with the commission written notification of the designation and identity of the alternate. The attorney general of each party state or his designee, or other counsel if the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission, but shall not vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under paragraph 1 (e) of this article. (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by this compact to consult with the commission member from that state. (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the members are present, and no action shall be binding unless approved by a majority of the total number of members. (d) The commission shall adopt an official seal to be used as it may provide. (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the annual and any other regular meetings, and shall provide for the giving of notice of annual, regular and special meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered. (f) The commission shall elect annually, from among its members, a chairman, a vice chairman and a treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix his duties and compensation. The executive director shall be secretary of the commission. The commission shall make provision for the bonding of such of its officers and employees as it may deem appropriate. (g) Irrespective of the civil service, personnel or other merit system laws of any party state, the executive director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies and programs. (h) The commission may borrow, accept or contract for the services of personnel from any state, the United States, or any other governmental entity. (i) The commission may accept for any of its purposes and functions any and all donations and grants of money, equipment, supplies, materials and services, conditional or otherwise, from any governmental entity, and may utilize and dispose of the same. (j) The commission may establish one or more offices for the transacting of its business. (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or officer in each of the party states. (l) The commission annually shall make to the governor and legislature of each party state a report covering its activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be reported in the annual report of the commission, and shall include the nature, amount and conditions, if any, of the Page 8 § 32.200 R.S.Mo. donation, gift, grant or services borrowed and the identity of the donor or lender. The commission may make additional reports as it may deem desirable. 2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have an executive committee of seven members, including the chairman, vice chairman, treasurer and four other members elected annually by the commission. The executive committee, subject to the provisions of this compact and consistent with the policies of the commission, shall function as provided in the bylaws of the commission. (b) The commission may establish advisory and technical committees, membership on which may include private persons and public officials, in furthering any of its activities. Such committees may consider any matter of concern to the commission, including problems of special interest to any party state and problems dealing with particular types of taxes. (c) The commission may establish such additional committees as its bylaws may provide. 3. In addition to powers conferred elsewhere in this compact, the commission shall have power to: (a) Study state and local tax systems and particular types of state and local taxes. (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws with a view toward encouraging the simplification and improvement of state and local tax law and administration. (c) Compile and publish information as in its judgment would assist the party states in implementation of the compact and taxpayers in complying with state and local tax laws. (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact. 4. (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature thereof. (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such available public sources of information as, in its judgment, present the most equitable and accurate comparisons among the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall indicate the sources used in obtaining information employed in applying the formula contained in this paragraph. (c) The commission shall not pledge the credit of any party state. The commission may meet any of its obligations in whole or in part with funds available to it under paragraph 1 (i) of this article; provided that the commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part in such manner. Except where the commission makes use of funds available to it under paragraph 1 (i), the commission shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same. (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws. All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed public accountant and the report of the audit shall be included in and become part of the annual report of the commission. Page 9 § 32.200 R.S.Mo. (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted officers of the party states and by any persons authorized by the commission. (f) Nothing contained in this article shall be construed to prevent commission compliance with laws relating to audit or inspection of accounts by or on behalf of any government contributing to the support of the commission. Article VII 1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provisions of law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt uniform regulations for any phase of the administration of such law, including assertion of jurisdiction to tax, or prescribing uniform tax forms. The commission may also act with respect to the provisions of article IV of this compact. 2. Prior to the adoption of any regulation, the commission shall: (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states and subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for advance notice of its regulation-making proceedings. (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant written data and views, which shall be considered fully by the commission. 3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states and subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption in accordance with its own laws and procedures. Article VIII* 1. This article shall be in force only in those party states that specifically provide therefor by statute. 2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records or other documents may request the commission to perform the audit on its behalf. In responding to the request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records, and other documents and any relevant property or stock of merchandise. The commission may enter into agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to be paid by the state or local government or governments for which it performs the service, for any audits performed by it in order to reimburse itself for the actual costs incurred in making the audit. 3. The commission may require the attendance of any person within the state where it is conducting an audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account, book, paper, document, other record, property or stock of merchandise being examined in connection with the audit. If the person is not within the jurisdiction, he may be required to attend for such purpose at any time and place fixed by the commission within the state of which he is a resident; provided that such state has adopted this article. 4. The commission may apply to any court having power to issue compulsory process for orders in aid of its powers and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to issue such Page 10 § 32.200 R.S.Mo. orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a court in the state in which the object of the order being sought is situated. The provisions of this paragraph apply only to courts in a state that has adopted this article. 5. The commission may decline to perform any audit requested if it finds that its available personnel or other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as determined by the commission. 6. Information obtained by any audit pursuant to this article shall be confidential and available only for tax purposes to party states, their subdivisions or the United States. Availability of information shall be in accordance with the laws of the states or subdivisions on whose account the commission performs the audit, and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any taxpayer to keep records for any period not otherwise required by law. 7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states or any of their subdivisions are not superseded or invalidated by this article. 8. In no event shall the commission make any charge against a taxpayer for an audit. 9. As used in this article, "tax" in addition to the meaning ascribed to it in article II, means any tax or license fee imposed in whole or in part for revenue purposes. Article IX 1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations by arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of article VII. 2. The commission shall select and maintain an arbitration panel composed of officers and employees of state and local governments and private persons who shall be knowledgeable and experienced in matters of tax law and administration. 3. Whenever a taxpayer who has elected to employ article IV, or whenever the laws of the party state or subdivision thereof are substantially identical with the relevant provisions of article IV, the taxpayer, by written notice to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an apportionment or allocation, if he is dissatisfied with the final administrative determination of the tax agency of the state or subdivision with respect thereto on the ground that it would subject him to double or multiple taxation by two or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as provided herein, and agrees to be bound thereby. 4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel. The two persons selected for the board in the manner provided by the foregoing provisions of this paragraph shall jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be Page 11 § 32.200 R.S.Mo. selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding. Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the meaning of this paragraph. 5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's incorporation, residence or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for gaining access to evidence relevant to the matter before it. 6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote. 7. The board shall have power to administer oaths, take testimony, subpoena and require the attendance of witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in which the person to whom the subpoena is directed may be found may make an order requiring compliance with the subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this paragraph apply only in states that have adopted this article. 8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a state or local government who serves as a member of a board shall be entitled to compensation therefor unless he is required on account of his service to forego the regular compensation attaching to his public employment, but any such board member shall be entitled to expenses. 9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other purpose. 10. The board shall file with the commission and with each tax agency represented in the proceeding: the determination of the board; the board's written statement of its reasons therefor; the record of the board's proceedings; and any other documents required by the arbitration rules of the commission to be filed. 11. The commission shall publish the determinations of boards together with the statements of the reasons therefor. 12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and of any amendment thereto with the appropriate agency or officer in each of the party states. 13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if otherwise lawful, by the parties to the arbitration proceeding. Article X 1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all party states whenever there is a new enactment of the compact. Page 12 § 32.200 R.S.Mo. 2. Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal. 3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination therein. Article XI Nothing in this compact shall be construed to: (a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement article III 2 of this compact. (b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other than a sales tax; provided that the definition of "tax" in article VIII 9 may apply for the purposes of that article and the commission's powers of study and recommendation pursuant to article VI 3 may apply. (c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to any person, corporation or other entity or subject matter, except to the extent that such jurisdiction is expressly conferred by or pursuant to this compact upon another agency or body. (d) Supersede or limit the jurisdiction of any court of the United States. Article XII This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact shall be severable and if any phrase, clause, sentence or provision of this compact is declared to be contrary to the constitution of any state or of the United States or the applicability thereof to any government, agency, person or circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any government, agency, person or circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party states and in full force and effect as to the state affected as to all severable matters. HISTORY: L. 1967 p. 102 § 1 NOTES: *Article VIII adopted in this state, RSMo 32.205 MISSOURI NOTES TO DECISIONS. (1980) The Multistate Tax Compact has altered the focus of an inquiry from the search for the source of income to a simple showing of the tax liability in another state. M. V. Marine Co. v. State Tax Commission (Mo.), 606 S.W.2d 644. LexisNexis (R) Notes: Page 13 § 32.200 R.S.Mo. CASE NOTES 1. Court had to transfer the appeal to the Missouri Supreme Court, where the case required construction of the term "business income" in the Multistate Tax Compact, Mo. Rev. Stat. § 32.200, art. IV.1, because the Missouri Supreme Court has exclusive appellate jurisdiction in all cases involving the construction of the state revenue laws. ABB C-E Nuclear Power, Inc. v. Dir. of Revenue, 2006 Mo. App. LEXIS 997 (Mo. Ct. App. June 30 2006). 2. Supreme Court of Missouri had exclusive jurisdiction pursuant to Mo. Const. art. V, § 3 over a Connecticut Administrative Hearing Commission finding that two corporations were subject to the Missouri income tax because the case necessarily involved the construction of the revenue laws of this state, including Mo. Rev. Stat. § 143.431.1, Mo. Rev. Stat. § 143.451, and Mo. Rev. Stat. § 32.200. Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 2002 Mo. LEXIS 107 (Mo. 2002). 3. Even if the U.S. Internal Revenue Code and accompanying rules and regulations and rulings were in some way binding upon the State Director of Revenue in his construction and interpretation of Mo. Rev. Stat. ch. 143, they cannot be relied on as indicative of a policy which other state statutes, such as Mo. Rev. Stat. § 32.200, did not adopt. M. V. Marine Co. v. State Tax Com., 606 S.W.2d 644, 1980 Mo. LEXIS 325 (Mo. 1980). 4. The Missouri Tax Commission failed to apply the plain language of the Multistate Tax Compact, Mo. Rev. Stat. § 32.200 et seq., when it affirmed an order of the Director of Revenue which assessed additional income tax against a taxpayer. Goldberg v. State Tax Com., 618 S.W.2d 635, 1981 Mo. LEXIS 322 (Mo. 1981), not followed by State ex rel. Nesslage v. Flint Hill, 718 S.W.2d 210, 1986 Mo. App. LEXIS 4858 (Mo. Ct. App. 1986). 5. The Administrative Hearing Commission properly held that top officials of a subsidiary corporation located in Missouri were employees of a corporate taxpayer, a Virginia corporation, and that investment interest earned by a financial subsidiary of the taxpayer on funds in overseas stock was not just a bookkeeping transaction; an income tax deficiency as to both items was properly assessed against the taxpayer. Philip Morris, Inc. v. Director of Revenue, 1988 Mo. LEXIS 112 (Mo. Dec. 13 1988). 6. Where corporate taxpayer had elected to pay subsidiary's employees and elected the formula for determining its tax, employees were the taxpayer's employees for income tax purposes, and the salaries were not paid simply as an accounting transaction. Philip Morris, Inc. v. Director of Revenue, 760 S.W.2d 888, 1988 Mo. LEXIS 100 (Mo. 1988). 7. Taxpayers' royalty income from licensing agreement was outside the scope of Missouri taxation under Mo. Rev. Stat. Page 14 § 32.200 R.S.Mo. § 143.431.1, Mo. Rev. Stat. § 143.451, and Mo. Rev. Stat. § 32.200 because the taxpayers had no contact, and specifically no sales, within the state of Missouri. Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 2002 Mo. LEXIS 107 (Mo. 2002). 8. Supreme Court of Missouri had exclusive jurisdiction pursuant to Mo. Const. art. V, § 3 over a Connecticut Administrative Hearing Commission finding that two corporations were subject to the Missouri income tax because the case necessarily involved the construction of the revenue laws of this state, including Mo. Rev. Stat. § 143.431.1, Mo. Rev. Stat. § 143.451, and Mo. Rev. Stat. § 32.200. Acme Royalty Co. v. Dir. of Revenue, 96 S.W.3d 72, 2002 Mo. LEXIS 107 (Mo. 2002). 9. The Administrative Hearing Commission properly held that top officials of a subsidiary corporation located in Missouri were employees of a corporate taxpayer, a Virginia corporation, and that investment interest earned by a financial subsidiary of the taxpayer on funds in overseas stock was not just a bookkeeping transaction; an income tax deficiency as to both items was properly assessed against the taxpayer. Philip Morris, Inc. v. Director of Revenue, 1988 Mo. LEXIS 112 (Mo. Dec. 13 1988). 10. Where a Delaware corporation that did business in Missouri divested itself of certain subsidiaries, the long-term capital gains created were "extraordinary" and treated as "nonbusiness income"; thus, the gains were not taxable in Missouri pursuant to Mo. Rev. Stat. § 32.200. James v. International Tel. & Tel. Corp., 654 S.W.2d 865, 1983 Mo. LEXIS 391 (Mo. 1983). 11. Where the Missouri Multistate Tax Compact, Mo. Rev. Stat. § 32.200 et seq., superseded former Mo. Rev. Stat. § 143.040.2 (now Mo. Rev. Stat. § 143.071) and Mo. Rev. Stat. § 143.451.2(2)(a) and changed the evaluation issue from the source of the income to the jurisdiction of foreign states to tax the taxpayer's income, the State Tax Commission of Missouri's assessment of a taxpayer's income tax liability for foreign royalty payments was remanded for further review because the effect of the Missouri Multistate Tax Compact was not considered in the original claim. A. P. Green Refractories Co. v. State Tax Com., 621 S.W.2d 340, 1981 Mo. App. LEXIS 3024, 217 U.S.P.Q. (BNA) 1357 (Mo. Ct. App. 1981). 12. Even if the U.S. Internal Revenue Code and accompanying rules and regulations and rulings were in some way binding upon the State Director of Revenue in his construction and interpretation of Mo. Rev. Stat. ch. 143, they cannot be relied on as indicative of a policy which other state statutes, such as Mo. Rev. Stat. § 32.200, did not adopt. M. V. Marine Co. v. State Tax Com., 606 S.W.2d 644, 1980 Mo. LEXIS 325 (Mo. 1980). 13. Although taxpayers still are given an option on the method of allocation they may use, all other questions that reference apportionment of income were to be resolved by reference to the Multistate Tax Compact under Mo. Const. art. III, § 1, Mo. Rev. Stat. §§ 32.200, 32.210, and 143.451, and former Mo. Rev. Stat. § 143.040 (now Mo. Rev. Stat. § 143.071); while duplicative taxation by multiple states was to be avoided, so too was the taxpayer's avoidance of all taxation by any state. M. V. Marine Co. v. State Tax Com., 606 S.W.2d 644, 1980 Mo. LEXIS 325 (Mo. 1980). 14. Missouri Administrative Hearing Commission properly found that the sale of the taxpayer's assets in a complete liquidation was not the type of business transaction in which it regularly engaged, nor did it constitute an integral part of the taxpayer's ordinary business; thus, the taxpayer, a Delaware corporation headquartered in Connecticut with operational facilities in several states including Missouri, was not liable for Missouri corporate income tax under Mo. Rev. Stat. § 32.200. ABB C-E Nuclear Power Inc. v. Dir. of Revenue, 215 S.W.3d 85, 2007 Mo. LEXIS 8, 26 A.L.R.6th 789 (Mo. 2007). Page 15 § 32.200 R.S.Mo. 15. To be relieved from liability for sales and use taxes by accepting out-of-state exemption certificates in "good faith" pursuant to Mo. Rev. Stat. § 32.200 and Mo. Const. art. V, § 2, "good faith" requires an honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry. Blevins Asphalt Constr. Co. v. Director of Revenue, 938 S.W.2d 899, 1997 Mo. LEXIS 20 (Mo. 1997). 16. To be relieved from liability for sales and use taxes by accepting out-of-state exemption certificates in "good faith" pursuant to Mo. Rev. Stat. § 32.200 and Mo. Const. art. V, § 2, "good faith" requires an honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry. Blevins Asphalt Constr. Co. v. Director of Revenue, 938 S.W.2d 899, 1997 Mo. LEXIS 20 (Mo. 1997). LAW REVIEWS 1. 51 J. Mo. B. 217, ARTICLE: SALES AND USE TAX ISSUES AT THE ADMINISTRATIVE HEARING COMMISSION (PART II), Dan Jordan and Kevin Thompson, July/August, 1995, Copyright (c) 1995 Journal of the Missouri Bar Journal of the Missouri Bar. LexisNexis Practice Insights 1. 2. 3. 4. 5. 6. Page 1 LexisNexis (R) Montana Code Annotated *** Current through 2013 Regular Session and the 2014 General Election *** Title 15 Taxation Chapter 1 Tax Administration Part 6 Multistate Tax Compact Go to the Montana Code Archive Directory 15-1-601, MCA (2013) 15-1-601 Compact adopted -- text. The Multistate Tax Compact is enacted into law and entered into with all jurisdictions legally joining in the compact, in the form substantially as set forth in this section. Article VIII of the Multistate Tax Compact relating to interstate audits is specifically adopted. Article I. Purposes The purposes of this compact are to: (1) facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes; (2) promote uniformity or compatibility in significant components of tax systems; (3) facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration; (4) avoid duplicative taxation. Article II. Definitions As used in this compact: (1) "state" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States; (2) "subdivision" means any government unit or special district of a state; (3) "taxpayer" means any corporation, partnership, firm, association, governmental unit or agency, or person acting as a business entity in more than one state; (4) "income tax" means a tax imposed on or measured by net income including any tax imposed on or Page 2 15-1-601, MCA measured by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions; (5) "capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety; (6) "gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax; (7) "sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession, or custody of tangible personal property or the rendering of services measured by the price of the tangible personal property transferred or services rendered and which is required by state or local law to be separately stated from the sales price by the seller or which is customarily separately stated from the sales price but does not include a tax imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles; (8) "use tax" means a nonrecurring tax, other than a sales tax, which: (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession, or custody of that property or the leasing of that property from another including any consumption, keeping, retention, or other use of tangible personal property; and (b) is complementary to a sales tax; (9) "tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which has a multistate impact, except that the provisions of Articles III, IV, and V of this compact shall apply only to the taxes specifically designated therein and the provisions of Article IX of this compact shall apply only in respect to determinations pursuant to Article IV. Article III. Elements of Income Tax Laws Taxpayer Option, State and Local Taxes (1) Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to apportion and allocate the taxpayer's income in the manner provided by the laws of such state or by the laws of such states and subdivisions without reference to this compact or may elect to apportion and allocate in accordance with Article IV. This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this subsection, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also may be applied to the entire tax base. In no instance wherein Article IV is employed for all subdivisions of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a state income tax. Taxpayer Option, Short Form (2) Each party state or any subdivision thereof which imposes an income tax shall provide by law that any taxpayer required to file a return whose only activities within the taxing jurisdiction consist of sales and do not include owning or renting real estate or tangible personal property and whose dollar volume of gross sales made during the tax year within the state or subdivision, as the case may be, is not in excess of $ 100,000 may elect to report and pay any tax due on the basis of a percentage of such volume and shall adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The multistate tax commission, not more than once in 5 years, may adjust the $ 100,000 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure, Page 3 15-1-601, MCA upon adoption by the commission, shall replace the $ 100,000 figure specifically provided herein. Each party state and subdivision thereof may make the same election available to taxpayers additional to those specified in this subsection. Coverage (3) Nothing in this article relates to the reporting or payment of any tax other than an income tax. Article IV. Division of Income (1) As used in this article, unless the context otherwise requires: (a) "business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations; (b) "commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed; (c) "compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services; (d) "financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company, investment company, or any type of insurance company; (e) "nonbusiness income" means all income other than business income; (f) "public utility" means any business entity: (i) which owns or operates any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, except by pipeline, or the production, transmission, sale, delivery, or furnishing of electricity, water, or steam; and (ii) whose rates of charges for goods or services have been established or approved by a federal, state, or local government or governmental agency; (g) "sales" means all gross receipts of the taxpayer not allocated under subsections of this article; (h) "state" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof; (i) "this state" means the state in which the relevant tax return is filed or, in the case of application of this article to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in which the relevant tax return is filed. (2) Any taxpayer having income from business activity which is taxable both within and without this state, other than activity as a financial organization or public utility or the rendering of purely personal services by an individual, shall allocate and apportion the taxpayer's net income as provided in this article. If a taxpayer has income from business activity as a public utility but derives the greater percentage of the taxpayer's income from activities subject to this article, the taxpayer may elect to allocate and apportion the taxpayer's entire net income as provided in this article. (3) For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another Page 4 15-1-601, MCA state if: (a) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (b) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not. (4) Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in subsections (5) through (8) of this article. (5) (a) Net rents and royalties from real property located in this state are allocable to this state. (b) Net rents and royalties from tangible personal property are allocable to this state: (i) if and to the extent that the property is utilized in this state; or (ii) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized. (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession. (6) (a) Capital gains and losses from sales of real property located in this state are allocable to this state. (b) Capital gains and losses from sales of tangible personal property are allocable to this state if: (i) the property had a situs in this state at the time of the sale; or (ii) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs. (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state. (7) Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state. (8) (a) Patent and copyright royalties are allocable to this state: (i) if and to the extent that the patent or copyright is utilized by the payer in this state; or (ii) if and to the extent that the patent or copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state. (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located. Page 5 15-1-601, MCA (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located. (9) All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor and the denominator of which is 3. (10) The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period. (11) Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. (12) The average value of property shall be determined by averaging the values at the beginning and ending of the tax period, but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer's property. (13) The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the tax period. (14) Compensation is paid in this state if: (a) the individual's service is performed entirely within the state; (b) the individual's service is performed both within and without the state, but the service performed without the state is incidental to the individual's service within the state; or (c) some of the service is performed in the state and: (i) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state; or (ii) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this state. (15) The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period and the denominator of which is the total sales of the taxpayer everywhere during the tax period. (16) Sales of tangible personal property are in this state if: (a) the property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or (b) the property is shipped from an office, store, warehouse, factory, or other place of storage in this state and: (i) the purchaser is the United States government; or Page 6 15-1-601, MCA (ii) the taxpayer is not taxable in the state of the purchaser. (17) Sales, other than sales of tangible personal property, are in this state if: (a) the income-producing activity is performed in this state; or (b) the income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance. (18) If the allocation and apportionment provisions of this article do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer's business activity, if reasonable: (a) separate accounting; (b) the exclusion of any one or more of the factors; (c) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (d) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. Article V. Elements of Sales and Use Tax Laws Tax Credit (1) Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined amount or amounts of legally imposed sales or use taxes paid by the purchaser with respect to the same property to another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any unused portion of the credit shall then be applied against the amount of any use tax due a subdivision. Exemption Certificates -- Vendors May Rely (2) Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction. Article VI. The Commission Organization and Management (1) (a) The Multistate Tax Commission is hereby established. It shall be composed of one member from each party state who shall be the head of the state agency charged with the administration of the types of taxes to which this compact applies. If there is more than one such agency, the state shall provide by law for the selection of the commission member from the heads of the relevant agencies. State law may provide that a member of the commission be represented by an alternate, but only if there is on file with the commission written notification of the designation and identity of the alternate. The attorney general of each party state or the attorney general's designee or other counsel if the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission but shall not vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under subsection (1)(e) of this article. (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by this compact to consult with the commission member from that state. (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the Page 7 15-1-601, MCA members are present, and no action shall be binding unless approved by a majority of the total number of members. (d) The commission shall adopt an official seal to be used as it may provide. (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the annual and any other regular meetings and shall provide for the giving of notice of annual, regular, and special meetings. Notice of special meetings shall include the reasons therefor and an agenda of the items to be considered. (f) The commission shall elect annually, from among its members, a presiding officer, a vice presiding officer, and a treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix the executive director's duties and compensation. The executive director shall be secretary of the commission. The commission shall make provision for the bonding of such of its officers and employees as it may deem appropriate. (g) Irrespective of the civil service, personnel, or other merit system laws of any party state, the executive director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies and programs. (h) The commission may borrow, accept, or contract for the services of personnel from any state, the United States, or any other governmental entity. (i) The commission may accept for any of its purposes and functions any and all donations and grants of money, equipment, supplies, materials, and services, conditional or otherwise, from any governmental entity and may utilize and dispose of the same. (j) The commission may establish one or more offices for the transacting of its business. (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws in convenient form and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or officer in each of the party states. (l) The commission annually shall make to the governor and legislature of each party state a report covering its activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be reported in the annual report of the commission and shall include the nature, amount, and conditions, if any, of the donation, gift, grant, or services borrowed and the identity of the donor or lender. The commission may make additional reports as it may deem desirable. Committees (2) (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have an executive committee of seven members, including the presiding officer, vice presiding officer, treasurer, and four other members elected annually by the commission. The executive committee, subject to the provisions of this compact and consistent with the policies of the commission, shall function as provided in the bylaws of the commission. (b) The commission may establish advisory and technical committees, membership on which may include private persons and public officials, in furthering any of its activities. Such committees may consider any matter of concern to the commission, including problems of special interest to any party state and problems dealing with particular types of taxes. (c) The commission may establish such additional committees as its bylaws may provide. Page 8 15-1-601, MCA Powers (3) In addition to powers conferred elsewhere in this compact, the commission shall have power to: (a) study state and local tax systems and particular types of state and local taxes; (b) develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws with a view toward encouraging the simplification and improvement of state and local tax law and administration; (c) compile and publish information as in its judgment would assist the party states in implementation of the compact and taxpayers in complying with state and local tax laws; (d) do all things necessary and incidental to the administration of its functions pursuant to this compact. Finance (4) (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature thereof. (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such budget shall be apportioned among the party states as follows: one-tenth in equal shares and the remainder in proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such available public sources of information as, in its judgment, present the most equitable and accurate comparisons among the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall indicate the sources used in obtaining information employed in applying the formula contained in this subsection. (c) The commission shall not pledge the credit of any party state. The commission may meet any of its obligations in whole or in part with funds available to it under subsection (1)(i) of this article, provided that the commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part in such manner. Except where the commission makes use of funds available to it under subsection (1)(i), the commission shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same. (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws. All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed public accountant, and the report of the audit shall be included in and become part of the annual report of the commission. (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted officers of the party states and by any person authorized by the commission. (f) Nothing contained in this article shall be construed to prevent commission compliance with laws relating to audit or inspection of accounts by or on behalf of any government contributing to the support of the commission. Article VII. Uniform Regulations and Forms (1) Whenever any two or more party states or subdivisions of party states have uniform or similar provisions of law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt uniform regulations for any phase of the administration of such law, including assertion of jurisdiction to tax or Page 9 15-1-601, MCA prescribing uniform tax forms. The commission may also act with respect to the provisions of Article IV of this compact. (2) Prior to the adoption of any regulation, the commission shall: (a) as provided in its bylaws, hold at least one public hearing on due notice to all affected party states and subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for advance notice of its regulation-making proceedings; (b) afford all affected party states and subdivisions and interested persons an opportunity to submit relevant written data and views, which shall be considered fully by the commission. (3) The commission shall submit any regulations adopted by it to the appropriate officials of all party states and subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption in accordance with its own laws and procedures. Article VIII. Interstate Audits (1) This article shall be in force only in those party states that specifically provide therefor by statute. (2) Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records, or other documents may request the commission to perform the audit on its behalf. In responding to the request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records, and other documents and any relevant property or stock of merchandise. The commission may enter into agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to be paid by the state or local government or governments for which it performs the service, for any audits performed by it in order to reimburse itself for the actual costs incurred in making the audit. (3) The commission may require the attendance of any person within the state where it is conducting an audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account, book, paper, document, other record, property, or stock of merchandise being examined in connection with the audit. If the person is not within the jurisdiction, the person may be required to attend for such purpose at any time and place fixed by the commission within the state of which the person is a resident, provided that such state has adopted this article. (4) The commission may apply to any court having power to issue compulsory process for orders in aid of its powers and responsibilities pursuant to this article, and any and all such courts shall have jurisdiction to issue such orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a court in the state in which the object of the order being sought is situated. The provisions of this subsection apply only to courts in a state that has adopted this article. (5) The commission may decline to perform any audit requested if it finds that its available personnel or other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as determined by the commission. (6) Information obtained by any audit pursuant to this article shall be confidential and available only for tax purposes to party states, their subdivisions, or the United States. Availability of information shall be in accordance with Page 10 15-1-601, MCA the laws of the states or subdivisions on whose account the commission performs the audit and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any taxpayer to keep records for any period not otherwise required by law. (7) Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states or any of their subdivisions are not superseded or invalidated by this article. (8) In no event shall the commission make any charge against a taxpayer for an audit. (9) As used in this article, "tax", in addition to the meaning ascribed to it in Article II, means any tax or license fee imposed in whole or in part for revenue purposes. Article IX. Arbitration (1) Whenever the commission finds a need for settling disputes concerning apportionments and allocations by arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of Article VII. (2) The commission shall select and maintain an arbitration panel composed of officers and employees of state and local governments and private persons who shall be knowledgeable and experienced in matters of tax law and administration. (3) Whenever a taxpayer who has elected to employ Article IV or whenever the laws of the party state or subdivision thereof are substantially identical with the relevant provisions of Article IV, the taxpayer, by written notice to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an apportionment or allocation if the taxpayer is dissatisfied with the final administrative determination of the tax agency of the state or subdivision with respect thereto on the ground that it would subject the taxpayer to double or multiple taxation by two or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as provided herein and agrees to be bound thereby. (4) The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel. The two persons selected for the board in the manner provided by the foregoing provisions of this subsection shall jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding. Residents within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the meaning of this subsection. (5) The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's incorporation, residence, or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for gaining access to evidence relevant to the matter before it. (6) The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote. (7) The board shall have power to administer oaths, take testimony, subpoena and require the attendance of witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena and upon application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in which the person to whom the subpoena is directed may be found may make an order requiring compliance with the subpoenas, and the court may punish failure to obey the order as a contempt. The provisions of this subsection apply Page 11 15-1-601, MCA only in states that have adopted this article. (8) Unless the parties otherwise agree, the expenses and other costs of the arbitration shall be assessed and allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a state or local government who serves as a member of a board shall be entitled to compensation therefor unless the member is required on account of the service to forego the regular compensation attaching to the member's public employment, but any such board member shall be entitled to expenses. (9) The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other purpose. (10) The board shall file with the commission and with each tax agency represented in the proceeding: the determination of the board, the board's written statement of its reasons therefor, the record of the board's proceedings, and any other documents required by the arbitration rules of the commission to be filed. (11) The commission shall publish the determinations of boards, together with the statements of the reasons therefor. (12) The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and of any amendment thereto with the appropriate agency or officer in each of the party states. (13) Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if otherwise lawful, by the parties to the arbitration proceedings. Article X. Entry Into Force and Withdrawal (1) This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all party states whenever there is a new enactment of the compact. (2) Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal. (3) No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination therein. Article XI. Effect on Other Laws and Jurisdiction Nothing in this compact shall be construed to: (1) affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement Article III, subsection (2), of this compact; (2) apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other than a sales tax; provided that the definition of "tax" in Article VIII, subsection (9), may apply for the purposes of that article and the commission's powers of study and recommendation pursuant to Article VI, subsection (3), may apply; (3) withdraw or limit the jurisdiction of any state or local court or administrative officer or body with Page 12 15-1-601, MCA respect to any person, corporation, or other entity or subject matter, except to the extent that such jurisdiction is expressly conferred by or pursuant to this compact upon another agency or body; (4) supersede or limit the jurisdiction of any court of the United States. Article XII. Construction and Severability This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact shall be severable, and if any phrase, clause, sentence, or provision of this compact is declared to be contrary to the constitution of any state or of the United States or if the applicability thereof to any government, agency, person, or circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any government, agency, person, or circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party states and in full force and effect as to the state affected as to all severable matters. HISTORY: En. Sec. 1, Ch. 17, L. 1969; amd. Sec. 1, Ch. 249, L. 1973; amd. Sec. 1, Ch. 163, L. 1975; R.C.M. 1947, 84-6701; amd. Sec. 142, Ch. 56, L. 2009. NOTES: Compiler's Comments 2009 Amendment: Chapter 56 made section gender neutral; and made minor changes in style. Amendment effective October 1, 2009. Uniform Act: Article IV of this Compact consists of the Uniform Division of Income for Tax Purposes Act. Official Comments Commission Notes for Article IV. The Uniform Division of Income for Tax Purposes Act is designed for enactment in those states which levy taxes on or measured by net income. The need for a uniform method of division of income for tax purposes among the several taxing jurisdictions has been recognized for many years and has long been recommended by the Council of State Governments. There is no other practical means of assuring that a taxpayer is not taxed on more than its net income. At present, the several states have various formulae for determining the amount of income to be taxed, and the differences in the formulae produce inequitable results. The problem has been well analyzed and its historical background outlined in an article appearing in 18 Ohio State Law Journal, page 84. The Uniform Division of Income for Tax Purposes Act is the result of conferences with the representatives of the Controller's Institute of America, the Council of State Governments and various interested individuals. Subsection 1 This definition is derived from the Model Unemployment Compensation Act which has been adopted in all states. It is expected that "public utility" will be defined to include all taxpayers subject to the control of the state's regulatory bodies on the theory that separate legislation will provide for the apportionment and allocation of the income of such taxpayers. Each state may wish to enact separate legislation to apportion and allocate the income of taxpayers subject to the control of its regulatory bodies. Page 13 15-1-601, MCA Subsection 11 This section is admittedly arbitrary in using original cost rather than depreciated cost, and in valuing rented property as eight times the annual rental. This approach is justified because the act does not impose a tax, nor prescribe the depreciation allowable in computing the tax, but merely provides a basis for division of the taxable income among the several states. The use of original cost obviates any differences due to varying methods of depreciation, and has the advantage that the basic figure is readily ascertainable from the taxpayer's books. No method of valuing the property would probably be universally acceptable. Subsection 14 This section is derived from the Model Unemployment Compensation Act. This is the same figure which will be used by taxpayers for unemployment compensation purposes. Subsection 16 Sales to the United States Government are treated separately because they are not necessarily attributable to a market existing in the state to which the goods are originally shipped. Subsection 18 It is anticipated that this act will be made a part of the income tax acts of the several states. For that reason, this section does not spell out the procedure to be followed in the event of a disagreement between the taxpayer and the tax administrator. The income tax acts of each state presumably outline the procedure to be followed. Case Notes Audit Information Subject to Discovery by Taxpayer: Pacificorp appealed taxes imposed by the Department of Revenue that were in part based on audits by other states belonging to the Multistate Tax Commission. The lower court affirmed the State Tax Appeal Board's refusal to turn over copies of the audits pursuant to discovery requests by Pacificorp. The Supreme Court held that the audits were subject to discovery under this section because the action was brought in Montana and its confidentiality rules were controlling and not those of the state performing the audit. Pacificorp v. Dept. of Revenue, 254 M 387, 838 P2d 914, 49 St. Rep. 774 (1992). Administrative Rules ARM 42.9.107 Multitiered pass-through entity structures with Montana source income -- reporting requirements. ARM 42.15.120 Income tax -- intent. Title 42, chapter 26, subchapter 2, ARM Corporate multistate activities -- income allocation and apportionment. Title 42, chapter 26, subchapter 12, ARM Telecommunication services for corporation license taxes. Page 1 North Dakota Century Code Annotated Copyright © 2015 Matthew Bender & Company, Inc. a member of the LexisNexis Group. All rights reserved. *** This document is current through the 2013 Regular Legislative Session *** TITLE 57 Taxation CHAPTER 57-59 Multistate Tax Compact Go to the North Dakota Code Archive Directory N.D. Cent. Code, § 57-59-01 (2014) 57-59-01. Multistate tax compact. The multistate tax compact is hereby entered into law and entered into with all jurisdictions legally joining therein, in the form substantially as follows: MULTISTATE TAX COMPACT Article I Purposes The purposes of this compact are to: 1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes. 2. Promote uniformity or compatibility in significant components of tax systems. 3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration. 4. Avoid duplicative taxation. Article II Definitions As used in this compact: 1. "Capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety. 2. "Gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax. Page 2 N.D. Cent. Code, § 57-59-01 3. "Income tax" means a tax imposed on or measured by net income including any tax imposed on or measured by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions. 4. "Sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession, or custody of tangible personal property or the rendering of services measured by the price of the tangible personal property transferred or services rendered and which is required by state or local law to be separately stated from the sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles. 5. "State" means a state of the United States, the District of Columbia, the commonwealth of Puerto Rico, or any territory or possession of the United States. 6. "Subdivision" means any governmental unit or special district of a state. 7. "Tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which has a multistate impact, except that the provisions of articles III, IV, and V of this compact shall apply only to the taxes specifically designated therein and the provisions of article IX of this compact shall apply only in respect to determinations pursuant to article IV. 8. "Taxpayer" means any corporation, partnership, firm, association, governmental unit, or agency or person acting as a business entity in more than one state. 9. "Use tax" means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession, or custody of that property or the leasing of that property from another including any consumption, keeping, retention, or other use of tangible personal property, and (b) is complementary to a sales tax. Article III Elements of Income Tax LawsTaxpayer Option, State and Local Taxes 1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to apportion and allocate the taxpayer's income in the manner provided by the laws of such state or by the laws of such states and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with article IV. This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this subsection, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also may be applied to the entire tax base. In no instance wherein article IV is employed for all subdivisions of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a state income tax. Taxpayer Option, Short Form 2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year within the state or subdivision, as the case may be, is not in excess of one hundred thousand dollars may elect to report and pay any tax due on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The multistate tax commission, not more than once in five years, may adjust the one hundred thousand dollar figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption by the commission, shall replace the one hundred thousand dollar figure Page 3 N.D. Cent. Code, § 57-59-01 specifically provided herein. Each party state and subdivision thereof may make the same election available to taxpayers additional to those specified in this subsection. Coverage 3. Nothing in this article relates to the reporting or payment of any tax other than an income tax. Article IV Division of Income 1. As used in this article, unless the context otherwise requires: (a) "Business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. (b) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed. (c) "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to employees for personal services. (d) "Financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company, investment company, or any type of insurance company. (e) "Nonbusiness income" means all income other than business income. (f) "Public utility" means any business entity (1) which owns or operates any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, except by pipeline, or the production, transmission, sale, delivery, or furnishing of electricity, water, or steam; and (2) whose rates of charges for goods or services have been established or approved by a federal, state, or local government or governmental agency. (g) "Sales" means all gross receipts of the taxpayer not allocated under subsections of this article. (h) "State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof. (i) "This state" means the state in which the relevant tax return is filed or, in the case of application of this article to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in which the relevant tax return is filed. 2. Any taxpayer having income from business activity which is taxable both within and without this state, other than activity as a financial organization or public utility or the rendering of purely personal services by an individual, shall allocate and apportion that taxpayer's net income as provided in this article. If a taxpayer has income from business activity as a public utility but derives the greater percentage of the taxpayer's income from activities subject to this article, the taxpayer may elect to allocate and apportion the taxpayer's entire net income as provided in this article. 3. For purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if (a) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax, or (b) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not. Page 4 N.D. Cent. Code, § 57-59-01 4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in subsections 5 through 8 of this article. 5. (a) Net rents and royalties from real property located in this state are allocable to this state. (b) Net rents and royalties from tangible personal property are allocable to this state: (1) if and to the extent that the property is utilized in this state, or (2) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized. (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession. 6. (a) Capital gains and losses from sales of real property located in this state are allocable to this state. (b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the property had a situs in this state at the time of the sale, or (2) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs. (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state. 7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state. 8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or copyright is utilized by the payer in this state, or (2) if and to the extent that the patent or copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state. (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located. (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located. 9. All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. 10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period. 11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. 12. The average value of property shall be determined by averaging the values at the beginning and ending of the Page 5 N.D. Cent. Code, § 57-59-01 tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer's property. 13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the tax period. 14. Compensation is paid in this state if: (a) The individual's service is performed entirely within the state; (b) The individual's service is performed both within and without the state, but the service performed without the state is incidental to the individual's service within the state; or (c) Some of the service is performed in the state and (1) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state, or (2) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this state. 15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period. 16. Sales of tangible personal property are in this state if: (a) The property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or (b) The property is shipped from an office, store, warehouse, factory, or other place of storage in this state and (1) the purchaser is the United States government, or (2) the taxpayer is not taxable in the state of the purchaser. 17. Sales, other than sales of tangible personal property, are in this state if: (a) The income-producing activity is performed in this state; or (b) The income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance. 18. If the allocation and apportionment provisions of this article do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer's business activity, if reasonable: (a) Separate accounting; (b) The exclusion of any one or more of the factors; (c) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (d) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. Article V Elements of Sales and Use Tax LawsTax Credit 1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined Page 6 N.D. Cent. Code, § 57-59-01 amount or amounts of legally imposed sales or use taxes paid by the purchaser with respect to the same property to another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any unused portion of the credit shall then be applied against the amount of any use tax due a subdivision. Exemption Certificates, Vendors May Rely 2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction. Article VI The CommissionOrganization and Management 1. (a) The multistate tax commission is hereby established. It shall be composed of one "member" from each party state who shall be the head of the state agency charged with the administration of the types of taxes to which this compact applies. If there is more than one such agency the state shall provide by law for the selection of the commission member from the heads of the relevant agencies. State law may provide that a member of the commission be represented by an alternate but only if there is on file with the commission written notification of the designation and identity of the alternate. The attorney general of each party state or the attorney general's designee, or other counsel if the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission, but shall not vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under subdivision e of subsection 1 of this article. (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by this compact to consult with the commission member from that state. (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the members are present, and no action shall be binding unless approved by a majority of the total number of members. (d) The commission shall adopt an official seal to be used as it may provide. (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the annual and any other regular meetings, and shall provide for the giving of notice of annual, regular, and special meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered. (f) The commission shall elect annually, from among its members, a chairman, a vice chairman, and a treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix the executive director's duties and compensation. The executive director shall be secretary of the commission. The commission shall make provision for the bonding of such of its officers and employees as it may deem appropriate. (g) Irrespective of the civil service, personnel, or other merit system laws of any party state, the executive director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies and programs. (h) The commission may borrow, accept, or contract for the services of personnel from any state, the United States, or any other governmental entity. (i) The commission may accept for any of its purposes and functions any and all donations and grants of money, equipment, supplies, materials, and services, conditional or otherwise, from any governmental entity, and may utilize and dispose of the same. Page 7 N.D. Cent. Code, § 57-59-01 (j) The commission may establish one or more offices for the transacting of its business. (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or officer in each of the party states. (l) The commission annually shall make to the governor and legislature of each party state a report covering its activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be reported in the annual report of the commission, and shall include the nature, amount, and conditions, if any, of the donation, gift, grant, or services borrowed and the identity of the donor or lender. The commission may make additional reports as it may deem desirable. Committees 2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have an executive committee of seven members, including the chairman, vice chairman, treasurer, and four other members elected annually by the commission. The executive committee subject to the provisions of this compact and consistent with the policies of the commission, shall function as provided in the bylaws of the commission. (b) The commission may establish advisory and technical committees, membership on which may include private persons and public officials, in furthering any of its activities. Such committees may consider any matter of concern to the commission, including problems of special interest to any party state and problems dealing with particular types of taxes. (c) The commission may establish such additional committees as its bylaws may provide. Powers 3. In addition to powers conferred elsewhere in this compact, the commission shall have power to: (a) Study state and local tax systems and particular types of state and local taxes. (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws with a view toward encouraging the simplification and improvement of state and local tax law and administration. (c) Compile and publish information as in its judgment would assist the party states in implementation of the compact and taxpayers in complying with state and local tax laws. (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact. Finance 4. (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature thereof. (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock taxes, gross receipts taxes, and sales and use taxes. In determining such amounts, the commission shall employ such available public sources of information as, in its judgment, present the most equitable and accurate comparisons among the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall Page 8 N.D. Cent. Code, § 57-59-01 indicate the sources used in obtaining information employed in applying the formula contained in this subsection. (c) The commission shall not pledge the credit of any party state. The commission may meet any of its obligations in whole or in part with funds available to it under subdivision i of subsection 1 of this article; provided, that the commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part in such manner. Except where the commission makes use of funds available to it under subdivision i of subsection 1, the commission shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same. (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws. All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed public accountant and the report of the audit shall be included in and become part of the annual report of the commission. (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted officers of the party states and by any persons authorized by the commission. (f) Nothing contained in this article shall be construed to prevent commission compliance with laws relating to audit or inspection of accounts by or on behalf of any government contributing to the support of the commission. Article VII Uniform Regulations and Forms 1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provisions of law relating to an income tax, the commission may adopt uniform regulations for any phase of the administration of such law, including assertion of jurisdiction to tax, or prescribing uniform tax forms. The commission may also act with respect to the provisions of article IV of this compact. 2. Prior to the adoption of any regulation, the commission shall: (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states and subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for advance notice of its regulation-making proceedings. (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant written data and views, which shall be considered fully by the commission. 3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states and subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption in accordance with its own laws and procedures. Article VIII Interstate Audits 1. This article shall be in force only in those party states that specifically provide therefor by statute. 2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records, or other documents may request the commission to perform the audit on its behalf. In responding to the request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records, and other documents and any relevant property or stock of merchandise. The commission may enter into agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to be paid by the state or local government or governments for which it performs the service, for any audits performed by it in order to reimburse itself for the actual costs incurred in making the audit. Page 9 N.D. Cent. Code, § 57-59-01 3. The commission may require the attendance of any person within the state where it is conducting an audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account, book, paper, document, other record, property, or stock of merchandise being examined in connection with the audit. If the person is not within the jurisdiction, the person may be required to attend for such purpose at any time and place fixed by the commission within the state of which the person is a resident; provided, that such state has adopted this article. 4. The commission may apply to any court having power to issue compulsory process for orders in aid of its powers and responsibilities pursuant to this article and any and all such courts shall have jurisdiction to issue such orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a court in the state in which the object of the order being sought is situated. The provisions of this subsection apply only to courts in a state that has adopted this article. 5. The commission may decline to perform any audit requested if it finds that its available personnel or other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as determined by the commission. 6. Information obtained by any audit pursuant to this article shall be confidential and available only for tax purposes to party states, their subdivisions, or the United States. Availability of information shall be in accordance with the laws of the states or subdivisions on whose account the commission performs the audit, and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this article shall be construed to require any taxpayer to keep records for any period not otherwise required by law. 7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states or any of their subdivisions are not superseded or invalidated by this article. 8. In no event shall the commission make any charge against a taxpayer for an audit. 9. As used in this article, "tax", in addition to the meaning ascribed to it in article II, means any tax or license fee imposed in whole or in part for revenue purposes. Article IX Arbitration 1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations by arbitration, it may adopt a regulation placing this article in effect, notwithstanding the provisions of article VII. 2. The commission shall select and maintain an arbitration panel composed of officers and employees of state and local governments and private persons who shall be knowledgeable and experienced in matters of tax law and administration. 3. Whenever a taxpayer who has elected to employ article IV, or whenever the laws of the party state or subdivision thereof are substantially identical with the relevant provisions of article IV, the taxpayer, by written notice to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an apportionment or allocation, if the taxpayer is dissatisfied with the final administrative determination of the tax agency of the state or subdivision with respect thereto on the ground that it would subject the taxpayer to double or multiple taxation by two or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as provided herein, and agrees to be bound thereby. Page 10 N.D. Cent. Code, § 57-59-01 4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel. The two persons selected for the board in the manner provided by the foregoing provisions of this subsection shall jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be qualified to serve if that member is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding. Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the meaning of this subsection. 5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's incorporation, residence, or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for gaining access to evidence relevant to the matter before it. 6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote. 7. The board shall have power to administer oaths, take testimony, subpoena, and require the attendance of witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in which the person to whom the subpoena is directed may be found may make an order requiring compliance with the subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this subsection apply only in states that have adopted this article. 8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a state or local government who serves as a member of a board shall be entitled to compensation therefor unless that person is required on account of that person's service to forego the regular compensation attaching to that person's public employment, but any such board member shall be entitled to expenses. 9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The determinations of the board shall be final for purposes of making the apportionment or allocation, but for no other purpose. 10. The board shall file with the commission and with each tax agency represented in the proceeding: the determination of the board; the board's written statement of its reasons therefor; the record of the board's proceedings; and any other documents required by the arbitration rules of the commission to be filed. 11. The commission shall publish the determinations of boards together with the statements of the reasons therefor. 12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and of any amendment thereto with the appropriate agency or officer in each of the party states. 13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if otherwise lawful, by the parties to the arbitration proceeding. Article X Entry Into Force and Withdrawal 1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all Page 11 N.D. Cent. Code, § 57-59-01 party states whenever there is a new enactment of the compact. 2. Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal. 3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination therein. Article XI Effect on Other Laws and Jurisdiction Nothing in this compact shall be construed to: 1. Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement subsection 2 of article III of this compact. 2. Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other than a sales tax; provided, that the definition of "tax" in subsection 9 of article VIII may apply for the purposes of that article and the commission's powers of study and recommendation pursuant to subsection 3 of article VI may apply. 3. Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to any person, corporation, limited liability company, or other entity or subject matter, except to the extent that such jurisdiction is expressly conferred by or pursuant to this compact upon another agency or body. 4. Supersede or limit the jurisdiction of any court of the United States. Article XII Construction and Severability This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact shall be severable and if any phrase, clause, sentence, or provision of this compact is declared to be contrary to the constitution of any state or of the United States or the applicability thereof to any government, agency, person, or circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any government, agency, person, or circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party states and in full force and effect as to the state affected as to all severable matters. HISTORY: S.L. 1969, ch. 537, § 1; 1993, ch. 54, § 106. NOTES: Comparative Legislation. Multistate Tax Compact: Ala. Code § 47-27-1 et seq. Alaska Stat. § 43-19-010 et seq. Ark. Stat. Ann. § 84.4101. Cal. Revenue and Taxation Code § 38001. Colo. Rev. Stat. § 24-60-1301. Page 12 N.D. Cent. Code, § 57-59-01 D.C. Law 4-17. Fla. Stat. § 213.15 et seq. Hawaii Rev. Stat. § 255-1 et seq. Idaho Code § 63-3701 et seq. Kan. Stat. Ann. § 79-4301. Mich. Comp. Laws §§ 205.581-205.589. Mo. Rev. Stat. § 32.200 et seq. Mont. Code Ann. § 15-31-122. Neb. Rev. Stat. § 77-2901 et seq. Nev. Rev. Stat. § 376.010 et seq. N. M. Stat. Ann. § 7-5-1 et seq. Or. Rev. Stat. § 305.655 et seq. S. D. Codified Laws § 10-54-1. Tex. Rev. Civ. Stat., Art. 7359a. Utah Code Ann. § 59-22-1. Wash. Rev. Code § 82.56.010. W. Va. Code c. 11, art. 10A. Page 1 Michie's TM Annotated Statutes of New Mexico Copyright © 2014 by Matthew Bender & Company, Inc. a member of the LexisNexis Group. All rights reserved. *** Statutes current through end of the Second Regular Session of the Fifty-First Legislature (2014 legislation) *** Chapter 7 Taxation Article 5 Multistate Tax Compact Go to the New Mexico Code Archive Directory N.M. Stat. Ann. § 7-5-1 (2014) 7-5-1. Compact enacted and entered into. The "Multistate Tax Compact" is enacted into law and entered into with all jurisdictions legally joining therein, in the form substantially as follows: "MULTISTATE TAX COMPACT Article I. Purposes. The purposes of this compact are to: 1. Facilitate proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes. 2. Promote uniformity or compatibility in significant components of tax systems. 3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration. 4. Avoid duplicative taxation. Article II. Definitions. As used in this compact: 1. "State" means a state of the United States, the District of Columbia, the commonwealth of Puerto Rico, or any territory or possession of the United States. 2. "Subdivision" means any governmental unit or special district of a state. 3. "Taxpayer" means any corporation, partnership, firm, association, governmental unit or agency or person acting as a business entity in more than one state. Page 2 N.M. Stat. Ann. § 7-5-1 4. "Income tax" means a tax imposed on or measured by net income including any tax imposed on or measured by an amount arrived at by deducting expenses from gross income, one or more forms of which expenses are not specifically and directly related to particular transactions. 5. "Capital stock tax" means a tax measured in any way by the capital of a corporation considered in its entirety. 6. "Gross receipts tax" means a tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in terms of gross receipts or in other terms, and in the determination of which no deduction is allowed which would constitute the tax an income tax. 7. "Sales tax" means a tax imposed with respect to the transfer for a consideration of ownership, possession or custody of tangible personal property or the rendering of services measured by the price of the tangible personal property transferred or services rendered and which is required by state or local law to be separately stated from the sales price by the seller, or which is customarily separately stated from the sales price, but does not include a tax imposed exclusively on the sale of a specifically identified commodity or article or class of commodities or articles. 8. "Use tax" means a nonrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession or custody of that property or the leasing of that property from another including any consumption, keeping, retention, or other use of tangible personal property and (b) is complementary to a sales tax. 9. "Tax" means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and any other tax which has a multistate impact, except that the provisions of Articles III, IV and V of this compact shall apply only to the taxes specifically designated therein and the provisions of Article IX of this compact shall apply only in respect to determinations pursuant to Article IV. Article III. Elements of Income Tax Laws. Taxpayer Option, State and Local Taxes. 1. Any taxpayer subject to an income tax whose income is subject to apportionment and allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of subdivisions in two or more party states may elect to apportion and allocate his income in the manner provided by the laws of such state or by the laws of such states and subdivisions without reference to this compact, or may elect to apportion and allocate in accordance with Article IV. This election for any tax year may be made in all party states or subdivisions thereof or in any one or more of the party states or subdivisions thereof without reference to the election made in the others. For the purposes of this paragraph, taxes imposed by subdivisions shall be considered separately from state taxes and the apportionment and allocation also may be applied to the entire tax base. In no instance wherein Article IV is employed for all subdivisions of a state may the sum of all apportionments and allocations to subdivisions within a state be greater than the apportionment and allocation that would be assignable to that state if the apportionment or allocation were being made with respect to a state income tax. Taxpayer Option, Short Form. 2. Each party state or any subdivision thereof which imposes an income tax shall provide by law that any taxpayer required to file a return, whose only activities within the taxing jurisdiction consist of sales and do not include owning or renting real estate or tangible personal property, and whose dollar volume of gross sales made during the tax year within the state or subdivision, as the case may be, is not in excess of $ 100,000 may elect to report and pay any tax due on the basis of a percentage of such volume, and shall adopt rates which shall produce a tax which reasonably approximates the tax otherwise due. The multistate tax commission, not more than once in five years, may adjust the $ 100,000 figure in order to reflect such changes as may occur in the real value of the dollar, and such adjusted figure, upon adoption by the commission, shall replace the $ 100,000 figure specifically provided herein. Each party state and subdivision thereof may make the same election available to taxpayers additional to those specified in this paragraph. Page 3 N.M. Stat. Ann. § 7-5-1 Coverage. 3. Nothing in this Article relates to the reporting or payment of any tax other than an income tax. Article IV. Division of Income. 1. As used in this Article, unless the context otherwise requires: (a) "Business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. (b) "Commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed. (c) "Compensation" means wages, salaries, commissions and any other form of remuneration paid to employees for personal services. (d) "Financial organization" means any bank, trust company, savings bank, industrial bank, land bank, safe deposit company, private banker, savings and loan association, credit union, cooperative bank, small loan company, sales finance company, investment company, or any type of insurance company. (e) "Nonbusiness income" means all income other than business income. (f) "Public utility" means any business entity (1) which owns or operates any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, except by pipeline, or the production, transmission, sale, delivery, or furnishing of electricity, water or steam; and (2) whose rates of charges for goods or services have been established or approved by a federal, state or local government or governmental agency. (g) "Sales" means all gross receipts of the taxpayer not allocated under paragraphs of this Article. (h) "State" means any state of the United States, the District of Columbia, the commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof. (i) "This state" means the state in which the relevant tax return is filed or, in the case of application of this Article to the apportionment and allocation of income for local tax purposes, the subdivision or local taxing district in which the relevant tax return is filed. 2. Any taxpayer having income from business activity which is taxable both within and without this state, other than activity as a financial organization or public utility or the rendering of purely personal services by an individual, shall allocate and apportion his net income as provided in this Article. If a taxpayer has income from business activity as a public utility but derives the greater percentage of his income from activities subject to this Article, the taxpayer may elect to allocate and apportion his entire net income as provided in this Article. 3. For purposes of allocation and apportionment of income under this Article, a taxpayer is taxable in another state if (1) in that state he is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax, or (2) that state has jurisdication [jurisdiction] to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not. 4. Rents and royalties from real or tangible personal property, capital gains, interest, dividends or patent or copyright royalties, to the extent that they constitute nonbusiness income, shall be allocated as provided in paragraphs 5 through 8 of this Article. Page 4 N.M. Stat. Ann. § 7-5-1 5. (a) Net rents and royalties from real property located in this state are allocable to this state. (b) Net rents and royalties from tangible personal property are allocable to this state: (1) if and to the extent that the property is utilized in this state, or (2) in their entirety if the taxpayer's commercial domicile is in this state and the taxpayer is not organized under the laws of or taxable in the state in which the property is utilized. (c) The extent of utilization of tangible personal property in a state is determined by multiplying the rents and royalties by a fraction, the numerator of which is the number of days of physical location of the property in the state during the rental or royalty period in the taxable year and the denominator of which is the number of days of physical location of the property everywhere during all rental or royalty periods in the taxable year. If the physical location of the property during the rental or royalty period is unknown or unascertainable by the taxpayer, tangible personal property is utilized in the state in which the property was located at the time the rental or royalty payer obtained possession. 6. (a) Capital gains and losses from sales of real property located in this state are allocable to this state. (b) Capital gains and losses from sales of tangible personal property are allocable to this state if (1) the property had a situs in this state at the time of the sale, or (2) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs. (c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state. 7. Interest and dividends are allocable to this state if the taxpayer's commercial domicile is in this state. 8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that the patent or copyright is utilized by the payer in this state, or (2) if and to the extent that the patent [or] copyright is utilized by the payer in a state in which the taxpayer is not taxable and the taxpayer's commercial domicile is in this state. (b) A patent is utilized in a state to the extent that it is employed in production, fabrication, manufacturing, or other processing in the state or to the extent that a patented product is produced in the state. If the basis of receipts from patent royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the patent is utilized in the state in which the taxpayer's commercial domicile is located. (c) A copyright is utilized in a state to the extent that printing or other publication originates in the state. If the basis of receipts from copyright royalties does not permit allocation to states or if the accounting procedures do not reflect states of utilization, the copyright is utilized in the state in which the taxpayer's commercial domicile is located. 9. All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. 10. The property factor is a fraction, the numerator of which is the average value of the taxpayer's real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer's real and tangible personal property owned or rented and used during the tax period. 11. Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. 12. The average value of property shall be determined by averaging the values at the beginning and ending of the tax period but the tax administrator may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the taxpayer's property. 13. The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax Page 5 N.M. Stat. Ann. § 7-5-1 period by the taxpayer for compensation and the denominator of which is the total compensation paid everywhere during the tax period. 14. Compensation is paid in this state if: (a) the individual's service is performed entirely within the state; (b) the individual's service is performed both within and without the state, but the service performed without the state is incidental to the individual's service within the state; or (c) some of the service is performed in the state and (1) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state, or (2) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this state. 15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period. 16. Sales of tangible personal property are in this state if: (a) the property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or (b) the property is shipped from an office, store, warehouse, factory or other place of storage in this state and (1) the purchaser is the United States government or (2) the taxpayer is not taxable in the state of the purchaser. 17. Sales, other than sales of tangible personal property, are in this state if: (a) the income-producing activity is performed in this state; or (b) the income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance. 18. If the allocation and apportionment provisions of this Article do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the tax administrator may require, in respect to all or any part of the taxpayer's business activity, if reasonable: (a) separate accounting; (b) the exclusion of any one or more of the factors; (c) the inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or (d) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. Article V. Elements of Sales and Use Tax Laws. Tax Credit. 1. Each purchaser liable for a use tax on tangible personal property shall be entitled to full credit for the combined amount or amounts of legally imposed sales or use taxes paid by him with respect to the same property to another state and any subdivision thereof. The credit shall be applied first against the amount of any use tax due the state, and any unused portion of the credit shall then be applied against the amount of any use tax due a subdivision. Page 6 N.M. Stat. Ann. § 7-5-1 Exemption Certificates, Vendors May Rely. 2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or other exemption certificate or other written evidence of exemption authorized by the appropriate state or subdivision taxing authority, the vendor shall be relieved of liability for a sales or use tax with respect to the transaction. Article VI. The Commission. Organization and Management. 1. (a) The multistate tax commission is hereby established. It shall be composed of one "member" from each party state who shall be the head of the state agency charged with the administration of the types of taxes to which this compact applies. If there is more than one such agency the state shall provide by law for the selection of the commission member from the heads of the relevant agencies. State law may provide that a member of the commission be represented by an alternate but only if there is on file with the commission written notification of the designation and identity of the alternate. The attorney general of each party state or his designee, or other counsel if the laws of the party state specifically provide, shall be entitled to attend the meetings of the commission, but shall not vote. Such attorneys general, designees, or other counsel shall receive all notices of meetings required under paragraph 1(e) of this Article. (b) Each party state shall provide by law for the selection of representatives from its subdivisions affected by this compact to consult with the commission member from that state. (c) Each member shall be entitled to one vote. The commission shall not act unless a majority of the members are present, and no action shall be binding unless approved by a majority of the total number of members. (d) The commission shall adopt an official seal to be used as it may provide. (e) The commission shall hold an annual meeting and such other regular meetings as its bylaws may provide and such special meetings as its executive committee may determine. The commission bylaws shall specify the dates of the annual and any other regular meetings, and shall provide for the giving of notice of annual, regular and special meetings. Notices of special meetings shall include the reasons therefor and an agenda of the items to be considered. (f) The commission shall elect annually, from among its members, a chairman, a vice chairman and a treasurer. The commission shall appoint an executive director who shall serve at its pleasure, and it shall fix his duties and compensation. The executive director shall be secretary of the commission. The commission shall make provision for the bonding of such of its officers and employees as it may deem appropriate. (g) Irrespective of the civil service, personnel or other merit system laws of any party state, the executive director shall appoint or discharge such personnel as may be necessary for the performance of the functions of the commission and shall fix their duties and compensation. The commission bylaws shall provide for personnel policies and programs. (h) The commission may borrow, accept or contract for the services of personnel from any state, the United States, or any other governmental entity. (i) The commission may accept for any of its purposes and functions any and all donations and grants of money, equipment, supplies, materials and services, conditional or otherwise, from any governmental entity, and may utilize and dispose of the same. (j) The commission may establish one or more offices for the transacting of its business. (k) The commission shall adopt bylaws for the conduct of its business. The commission shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any amendments thereto with the appropriate agency or officer in each of the party states. Page 7 N.M. Stat. Ann. § 7-5-1 (l) The commission annually shall make to the governor and legislature of each party state a report covering its activities for the preceding year. Any donation or grant accepted by the commission or services borrowed shall be reported in the annual report of the commission, and shall include the nature, amount and conditions, if any, of the donation, gift, grant or services borrowed and the identity of the donor or lender. The commission may make additional reports as it may deem desirable. Committees. 2. (a) To assist in the conduct of its business when the full commission is not meeting, the commission shall have an executive committee of seven members, including the chairman, vice chairman, treasurer and four other members elected annually by the commission. The executive committee, subject to the provisions of this compact and consistent with the policies of the commission, shall function as provided in the bylaws of the commission. (b) The commission may establish advisory and technical committees, membership on which may include private persons and public officials, in furthering any of its activities. Such committees may consider any matter of concern to the commission, including problems of special interest to any party state and problems dealing with particular types of taxes. (c) The commission may establish such additional committees as its bylaws may provide. Powers. 3. In addition to powers conferred elsewhere in this compact, the commission shall have power to: (a) Study state and local tax systems and particular types of state and local taxes. (b) Develop and recommend proposals for an increase in uniformity or compatibility of state and local tax laws with a view toward encouraging the simplification and improvement of state and local tax law and administration. (c) Compile and publish information as in its judgment would assist the party states in implementation of the compact and taxpayers in complying with state and local tax laws. (d) Do all things necessary and incidental to the administration of its functions pursuant to this compact. Finance. 4. (a) The commission shall submit to the governor or designated officer or officers of each party state a budget of its estimated expenditures for such period as may be required by the laws of that state for presentation to the legislature thereof. (b) Each of the commission's budgets of estimated expenditures shall contain specific recommendations of the amounts to be appropriated by each of the party states. The total amount of appropriations requested under any such budget shall be apportioned among the party states as follows: one-tenth in equal shares; and the remainder in proportion to the amount of revenue collected by each party state and its subdivisions from income taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In determining such amounts, the commission shall employ such available public sources of information as, in its judgment, present the most equitable and accurate comparisons among the party states. Each of the commission's budgets of estimated expenditures and requests for appropriations shall indicate the sources used in obtaining information employed in applying the formula contained in this paragraph. (c) The commission shall not pledge the credit of any party state. The commission may meet any of its obligations in whole or in part with funds available to it under paragraph (1)(i) of this Article: provided that the commission takes specific action setting aside such funds prior to incurring any obligation to be met in whole or in part in such manner. Except where the commission makes use of funds available to it under paragraph 1(i), the commission Page 8 N.M. Stat. Ann. § 7-5-1 shall not incur any obligation prior to the allotment of funds by the party states adequate to meet the same. (d) The commission shall keep accurate accounts of all receipts and disbursements. The receipts and disbursements of the commission shall be subject to the audit and accounting procedures established under its bylaws. All receipts and disbursements of funds handled by the commission shall be audited yearly by a certified or licensed public accountant and the report of the audit shall be included in and become part of the annual report of the commission. (e) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted officers of the party states and by any persons authorized by the commission. (f) Nothing contained in this Article shall be construed to prevent commission compliance with laws relating to audit or inspection of accounts by or on behalf of any government contributing to the support of the commission. Article VII. Uniform Regulations and Forms. 1. Whenever any two or more party states, or subdivisions of party states, have uniform or similar provisions of law relating to an income tax, capital stock tax, gross receipts tax, sales or use tax, the commission may adopt uniform regulations for any phase of the administration of such law, including assertion of jurisdiction to tax, or prescribing uniform tax forms. The commission may also act with respect to the provisions of Article IV of this compact. 2. Prior to the adoption of any regulation, the commission shall: (a) As provided in its bylaws, hold at least one public hearing on due notice to all affected party states and subdivisions thereof and to all taxpayers and other persons who have made timely request of the commission for advance notice of its regulation-making proceedings. (b) Afford all affected party states and subdivisions and interested persons an opportunity to submit relevant written data and views, which shall be considered fully by the commission. 3. The commission shall submit any regulations adopted by it to the appropriate officials of all party states and subdivisions to which they might apply. Each such state and subdivision shall consider any such regulation for adoption in accordance with its own laws and procedures. Article VIII. Interstate Audits. 1. This Article shall be in force only in those party states that specifically provide therefor by statute. 2. Any party state or subdivision thereof desiring to make or participate in an audit of any accounts, books, papers, records or other documents may request the commission to perform the audit on its behalf. In responding to the request, the commission shall have access to and may examine, at any reasonable time, such accounts, books, papers, records, and other documents and any relevant property or stock of merchandise. The commission may enter into agreements with party states or their subdivisions for assistance in performance of the audit. The commission shall make charges, to be paid by the state or local government or governments for which it performs the service, for any audits performed by it in order to reimburse itself for the actual costs incurred in making the audit. 3. The commission may require the attendance of any person within the state where it is conducting an audit or part thereof at a time and place fixed by it within such state for the purpose of giving testimony with respect to any account, book, paper, document, other record, property or stock of merchandise being examined in connection with the audit. If the person is not within the jurisdiction, he may be required to attend for such purpose at any time and place fixed by the commission within the state of which he is a resident; provided that such state has adopted this Article. 4. The commission may apply to any court having power to issue compulsory process for orders in aid of its powers Page 9 N.M. Stat. Ann. § 7-5-1 and responsibilities pursuant to this Article and any and all such courts shall have jurisdiction to issue such orders. Failure of any person to obey any such order shall be punishable as contempt of the issuing court. If the party or subject matter on account of which the commission seeks an order is within the jurisdiction of the court to which application is made, such application may be to a court in the state or subdivision on behalf of which the audit is being made or a court in the state in which the object of the order being sought is situated. The provisions of this paragraph apply only to courts in a state that has adopted this Article. 5. The commission may decline to perform any audit requested if it finds that its available personnel or other resources are insufficient for the purpose or that, in the terms requested, the audit is impracticable of satisfactory performance. If the commission, on the basis of its experience, has reason to believe that an audit of a particular taxpayer, either at a particular time or on a particular schedule, would be of interest to a number of party states or their subdivisions, it may offer to make the audit or audits, the offer to be contingent on sufficient participation therein as determined by the commission. 6. Information obtained by any audit pursuant to this Article shall be confidential and available only for tax purposes to party states, their subdivisions or the United States. Availability of information shall be in accordance with the laws of the states or subdivisions on whose account the commission performs the audit, and only through the appropriate agencies or officers of such states or subdivisions. Nothing in this Article shall be construed to require any taxpayer to keep records for any period not otherwise required by law. 7. Other arrangements made or authorized pursuant to law for cooperative audit by or on behalf of the party states or any of their subdivisions are not superseded or invalidated by this Article. 8. In no event shall the commission make any charge against a taxpayer for an audit. 9. As used in this Article, "tax," in addition to the meaning ascribed to it in Article II, means any tax or license fee imposed in whole or in part for revenue purposes. Article IX. Arbitration. 1. Whenever the commission finds a need for settling disputes concerning apportionments and allocations by arbitration, it may adopt a regulation placing this Article in effect, notwithstanding the provisions of Article VII. 2. The commission shall select and maintain an arbitration panel composed of officers and employees of state and local governments and private persons who shall be knowledgeable and experienced in matters of tax law and administration. 3. Whenever a taxpayer who has elected to employ Article IV, or whenever the laws of the party state or subdivision thereof are substantially identical with the relevant provisions of Article IV, the taxpayer, by written notice to the commission and to each party state or subdivision thereof that would be affected, may secure arbitration of an apportionment or allocation, if he is dissatisfied with the final administrative determination of the tax agency of the state or subdivision with respect thereto on the ground that it would subject him to double or multiple taxation by two or more party states or subdivisions thereof. Each party state and subdivision thereof hereby consents to the arbitration as provided herein, and agrees to be bound thereby. 4. The arbitration board shall be composed of one person selected by the taxpayer, one by the agency or agencies involved, and one member of the commission's arbitration panel. If the agencies involved are unable to agree on the person to be selected by them, such person shall be selected by lot from the total membership of the arbitration panel. The two persons selected for the board in the manner provided by the foregoing provisions of this paragraph shall jointly select the third member of the board. If they are unable to agree on the selection, the third member shall be selected by lot from among the total membership of the arbitration panel. No member of a board selected by lot shall be qualified to serve if he is an officer or employee or is otherwise affiliated with any party to the arbitration proceeding. Page 10 N.M. Stat. Ann. § 7-5-1 Residence within the jurisdiction of a party to the arbitration proceeding shall not constitute affiliation within the meaning of this paragraph. 5. The board may sit in any state or subdivision party to the proceeding, in the state of the taxpayer's incorporation, residence or domicile, in any state where the taxpayer does business, or in any place that it finds most appropriate for gaining access to evidence relevant to the matter before it. 6. The board shall give due notice of the times and places of its hearings. The parties shall be entitled to be heard, to present evidence, and to examine and cross-examine witnesses. The board shall act by majority vote. 7. The board shall have power to administer oaths, take testimony, subpoena and require the attendance of witnesses and the production of accounts, books, papers, records, and other documents, and issue commissions to take testimony. Subpoenas may be signed by any member of the board. In case of failure to obey a subpoena, and upon application by the board, any judge of a court of competent jurisdiction of the state in which the board is sitting or in which the person to whom the subpoena is directed may be found may make an order requiring compliance with the subpoena, and the court may punish failure to obey the order as a contempt. The provisions of this paragraph apply only in states that have adopted this Article. 8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall be assessed and allocated among the parties by the board in such manner as it may determine. The commission shall fix a schedule of compensation for members of arbitration boards and of other allowable expenses and costs. No officer or employee of a state or local government who serves as a member of a board shall be entitled to compensation therefor unless he is required on account of his service to forego the regular compensation attaching to his public employment, but any such board member shall be entitled to expenses. 9. The board shall determine the disputed apportionment or allocation and any matters necessary thereto. The determinations of the board shall be final for the purposes of making the apportionment or allocation, but for no other purpose. 10. The board shall file with the commission and with each tax agency represented in the proceeding: the determination of the board; the board's written statement of its reasons therefor; the record of the board's proceedings; and any other documents required by the arbitration rules of the commission to be filed. 11. The commission shall publish the determinations of boards together with the statements of the reasons therefor. 12. The commission shall adopt and publish rules of procedure and practice and shall file a copy of such rules and of any amendment thereto with the appropriate agency or officer in each of the party states. 13. Nothing contained herein shall prevent at any time a written compromise of any matter or matters in dispute, if otherwise lawful, by the parties to the arbitration proceeding. Article X. Entry Into Force and Withdrawal. 1. This compact shall enter into force when enacted into law by any seven states. Thereafter, this compact shall become effective as to any other state upon its enactment thereof. The commission shall arrange for notification of all party states whenever there is a new enactment of the compact. 2. Any party state may withdraw from this compact by enacting a statute repealing the same. No withdrawal shall affect any liability already incurred by or chargeable to a party state prior to the time of such withdrawal. 3. No proceeding commenced before an arbitration board prior to the withdrawal of a state and to which the withdrawing state or any subdivision thereof is a party shall be discontinued or terminated by the withdrawal, nor shall Page 11 N.M. Stat. Ann. § 7-5-1 the board thereby lose jurisdiction over any of the parties to the proceeding necessary to make a binding determination therein. Article XI. Effect on Other Laws and Jurisdiction. Nothing in this compact shall be construed to: (a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that a party state shall be obligated to implement Article III 2 of this compact. (b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any tax on motor fuel, other than a sales tax; provided that the definition of "tax" in Article VIII 9 may apply for the purposes of that Article and the commission's powers of study and recommendation pursuant to Article VI 3 may apply. (c) Withdraw or limit the jurisdiction of any state or local court or administrative officer or body with respect to any person, corporation or other entity or subject matter, except to the extent that such jurisdiction is expressly conferred by or pursuant to this compact upon another agency or body. (d) Supersede or limit the jurisdiction of any court of the United States. Article XII. Construction and Severability. This compact shall be liberally construed so as to effectuate the purposes thereof. The provisions of this compact shall be severable and if any phrase, clause, sentence or provision of this compact is declared to be contrary to the constitution of any state or of the United States or the applicability thereof to any government, agency, person or circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any government, agency, person or circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining party states and in full force and effect as to the state affected as to all severable matters." HISTORY: 1953 Comp., § 72-15A-37, enacted by Laws 1967, ch. 56, § 1. NOTES: LexisNexis Practice Insights 1. 2. 3. 4. 5. 6. 7. 8. 9. Page 12 N.M. Stat. Ann. § 7-5-1 10. 11. Notes to Decisions Constitutionality. Registration. Tax certificate number. Tax challenge. Constitutionality. Allegations that the Multistate Tax Commission, had abused its powers by conducting a campaign of harassment against members of plaintiff class of taxpayers failed to establish that the compact was in violation of the Commerce Clause, U.S. Const. art. I, § 8. United States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452, 98 S. Ct. 799, 54 L. Ed. 2d 682, 1978 U.S. LEXIS 58 (U.S. 1978). Multistate Tax Compact, did not violate the Compact Clause, U.S. Const. art. I, § 10, because it granted the states no powers that they did not already have individually, and was entirely voluntary to the states. United States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452, 98 S. Ct. 799, 54 L. Ed. 2d 682, 1978 U.S. LEXIS 58 (U.S. 1978). Registration. Mere possession of a New Mexico registration number does not mean that a taxpayer is registered with New Mexico for gross receipts tax purposes. Siemens Energy & Automation v. New Mexico Taxation & Revenue Dep t, 119 N.M. 316, 889 P.2d 1238, 1994 N.M. App. LEXIS 171 (Ct. App. 1994). Tax certificate number. The presence of a purchaser's taxpayer identification number on a sales and use tax exemption certificate is not, by itself, evidence that a seller did not accept the certificate in good faith. Siemens Energy & Automation v. New Mexico Taxation & Revenue Dep t, 119 N.M. 316, 889 P.2d 1238, 1994 N.M. App. LEXIS 171 (Ct. App. 1994). Tax challenge. In a taxpayer's challenge of an assessment of gross receipts tax against it, a hearing officer's finding that a sales and use tax exemption certificate delivered by a purchaser to the taxpayer was not in the proper form required to merit a tax exemption violated 7-1-25C(1), (2) NMSA 1978 where the taxpayer submitted valid multi-state certificates on the three sales in question, where the New Mexico Taxation and Revenue Department presented no testimony on the subject and did not even cross-examine the taxpayer's representative on why the certificates were not valid, where a reference in the testimony to the certificates as "multi-jurisdictional certificates," rather than "multi-state certificates," caused no confusion, and where thus there was no evidence to support the hearing officer's finding. Siemens Energy & Automation v. New Mexico Taxation & Revenue Dep t, 119 N.M. 316, 889 P.2d 1238, 1994 N.M. App. LEXIS 171 (Ct. App. 1994). Research References and Practice Aids New Mexico Law Review. New Mexico Taxes: Taking Another Look, Robert J. Desiderio, James La Fata and Maria Siemel McCulley, 32 N.M. L. Rev. 351 (2002). Page 1 LexisNexis (R) Texas Annotated Statutes Copyright © 2014 by Matthew Bender & Company, Inc. a member of the LexisNexis Group All rights reserved. *** This document is current through the 2013 3rd Called Session *** CODE OF CRIMINAL PROCEDURE TITLE 1. CODE OF CRIMINAL PROCEDURE OF 1965 PROCEEDINGS AFTER VERDICT CHAPTER 42. JUDGMENT AND SENTENCE GO TO TEXAS CODE ARCHIVE DIRECTORY Tex. Code Crim. Proc. art. 42.19 (2014) Art. 42.19. Interstate Corrections Compact Article I. Purpose and Policy The party states, desiring by common action to fully utilize and improve their institutional facilities and provide adequate programs for the confinement, treatment, and rehabilitation of various types of offenders, declare that it is the policy of each of the party states to provide such facilities and programs on a basis of cooperation with one another, thereby serving the best interests of such offenders and of society and effecting economies in capital expenditures and operational costs. The purpose of this compact is to provide for the mutual development and execution of such programs of cooperation for the confinement, treatment, and rehabilitation of offenders with the most economical use of human and material resources. Article II. Definitions As used in this compact, unless the context clearly requires otherwise: (a) "State" means a state of the United States; the United States of America; a territory or possession of the United States; the District of Columbia; the commonwealth of Puerto Rico. (b) "Sending state" means a state party to this compact in which conviction or court commitment was had. Page 2 Tex. Code Crim. Proc. art. 42.19 (c) "Receiving state" means a state party to this compact to which an inmate is sent for confinement other than a state in which conviction or court commitment was had. (d) "Inmate" means a male or female offender who is committed, under sentence to or confined in a penal or correctional institution. (e) "Institution" means any penal or correctional facility, including but not limited to a facility for the mentally ill or mentally defective, in which inmates as defined in (d) above may lawfully be confined. Article III. Contracts (a) Each party state may make one or more contracts with any one or more of the other party states for the confinement of inmates on behalf of a sending state in institutions situated within receiving states. Any such contract shall provide for: 1. Its duration. 2. Payments to be made to the receiving state by the sending state for inmate maintenance, extraordinary medical and dental expenses, and any participation in or receipt by inmates of rehabilitative or correctional services, facilities, programs, or treatment not reasonably included as part of normal maintenance. 3. Participation in programs of inmate employment, if any; the disposition or crediting of any payments received by inmates on account thereof; and the crediting of proceeds from or disposal of any products resulting therefrom. 4. Delivery and retaking of inmates. 5. Such other matters as may be necessary and appropriate to fix the obligations, responsibilities, and rights of the sending and receiving states. (b) The terms and provisions of this compact shall be a part of any contract entered into by the authority of or pursuant thereto, and nothing in any such contract shall be inconsistent therewith. Article IV. Procedures and Rights (a) Whenever the duly constituted authorities in a state party to this compact, and which has entered into a contract pursuant to Article III, shall decide that confinement in, or transfer of an inmate to, an institution within the territory of another party state is necessary or desirable in order to provide adequate quarters and care or an appropriate program of rehabilitation or treatment, such official may direct that the confinement be within an institution within the territory of such other party state, the receiving state to act in that regard solely as agent for the sending state. (b) The appropriate officials of any state party to this compact shall have access, at all reasonable times, to any institution in which it has a contractual right to confine inmates for the purpose of inspecting the facilities thereof and visiting such of its inmates as may be confined in the institution. (c) Inmates confined in an institution pursuant to this compact shall at all times be subject to the jurisdiction of the sending state and may at any time be removed therefrom for transfer to a prison or other institution within the Page 3 Tex. Code Crim. Proc. art. 42.19 sending state, for transfer to another institution in which the sending state may have a contractual or other right to confine inmates, for release on probation or parole, for discharge, or for any other purpose permitted by the laws of the sending state. However, the sending state shall continue to be obligated to such payments as may be required pursuant to the terms of any contract entered into under the terms of Article III. (d) Each receiving state shall provide regular reports to each sending state on the inmates of that sending state who are in institutions pursuant to this compact including a conduct record of each inmate and shall certify such record to the official designated by the sending state, in order that each inmate may have official review of his or her record in determining and altering the disposition of the inmate in accordance with the law which may obtain in the sending state and in order that the same may be a source of information for the sending state. (e) All inmates who may be confined in an institution pursuant to this compact shall be treated in a reasonable and humane manner and shall be treated equally with such similar inmates of the receiving state as may be confined in the same institution. The fact of confinement in a receiving state shall not deprive any inmate so confined of any legal rights which the inmate would have had if confined in an appropriate institution of the sending state. (f) Any hearing or hearings to which an inmate confined pursuant to this compact may be entitled by the laws of the sending state may be had before the appropriate authorities of the sending state, or of the receiving state if authorized by the sending state. The receiving state shall provide adequate facilities for such hearing as may be conducted by the appropriate officials of a sending state. In the event such hearing or hearings are had before officials of the receiving state, the governing law shall be that of the sending state and a record of the hearing or hearings as prescribed by the sending state shall be made. The record together with any recommendations of the hearing officials shall be transmitted forthwith to the official or officials before whom the hearing would have been had if it had taken place in the sending state. In any and all proceedings had pursuant to the provisions of this paragraph (f), the officials of the receiving state shall act solely as agents of the sending state and no final determination shall be made in any matter except by the appropriate officials of the sending state. (g) Any inmate confined pursuant to this compact shall be released within the territory of the sending state unless the inmate and the sending and receiving states shall agree upon release in some other place. The sending state shall bear the cost of such return to its territory. (h) Any inmate confined pursuant to this compact shall have any rights and all rights to participate in and derive any benefits or incur or be relieved of any obligations or have such obligations modified or his status changed on account of any action or proceeding in which he could have participated if confined in any appropriate institution of the sending state located within such state. (i) The parent, guardian, trustee, or other person or persons entitled under the laws of the sending state to act for, advise, or otherwise function with respect to any inmate shall not be deprived of or restricted in his exercise of any power in respect of any inmate confined pursuant to the terms of this compact. Article V. Act Not Reviewable in Receiving State: Extradition (a) Any decision of the sending state in respect of any matter over which it retains jurisdiction pursuant to this compact shall be conclusive upon and not reviewable within the receiving state, but if at the time the sending state seeks to remove an inmate from an institution in the receiving state there is pending against the inmate within such state any criminal charge or if the inmate is formally accused of having committed within such state a criminal offense, the inmate shall not be returned without the consent of the receiving state until discharged from prosecution or other form of proceeding, imprisonment, or detention for such offense. The duly accredited officer of the sending state shall be Page 4 Tex. Code Crim. Proc. art. 42.19 permitted to transport inmates pursuant to this compact through any and all states party to this compact without interference. (b) An inmate who escapes from an institution in which he is confined pursuant to this compact shall be deemed a fugitive from the sending state and from the state in which the institution escaped from is situated. In the case of an escape to a jurisdiction other than the sending or receiving state, the responsibility for institution of extradition or rendition proceedings shall be that of the sending state, but nothing contained herein shall be construed to prevent or affect the activities of officers and agencies of any jurisdiction directed toward the apprehension and return of an escapee. Article VI. Federal Aid Any state party to this compact may accept federal aid for use in connection with any institution or program, the use of which is or may be affected by this compact or any contract pursuant thereto. Any inmate in a receiving state pursuant to this compact may participate in any such federally aided program or activity for which the sending and receiving states have made contractual provision. However, if such program or activity is not part of the customary correctional regimen, the express consent of the appropriate official of the sending state shall be required therefor. Article VII. Entry into Force This compact shall enter into force and become effective and binding upon the states so acting when it has been enacted into law by any two states. Thereafter, this compact shall enter into force and become effective and binding as to any other of such states upon similar action by such state. Article VIII. Withdrawal and Termination This compact shall continue in force and remain binding upon a party state until it shall have enacted a statute repealing the compact and providing for the sending of formal written notice of withdrawal from the compact to the appropriate officials of all other party states. An actual withdrawal shall not take effect until one year after the notices provided in the statute have been sent. Such withdrawal shall not relieve the withdrawing state from its obligations assumed hereunder prior to the effective date of withdrawal. Before the effective date of withdrawal, a withdrawal state shall remove to its territory, at its own expense, such inmates as it may have confined pursuant to the provisions of this compact. Article IX. Other Arrangements Unaffected Nothing contained in this compact shall be construed to abrogate or impair an agreement or other arrangement which a party state may have with a nonparty state for the confinement, rehabilitation, or treatment of inmates, nor to repeal any other laws of a party state authorizing the making of cooperative institutional arrangements. Page 5 Tex. Code Crim. Proc. art. 42.19 Article X. Construction and Severability (a) The provisions of this compact shall be liberally construed and shall be severable. If any phrase, clause, sentence, or provision of this compact is declared to be contrary to the constitution of any participating state or of the United States or the applicability thereof to any government, agency, person, or circumstance is held invalid, the validity of the remainder of this compact and the applicability thereof to any government, agency, person, or circumstance shall not be affected thereby. If this compact shall be held contrary to the constitution of any state participating therein, the compact shall remain in full force and effect as to the remaining states and in full force and effect as to the state affected as to all severable matters. (b) Powers. The director of the Texas Department of Criminal Justice is authorized and directed to do all things necessary or incidental to the carrying out of the compact in every particular. HISTORY: Enacted by Acts 1985, 69th Leg., ch. 24 (S.B. 126), § 1, effective January 1, 1986; am. Acts 1987, 70th Leg., ch. 167 (S.B. 892), § 5.01(a 9), effective September 1, 1987 (renumbered from art. 42.18); am. Acts 2009, 81st Leg., ch. 87 (S.B. 1969), § 25.031, effective September 1, 2009. NOTES: 2009 amendment, substituted "Texas Department of Criminal Justice" for "Texas Department of Corrections" in Art. X(b). LexisNexis (R) Notes: CASE NOTES 1. Pursuant to Tex. Code Crim. Proc. Ann. art. 42.19, § 9(c)(1), defendant's pre-sentence investigation report (PSI) was ordered after defendant entered his plea of guilty. Any inspection by the trial court necessarily took place after such plea, in conformance with the statutory requirement, and could not have influenced its finding of guilt. Smith v. State, 2004 Tex. App. LEXIS 10566 (Tex. App. Houston 1st Dist. Nov. 24 2004). 2. Revocation of community supervision was proper, because the petitioner pled true to counts one and two of the State's motion to revoke, the petitioner received notice of and pled true to count one, which, standing alone, was sufficient evidence for the trial court's revocation of his community supervision, notwithstanding his argument with regard to count two, and imposition of a nineteen-year sentence was within the applicable punishment range for the offense of possession of a controlled substance to which the petitioner pled guilty. Dellatorre v. State, 2012 Tex. App. LEXIS 1823 (Tex. App. Beaumont Mar. 7 2012). Page 6 Tex. Code Crim. Proc. art. 42.19 3. Tex. Code Crim. Proc. Ann. art. 42.08(b) required stacking for any offense an inmate committed during the time he was an inmate processed into the Texas Department of Criminal Justice -- Institutional Division (TDCJ-ID), and was actually serving a sentence in TDCJ-ID, regardless of the inmate's temporal physical location at the time he committed the offense. The court noted that the term "inmate" generally connoted the offender"s permanent institutional status, not his temporary physical location, and cited Tex. Code Crim. Proc. Ann. art. 42.19 as an example. Rhodes v. State, 175 S.W.3d 348, 2004 Tex. App. LEXIS 9136 (Tex. App. Houston 1st Dist. 2004). 4. Although Tex. Code Crim. Proc. Ann. art. 42.12 itself does not define "state," the Code Construction Act, defines "state" to include Puerto Rico pursuant to Tex. Gov't Code Ann. § 311.005, and 48 U.S.C.S. § 734. Additionally, the code of criminal procedure elsewhere adopts definitions of "state" that include Puerto Rico, for example, Tex. Code Crim. Proc. Ann. arts. 24.29 and 42.19, and Tex. Gov't Code Ann. § 311.011(b). Robles v. State, 141 S.W.3d 250, 2004 Tex. App. LEXIS 5787 (Tex. App. Austin 2004). 5. Pursuant to Tex. Code Crim. Proc. Ann. art. 42.19, § 9(c)(1), defendant's pre-sentence investigation report (PSI) was ordered after defendant entered his plea of guilty. Any inspection by the trial court necessarily took place after such plea, in conformance with the statutory requirement, and could not have influenced its finding of guilt. Smith v. State, 2004 Tex. App. LEXIS 10566 (Tex. App. Houston 1st Dist. Nov. 24 2004). 6. Although Tex. Code Crim. Proc. Ann. art. 42.12 itself does not define "state," the Code Construction Act, defines "state" to include Puerto Rico pursuant to Tex. Gov't Code Ann. § 311.005, and 48 U.S.C.S. § 734. Additionally, the code of criminal procedure elsewhere adopts definitions of "state" that include Puerto Rico, for example, Tex. Code Crim. Proc. Ann. arts. 24.29 and 42.19, and Tex. Gov't Code Ann. § 311.011(b). Robles v. State, 141 S.W.3d 250, 2004 Tex. App. LEXIS 5787 (Tex. App. Austin 2004). TREATISES AND ANALYTICAL MATERIALS 1. 4-92 Texas Criminal Practice Guide § 92.05, POSTCONVICTION REMEDIES, PRISONERS' RIGHTS, Disciplinary Procedures, Texas Criminal Practice Guide. 2. 4-92 Texas Criminal Practice Guide § 92.201, POSTCONVICTION REMEDIES, PRISONERS' RIGHTS, Statutes and Rules, Texas Criminal Practice Guide. Page 1 LexisNexis (R) Texas Annotated Statutes Copyright © 2014 by Matthew Bender & Company, Inc. a member of the LexisNexis Group All rights reserved. *** This document is current through the 2013 3rd Called Session *** TEXAS FAMILY CODE TITLE 3. JUVENILE JUSTICE CODE CHAPTER 60. UNIFORM INTERSTATE COMPACT ON JUVENILES GO TO TEXAS CODE ARCHIVE DIRECTORY Tex. Fam. Code § 60.010 (2014) § 60.010. Interstate Compact for Juveniles ARTICLE I PURPOSE The compacting states to this Interstate Compact recognize that each state is responsible for the proper supervision or return of juveniles, delinquents, and status offenders who are on probation or parole and who have absconded, escaped, or run away from supervision and control and in so doing have endangered their own safety and the safety of others. The compacting states also recognize that each state is responsible for the safe return of juveniles who have run away from home and in doing so have left their state of residence. The compacting states also recognize that congress, by enacting the Crime Control Act, 4 U.S.C. Section 112 (1965), has authorized and encouraged compacts for cooperative efforts and mutual assistance in the prevention of crime. It is the purpose of this compact, through means of joint and cooperative action among the compacting states to: (A) ensure that the juveniles who are moved under this compact to another state for probation or parole supervision and services are governed in the receiving state by the same standards that apply to juveniles receiving such supervision and services in the receiving state; (B) ensure that the public safety interests of the citizens, including the victims of juvenile offenders, in both the sending and receiving states are adequately protected and balanced with the juvenile's and the juvenile's family's best interests and welfare when an interstate movement is under consideration; (C) return juveniles who have run away, absconded, or escaped from supervision or control or have been accused of an offense to the state requesting their return through a fair and prompt judicial review process that ensures that the requisition is in order and that the transport is properly supervised; (D) make provisions for contracts between member states for the cooperative institutionalization in public facilities in member states for delinquent youth needing special services; (E) provide for Page 2 Tex. Fam. Code § 60.010 the effective tracking of juveniles who move interstate under the compact's provisions; (F) equitably allocate the costs, benefits, and obligations of the compacting states; (G) establish procedures to manage the movement between states of juvenile offenders released to the community under the jurisdiction of courts, juvenile departments, or any other criminal or juvenile justice agency which has jurisdiction over juvenile offenders, ensuring that a receiving state accepts supervision of a juvenile when the juvenile's parent or other person having legal custody resides or is undertaking residence there; (H) ensure immediate notice to jurisdictions where defined offenders are authorized to travel or to relocate across state lines; (I) establish a system of uniform data collection on information pertaining to juveniles who move interstate under this compact that prevents public disclosure of identity and individual treatment information but allows access by authorized juvenile justice and criminal justice officials and regular reporting of compact activities to heads of state executive, judicial, and legislative branches and juvenile and criminal justice administrators; (J) monitor compliance with rules governing interstate movement of juveniles and initiate interventions to address and correct noncompliance; (K) coordinate training and education regarding the regulation of interstate movement of juveniles for officials involved in such activity; and (L) coordinate the implementation and operation of the compact with the Interstate Compact for the Placement of Children, the Interstate Compact for Adult Offender Supervision and other compacts affecting juveniles particularly in those cases where concurrent or overlapping supervision issues arise. It is the policy of the compacting states that the activities conducted by the Interstate Commission created herein are the formation of public policies and therefore are public business. Furthermore, the compacting states shall cooperate and observe their individual and collective duties and responsibilities for the prompt return and acceptance of juveniles subject to the provisions of this compact. The provisions of this compact shall be reasonably and liberally construed to accomplish the purposes and policies of the compact. ARTICLE II DEFINITIONS As used in this compact, unless the context clearly requires a different construction: A. "Bylaws" means those bylaws established by the Interstate Commission for its governance or for directing or controlling the Interstate Commission's actions or conduct. B. "Compact administrator" means the individual in each compacting state appointed pursuant to the terms of this compact responsible for the administration and management of the state's supervision and transfer of juveniles subject to the terms of this compact and to the rules adopted by the Interstate Commission under this compact. C. "Compacting state" means any state which has enacted the enabling legislation for this compact. D. "Commissioner" means the voting representative of each compacting state appointed pursuant to Article III of this compact. E. "Court" means any court having jurisdiction over delinquent, neglected, or dependent children. F. "Deputy compact administrator" means the individual, if any, in each compacting state appointed to act on behalf of a compact administrator pursuant to the terms of this compact, responsible for the administration and management of the state's supervision and transfer of juveniles subject to the terms of this compact and to the rules adopted by the Interstate Commission under this compact. G. "Interstate Commission" means the Interstate Commission for Juveniles created by Article III of this compact. H. "Juvenile" means any person defined as a juvenile in any member state or by the rules of the Interstate Commission, including: Page 3 Tex. Fam. Code § 60.010 (1) Accused Delinquent -- a person charged with an offense that, if committed by an adult, would be a criminal offense; (2) Adjudicated Delinquent -- a person found to have committed an offense that, if committed by an adult, would be a criminal offense; (3) Accused Status Offender -- a person charged with an offense that would not be a criminal offense if committed by an adult; (4) Adjudicated Status Offender -- a person found to have committed an offense that would not be a criminal offense if committed by an adult; and (5) Nonoffender -- a person in need of supervision who has not been accused or adjudicated a status offender or delinquent. I. "Noncompacting state" means any state which has not enacted the enabling legislation for this compact. J. "Probation or parole" means any kind of supervision or conditional release of juveniles authorized under the laws of the compacting states. K. "Rule" means a written statement by the Interstate Commission promulgated pursuant to Article VI of this compact that is of general applicability, implements, interprets, or prescribes a policy or provision of the compact, or an organizational, procedural, or practice requirement of the Interstate Commission, and has the force and effect of statutory law in a compacting state, and includes the amendment, repeal, or suspension of an existing rule. L. "State" means a state of the United States, the District of Columbia (or its designee), the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Northern Marianas Islands. ARTICLE III INTERSTATE COMMISSION FOR JUVENILES A. The compacting states hereby create the Interstate Commission for Juveniles. The Interstate Commission shall be a body corporate and joint agency of the compacting states. The commission shall have all the responsibilities, powers, and duties set forth herein, and such additional powers as may be conferred upon it by subsequent action of the respective legislatures of the compacting states in accordance with the terms of this compact. B. The Interstate Commission shall consist of commissioners appointed by the appropriate appointing authority in each state pursuant to the rules and requirements of each compacting state. The commissioner shall be the compact administrator, deputy compact administrator, or designee from that state who shall serve on the Interstate Commission in such capacity under or pursuant to the applicable law of the compacting state. C. In addition to the commissioners who are the voting representatives of each state, the Interstate Commission shall include individuals who are not commissioners, but who are members of interested organizations. Such noncommissioner members must include a member of the national organizations of governors, legislators, state chief justices, attorneys general, Interstate Compact for Adult Offender Supervision, Interstate Compact for the Placement of Children, juvenile justice and juvenile corrections officials, and crime victims. All noncommissioner members of the Interstate Commission shall be ex officio (nonvoting) members. The Interstate Commission may provide in its bylaws for such additional ex officio (nonvoting) members, including members of other national organizations, in such numbers as shall be determined by the commission. Page 4 Tex. Fam. Code § 60.010 D. Each compacting state represented at any meeting of the Interstate Commission is entitled to one vote. A majority of the compacting states shall constitute a quorum for the transaction of business, unless a larger quorum is required by the bylaws of the Interstate Commission. E. The Interstate Commission shall meet at least once each calendar year. The chairperson may call additional meetings and, upon the request of a simple majority of the compacting states, shall call additional meetings. Public notice shall be given of all meetings and meetings shall be open to the public. F. The Interstate Commission shall establish an executive committee, which shall include commission officers, members, and others as determined by the bylaws. The executive committee shall have the power to act on behalf of the Interstate Commission during periods when the Interstate Commission is not in session, with the exception of rulemaking or amendment to the compact. The executive committee shall oversee the day-to-day activities of the administration of the compact managed by an executive director and Interstate Commission staff; administers enforcement and compliance with the provisions of the compact, its bylaws and rules, and performs such other duties as directed by the Interstate Commission or set forth in the bylaws. G. Each member of the Interstate Commission shall have the right and power to cast a vote to which that compacting state is entitled and to participate in the business and affairs of the Interstate Commission. A member shall vote in person and shall not delegate a vote to another compacting state. However, a commissioner shall appoint another authorized representative, in the absence of the commissioner from that state, to cast a vote on behalf of the compacting state at a specified meeting. The bylaws may provide for members' participation in meetings by telephone or other means of telecommunication or electronic communication. H. The Interstate Commission's bylaws shall establish conditions and procedures under which the Interstate Commission shall make its information and official records available to the public for inspection or copying. The Interstate Commission may exempt from disclosure any information or official records to the extent they would adversely affect personal privacy rights or proprietary interests. I. Public notice shall be given of all meetings and all meetings shall be open to the public, except as set forth in the rules or as otherwise provided in the compact. The Interstate Commission and any of its committees may close a meeting to the public when it determines by two-thirds vote that an open meeting would be likely to: 1. Relate solely to the Interstate Commission's internal personnel practices and procedures; 2. Disclose matters specifically exempted from disclosure by statute; 3. Disclose trade secrets or commercial or financial information which is privileged or confidential; 4. Involve accusing any person of a crime or formally censuring any person; 5. Disclose information of a personal nature where disclosure would constitute a clearly unwarranted invasion of personal privacy; 6. Disclose investigative records compiled for law enforcement purposes; 7. Disclose information contained in or related to examination, operating or condition reports prepared by, or on behalf of or for the use of, the Interstate Commission with respect to a regulated person or entity for the purpose of regulation or supervision of such person or entity; 8. Disclose information, the premature disclosure of which would significantly endanger the stability of a regulated person or entity; or 9. Specifically relate to the Interstate Commission's issuance of a subpoena, or its participation in a civil action or Page 5 Tex. Fam. Code § 60.010 other legal proceeding. J. For every meeting closed pursuant to this provision, the Interstate Commission's legal counsel shall publicly certify that, in the legal counsel's opinion, the meeting may be closed to the public, and shall reference each relevant exemptive provision. The Interstate Commission shall keep minutes which shall fully and clearly describe all matters discussed in any meeting and shall provide a full and accurate summary of any actions taken, and the reasons therefore, including a description of each of the views expressed on any item and the record of any roll call vote (reflected in the vote of each member on the question). All documents considered in connection with any action shall be identified in such minutes. K. The Interstate Commission shall collect standardized data concerning the interstate movement of juveniles as directed through its rules which shall specify the data to be collected, the means of collection and data exchange, and reporting requirements. Such methods of data collection, exchange, and reporting shall insofar as is reasonably possible conform to up-to-date technology and coordinate the Interstate Commission's information functions with the appropriate repository of records. ARTICLE IV POWERS AND DUTIES OF THE INTERSTATE COMMISSION The commission shall have the following powers and duties: 1. To provide for dispute resolution among compacting states. 2. To promulgate rules to effect the purposes and obligations as enumerated in this compact, which shall have the force and effect of statutory law and shall be binding in the compacting states to the extent and in the manner provided in this compact. 3. To oversee, supervise, and coordinate the interstate movement of juveniles subject to the terms of this compact and any bylaws adopted and rules promulgated by the Interstate Commission. 4. To enforce compliance with the compact provisions, the rules promulgated by the Interstate Commission, and the bylaws, using all necessary and proper means, including but not limited to the use of judicial process. 5. To establish and maintain offices which shall be located within one or more of the compacting states. 6. To purchase and maintain insurance and bonds. 7. To borrow, accept, hire, or contract for services of personnel. 8. To establish and appoint committees and hire staff which it deems necessary for the carrying out of its functions including, but not limited to, an executive committee as required by Article III of this compact, which shall have the power to act on behalf of the Interstate Commission in carrying out its powers and duties hereunder. 9. To elect or appoint officers, attorneys, employees, agents, or consultants, and to fix their compensation, define their duties, and determine their qualifications, and to establish the Interstate Commission's personnel policies and programs relating to, inter alia, conflicts of interest, rates of compensation, and qualifications of personnel. 10. To accept any and all donations and grants of money, equipment, supplies, materials, and services, and to receive, utilize, and dispose of same. Page 6 Tex. Fam. Code § 60.010 11. To lease, purchase, accept contributions or donations of, or otherwise to own, hold, improve, or use any property, whether real, personal, or mixed. 12. To sell, convey, mortgage, pledge, lease, exchange, abandon, or otherwise dispose of any property, whether real, personal, or mixed. 13. To establish a budget and make expenditures and levy dues as provided in Article VIII of this compact. 14. To sue and be sued. 15. To adopt a seal and bylaws governing the management and operation of the Interstate Commission. 16. To perform such functions as may be necessary or appropriate to achieve the purposes of this compact. 17. To report annually to the legislatures, governors, and judiciary of the compacting states concerning the activities of the Interstate Commission during the preceding year. Such reports shall also include any recommendations that may have been adopted by the Interstate Commission. 18. To coordinate education, training, and public awareness regarding the interstate movement of juveniles for officials involved in such activity. 19. To establish uniform standards of the reporting, collecting, and exchanging of data. 20. The Interstate Commission shall maintain its corporate books and records in accordance with the bylaws. ARTICLE V ORGANIZATION AND OPERATION OF THE INTERSTATE COMMISSION Sec. A. Bylaws 1. The Interstate Commission shall, by a majority of the members present and voting, within 12 months of the first Interstate Commission meeting, adopt bylaws to govern its conduct as may be necessary or appropriate to carry out the purposes of the compact, including, but not limited to: a. Establishing the fiscal year of the Interstate Commission; b. Establishing an executive committee and such other committees as may be necessary; c. Providing for the establishment of committees governing any general or specific delegation of any authority or function of the Interstate Commission; d. Providing reasonable procedures for calling and conducting meetings of the Interstate Commission and ensuring reasonable notice of each such meeting; e. Establishing the titles and responsibilities of the officers of the Interstate Commission; f. Providing a mechanism for concluding the operations of the Interstate Commission and the return of any surplus funds that may exist upon the termination of the compact after the payment or reserving of all of its debts and obligations; Page 7 Tex. Fam. Code § 60.010 g. Providing start-up rules for initial administration of the compact; and h. Establishing standards and procedures for compliance and technical assistance in carrying out the compact. Sec. B. Officers and Staff 1. The Interstate Commission shall, by a majority of the members, elect annually from among its members a chairperson and a vice chairperson, each of whom shall have such authority and duties as may be specified in the bylaws. The chairperson or, in the chairperson's absence or disability, the vice chairperson shall preside at all meetings of the Interstate Commission. The officers so elected shall serve without compensation or remuneration from the Interstate Commission, provided that, subject to the availability of budgeted funds, the officers shall be reimbursed for any ordinary and necessary costs and expenses incurred by them in the performance of their duties and responsibilities as officers of the Interstate Commission. 2. The Interstate Commission shall, through its executive committee, appoint or retain an executive director for such period, upon such terms and conditions, and for such compensation as the Interstate Commission may deem appropriate. The executive director shall serve as secretary to the Interstate Commission, but shall not be a member and shall hire and supervise such other staff as may be authorized by the Interstate Commission. Sec. C. Qualified Immunity, Defense, and Indemnification 1. The Interstate Commission's executive director and employees shall be immune from suit and liability, either personally or in their official capacity, for any claim for damage to or loss of property or personal injury or other civil liability caused or arising out of or relating to any actual or alleged act, error, or omission that occurred, or that such person had a reasonable basis for believing occurred, within the scope of Interstate Commission employment, duties, or responsibilities, provided that any such person shall not be protected from suit or liability for any damage, loss, injury, or liability caused by the intentional or wilful and wanton misconduct of any such person. 2. The liability of any commissioner, or the employee or agent of a commissioner, acting within the scope of such person's employment or duties for acts, errors, or omissions occurring within such person's state may not exceed the limits of liability set forth under the constitution and laws of that state for state officials, employees, and agents. Nothing in this subsection shall be construed to protect any such person from suit or liability for any damage, loss, injury, or liability caused by the intentional or wilful and wanton misconduct of any such person. 3. The Interstate Commission shall defend the executive director or the employees or representatives of the Interstate Commission and, subject to the approval of the attorney general of the state represented by any commissioner of a compacting state, shall defend such commissioner or the commissioner's representatives or employees in any civil action seeking to impose liability arising out of any actual or alleged act, error, or omission that occurred within the scope of Interstate Commission employment, duties, or responsibilities, or that the defendant had a reasonable basis for believing occurred within the scope of Interstate Commission employment, duties, or responsibilities, provided that the actual or alleged act, error, or omission did not result from intentional or wilful and wanton misconduct on the part of such person. 4. The Interstate Commission shall indemnify and hold the commissioner of a compacting state, or the commissioner's representatives or employees, or the Interstate Commission's representatives or employees, harmless in the amount of any settlement or judgment obtained against such persons arising out of any actual or alleged act, error, or omission that occurred within the scope of Interstate Commission employment, duties, or responsibilities, or that such persons had a reasonable basis for believing occurred within the scope of Interstate Commission employment, duties, or responsibilities, provided that the actual or alleged act, error, or omission did not result from intentional or wilful and wanton misconduct on the part of such persons. ARTICLE VI Page 8 Tex. Fam. Code § 60.010 RULEMAKING FUNCTIONS OF THE INTERSTATE COMMISSION A. The Interstate Commission shall promulgate and publish rules in order to effectively and efficiently achieve the purposes of the compact. B. Rulemaking shall occur pursuant to the criteria set forth in this article and the bylaws and rules adopted pursuant thereto. Such rulemaking shall substantially conform to the principles of the "Model State Administrative Procedures Act," 1981 Act, Uniform Laws Annotated, Vol. 15, p.1 (2000), or such other administrative procedures act, as the Interstate Commission deems appropriate consistent with due process requirements under the United States Constitution as now or hereafter interpreted by the United States Supreme Court. All rules and amendments shall become binding as of the date specified, as published with the final version of the rule as approved by the Interstate Commission. C. When promulgating a rule, the Interstate Commission shall, at a minimum: 1. Publish the proposed rule's entire text stating the reason or reasons for that proposed rule; 2. Allow and invite persons to submit written data, facts, opinions, and arguments, which information shall be added to the record and be made publicly available; 3. Provide an opportunity for an informal hearing, if petitioned by 10 or more persons; and 4. Promulgate a final rule and its effective date, if appropriate, based on input from state or local officials, or interested parties. D. Allow, not later than 60 days after a rule is promulgated, any interested person to file a petition in the United States District Court for the District of Columbia or in the federal district court where the Interstate Commission's principal office is located for judicial review of the rule. If the court finds that the Interstate Commission's action is not supported by substantial evidence in the rulemaking record, the court shall hold the rule unlawful and set it aside. For purposes of this subsection, evidence is substantial if it would be considered substantial evidence under the Model State Administrative Procedures Act. E. If a majority of the legislatures of the compacting states rejects a rule, those states may, by enactment of a statute or resolution in the same manner used to adopt the compact, cause that such rule shall have no further force and effect in any compacting state. F. The existing rules governing the operation of the Interstate Compact on Juveniles superceded by this Act shall be null and void 12 months after the first meeting of the Interstate Commission created under this compact. G. Upon determination by the Interstate Commission that an emergency exists, the Interstate Commission may promulgate an emergency rule which shall become effective immediately upon adoption, provided that the usual rulemaking procedures provided hereunder shall be retroactively applied to said rule as soon as reasonably possible, but no later than 90 days after the effective date of the emergency rule. ARTICLE VII OVERSIGHT, ENFORCEMENT, AND DISPUTE RESOLUTION BY THE INTERSTATE COMMISSION Page 9 Tex. Fam. Code § 60.010 Sec. A. Oversight 1. The Interstate Commission shall oversee the administration and operations of the interstate movement of juveniles subject to this compact in the compacting states and shall monitor such activities being administered in noncompacting states which may significantly affect compacting states. 2. The courts and executive agencies in each compacting state shall enforce this compact and shall take all actions necessary and appropriate to effectuate the compact's purposes and intent. The provisions of this compact and the rules promulgated hereunder shall be received by all the judges, public officers, commissions, and departments of the state government as evidence of the authorized statute and administrative rules. All courts shall take judicial notice of the compact and the rules. In any judicial or administrative proceeding in a compacting state pertaining to the subject matter of this compact which may affect the powers, responsibilities, or actions of the Interstate Commission, the Interstate Commission shall be entitled to receive all service of process in any such proceeding, and shall have standing to intervene in the proceeding for all purposes. Sec. B. Dispute Resolution 1. The compacting states shall report to the Interstate Commission on all issues and activities necessary for the administration of the compact as well as issues and activities pertaining to compliance with the provisions of the compact and its bylaws and rules. 2. The Interstate Commission shall attempt, upon the request of a compacting state, to resolve any disputes or other issues which are subject to the compact and which may arise among compacting states and between compacting and noncompacting states. The Interstate Commission shall promulgate a rule providing for both mediation and binding dispute resolution for disputes among the compacting states. 3. The Interstate Commission, in the reasonable exercise of its discretion, shall enforce the provisions and rules of this compact using any or all means set forth in Article X of this compact. ARTICLE VIII FINANCE A. The Interstate Commission shall pay or provide for the payment of the reasonable expenses of its establishment, organization, and ongoing activities. B. The Interstate Commission shall levy on and collect an annual assessment from each compacting state to cover the cost of the internal operations and activities of the Interstate Commission and its staff which must be in a total amount sufficient to cover the Interstate Commission's annual budget as approved each year. The aggregate annual assessment amount shall be allocated based upon a formula to be determined by the Interstate Commission, taking into consideration the population of each compacting state and the volume of interstate movement of juveniles in each compacting state. The Interstate Commission shall promulgate a rule binding upon all compacting states that governs said assessment. C. The Interstate Commission shall not incur any obligations of any kind prior to securing the funds adequate to meet the same, nor shall the Interstate Commission pledge the credit of any of the compacting states, except by and with the authority of the compacting state. D. The Interstate Commission shall keep accurate accounts of all receipts and disbursements. The receipts and disbursements of the Interstate Commission shall be subject to the audit and accounting procedures established under its Page 10 Tex. Fam. Code § 60.010 bylaws. However, all receipts and disbursements of funds handled by the Interstate Commission shall be audited yearly by a certified or licensed public accountant and the report of the audit shall be included in and become part of the annual report of the Interstate Commission. ARTICLE IX COMPACTING STATES, EFFECTIVE DATE, AND AMENDMENT A. Any state, as defined in Article II of this compact, is eligible to become a compacting state. B. The compact shall become effective and binding upon legislative enactment of the compact into law by no less than 35 of the states. The initial effective date shall be the later of July 1, 2004, or upon enactment into law by the 35th jurisdiction. Thereafter, the compact shall become effective and binding, as to any other compacting state, upon enactment of the compact into law by that state. The governors of noncompacting states or their designees shall be invited to participate in Interstate Commission activities on a nonvoting basis prior to adoption of the compact by all states. C. The Interstate Commission may propose amendments to the compact for enactment by the compacting states. No amendment shall become effective and binding upon the Interstate Commission and the compacting states unless and until it is enacted into law by unanimous consent of the compacting states. ARTICLE X WITHDRAWAL, DEFAULT, TERMINATION, AND JUDICIAL ENFORCEMENT Sec. A. Withdrawal 1. Once effective, the compact shall continue in force and remain binding upon each and every compacting state, provided that a compacting state may withdraw from the compact by specifically repealing the statute which enacted the compact into law. 2. The effective date of withdrawal is the effective date of the repeal. 3. The withdrawing state shall immediately notify the chairperson of the Interstate Commission in writing upon the introduction of legislation repealing this compact in the withdrawing state. The Interstate Commission shall notify the other compacting states of the withdrawing state's intent to withdraw within 60 days of its receipt thereof. 4. The withdrawing state is responsible for all assessments, obligations, and liabilities incurred through the effective date of withdrawal, including any obligations, the performance of which extend beyond the effective date of withdrawal. 5. Reinstatement following withdrawal of any compacting state shall occur upon the withdrawing state reenacting the compact or upon such later date as determined by the Interstate Commission. Sec. B. Technical Assistance, Fines, Suspension, Termination, and Default 1. If the Interstate Commission determines that any compacting state has at any time defaulted in the performance of any of its obligations or responsibilities under this compact, or the bylaws or duly promulgated rules, the Interstate Page 11 Tex. Fam. Code § 60.010 Commission may impose any or all of the following penalties: a. Remedial training and technical assistance as directed by the Interstate Commission; b. Alternative dispute resolution; c. Fines, fees, and costs in such amounts as are deemed to be reasonable as fixed by the Interstate Commission; and d. Suspension or termination of membership in the compact, which shall be imposed only after all other reasonable means of securing compliance under the bylaws and rules have been exhausted and the Interstate Commission has determined that the offending state is in default. Immediate notice of suspension shall be given by the Interstate Commission to the governor, the chief justice or the chief judicial officer of the state, and the majority and minority leaders of the defaulting state's legislature. The grounds for default include, but are not limited to, failure of a compacting state to perform such obligations or responsibilities imposed upon it by this compact, the bylaws or duly promulgated rules, and any other grounds designated in commission bylaws and rules. The Interstate Commission shall immediately notify the defaulting state in writing of the penalty imposed by the Interstate Commission and of the default pending a cure of the default. The Interstate Commission shall stipulate the conditions and the time period within which the defaulting state must cure its default. If the defaulting state fails to cure the default within the time period specified by the Interstate Commission, the defaulting state shall be terminated from the compact upon an affirmative vote of a majority of the compacting states and all rights, privileges, and benefits conferred by this compact shall be terminated from the effective date of termination. 2. Within 60 days of the effective date of termination of a defaulting state, the Interstate Commission shall notify the governor, the chief justice or chief judicial officer of the state, and the majority and minority leaders of the defaulting state's legislature of such termination. 3. The defaulting state is responsible for all assessments, obligations, and liabilities incurred through the effective date of termination including any obligations, the performance of which extends beyond the effective date of termination. 4. The Interstate Commission shall not bear any costs relating to the defaulting state unless otherwise mutually agreed upon in writing between the Interstate Commission and the defaulting state. 5. Reinstatement following termination of any compacting state requires both a reenactment of the compact by the defaulting state and the approval of the Interstate Commission pursuant to the rules. Sec. C. Judicial Enforcement The Interstate Commission may, by majority vote of the members, initiate legal action in the United States District Court for the District of Columbia or, at the discretion of the Interstate Commission, in the federal district where the Interstate Commission has its offices, to enforce compliance with the provisions of the compact, its duly promulgated rules and bylaws, against any compacting state in default. In the event judicial enforcement is necessary the prevailing party shall be awarded all costs of such litigation including reasonable attorney's fees. Sec. D. Dissolution of Compact 1. The compact dissolves effective upon the date of the withdrawal or default of the compacting state, which reduces membership in the compact to one compacting state. 2. Upon the dissolution of this compact, the compact becomes null and void and shall be of no further force or effect, and the business and affairs of the Interstate Commission shall be concluded and any surplus funds shall be Page 12 Tex. Fam. Code § 60.010 distributed in accordance with the bylaws. ARTICLE XI SEVERABILITY AND CONSTRUCTION A. The provisions of this compact shall be severable, and if any phrase, clause, sentence, or provision is deemed unenforceable, the remaining provisions of the compact shall be enforceable. B. The provisions of this compact shall be liberally construed to effectuate its purposes. ARTICLE XII BINDING EFFECT OF COMPACT AND OTHER LAWS Sec. A. Other Laws 1. Nothing herein prevents the enforcement of any other law of a compacting state that is not inconsistent with this compact. 2. All compacting states' laws other than state constitutions and other interstate compacts conflicting with this compact are superseded to the extent of the conflict. Sec. B. Binding Effect of the Compact 1. All lawful actions of the Interstate Commission, including all rules and bylaws promulgated by the Interstate Commission, are binding upon the compacting states. 2. All agreements between the Interstate Commission and the compacting states are binding in accordance with their terms. 3. Upon the request of a party to a conflict over meaning or interpretation of Interstate Commission actions, and upon a majority vote of the compacting states, the Interstate Commission may issue advisory opinions regarding such meaning or interpretation. 4. In the event any provision of this compact exceeds the constitutional limits imposed on the legislature of any compacting state, the obligations, duties, powers, or jurisdiction sought to be conferred by such provision upon the Interstate Commission shall be ineffective and such obligations, duties, powers, or jurisdiction shall remain in the compacting state and shall be exercised by the agency thereof to which such obligations, duties, powers, or jurisdiction are delegated by law in effect at the time this compact becomes effective. HISTORY: Enacted by Acts 2005, 79th Leg., ch. 1007 (H.B. 706), § 1.01, effective September 1, 2005. NOTES: Editor's Notes. -- Acts 2005, 79th Leg., ch. 1007 (H.B. 706) implemented a significant revision of the original 1955 Interstate Compact on Juveniles, effective on the date that the new version of the compact was adopted by 35 states. The new compact was Page 13 Tex. Fam. Code § 60.010 adopted by the 35th state, Illinois, on August 26, 2008, making the compact and conforming amendments effective on that date. LexisNexis (R) Notes: TREATISES AND ANALYTICAL MATERIALS 1. 5-111 Texas Criminal Practice Guide § 111.04, JUVENILE PROCEEDINGS, ARREST AND PRELIMINARY PROCEEDINGS, Extradition of Juveniles, Texas Criminal Practice Guide. COUNCIL OF STATE GOVERNMENTS—NATIONAL CENTER FOR INTERSTATE COMPACTS Interstate Compacts vs. Uniform Laws Interstate Compacts Interstate compacts are formal agreements between states that have the characteristics of both statutory law and contractual agreements. They are enacted by state legislatures adopting reciprocal laws that substantively mirror one another. Compacts are considered contracts because of the manner in which they are enacted. There is an offer (the presentation of a reciprocal law to state legislatures), acceptance (the actual enactment of the law) and consideration (the settlement of a dispute or creation of a regulatory scheme). Since a state is forbidden by the Constitution to impair the obligation of contracts, it cannot unilaterally renounce an interstate compact except as agreed by the parties. Consequently, the interstate compact is the instrument best suited for the establishment of permanent arrangements among the states. The interstate compact is effective in the formulation of arrangements where a high degree of stability is desired. Interstate compacts are not uniform laws. Unlike laws such as the Uniform Commercial Code, compacts are not subject to unilateral amendment. Nor are interstate compacts mere administrative agreements. As contracts, compacts constitute solemn treaties between the states, which are acting as sovereigns within a constituent union when adopting a compact. Therefore, compacts have standing as both binding state law and a contract between the member states such that no one state can unilaterally act in conflict with the terms of the compact. Any state law in contradiction or conflict with the compact is unconstitutional, absent the reserve of power to the party states. The terms of the compact take precedence over state law even to the extent that a compact can trump a state constitutional provision. In effect, by entering a compact, the party states have contractually agreed that the terms and conditions of the compact supercede state considerations to the extent authorized by the compact relative to any conflicting laws or principles. Advantages of Interstate Compacts • Interstate compacts provide an effective solution that respects fundamental principles of federalism, recognizing the supremacy of the federal government regarding national issues while allowing the states to take appropriate collective action in addressing suprastate problems. Compacts enable the states – in their sovereign capacity – to act jointly and collectively, generally outside the confines of the federal legislative or regulatory process while concomitantly respecting the view of Congress on the appropriateness of joint action. The interstate compacts can effectively preempt federal interference into matters that are traditionally within the purview of the states and yet which have regional or national implications. 1 COUNCIL OF STATE GOVERNMENTS—NATIONAL CENTER FOR INTERSTATE COMPACTS • Unlike federal actions that impose unilateral, rigid mandates, compacts afford states the opportunity to develop dynamic, self-regulatory systems over which the party states can maintain control through a coordinated legislative and administrative process. The very nature of an interstate compact makes it an ideal tool to meet the need of cooperative state action in developing and enforcing standards upon the party states. Compacts also enable the states to develop adaptive structures that can evolve to meet new and increased challenges that naturally arise over time. In short, through the compact device, states acting jointly can control not only the solution to a problem but also shape the future agenda as the problem changes. The closer the coordination between the various elements of the cooperative undertaking, the more necessary is the use of the compact approach. • Interstate compacts can be structured to respect the balance of power among federal, state, and local interests. While many regulatory compacts provide power to regulate cross-border problems, they can be structured to do so in a manner that preserves national interests. To a large extent, the Compact Clause requiring congressional consent to compacts that impact federal interests ensures that federal concerns are at the forefront of compact construction while simultaneously enabling states to maintain functional and regulatory control over an issue. Approval by Congress provides states with the authority to regulate in an area which would otherwise be unavailable to the state. • Interstate compacts can broaden a state’s parochial focus by allowing states to act collectively and jointly to address regional and national problems. Making decisions based on the state line boundaries can be problematic because boundaries do not necessarily reflect natural or logical divisions to supra-state problems. State legislatures and state regulators generally do not make decisions that are likely to restrict their own citizens’ activities based on the need to protect a neighboring state’s interests. Consequently, an interstate compact provides the opportunity to make decisions across state boundaries without resorting to federalization, which has limitations in resolving cross-boundary problems. • Interstate compacts provide party states with a predictable, stable and enforceable instrument of policy control. The contractual nature of compacts ensures their enforceability on the party states. The fact that compacts cannot be unilaterally amended ensures that party states will have predictable and stable policy platform for resolving problems. By entering into an interstate compact, each party state acquires the legal right to require the other states to perform under the terms and conditions of the compact. Disadvantages of interstate compacts The principle disadvantage of compacts may be characterized as twofold: • The long negotiations and arduous course they must run before becoming effective; and 2 COUNCIL OF STATE GOVERNMENTS—NATIONAL CENTER FOR INTERSTATE COMPACTS • The ceding of traditional state sovereignty, particularly as required by several modern administrative compacts. The very purpose of an interstate compact is to provide for the collective allocation of governing authority between party states, which does not allow much room for individualism. The requirement of substantive “sameness” prevents party states from passing dissimilar enactments notwithstanding, perhaps, pressing state differences with respect to particular matters within the compact. To the extent that a compact is used as a governing tool, they require, even in the boundary compact context, that party states cede some portion of their sovereignty. Uniform Laws The concept of uniformity is most familiar in connection with the work of the National Conference of Commissioners on Uniform State Laws. That organization has accomplished much by preparing uniform laws and offering them for consideration by the states. A number of these laws, especially in the commercial field, have achieved wide adoption over a period of years. However, uniformity attained in this way is subject to dissipation from two directions: 1. Uniformity can be impaired by the unilateral action of particular state legislatures in amending a uniform statute so that it is no longer uniform or in introducing non- uniform provisions when the act is being initially considered by the legislature. 2. Differing interpretations of provisions of uniform acts can impair the degree of uniformity actually achieved. The ordinary law, for all its identity in language with the laws of other states, is only a simple statute organically unconnected with the statutes of other jurisdictions. Accordingly, the courts in different states can and sometimes do interpret identical provisions differently. Since the highest court of each state is the final authority on the meaning of the statutes of its own state, there is no satisfactory way to achieve a reconciliation of divergent interpretations. If uniform provisions are embodied in a compact, no state could subsequently destroy this uniformity by unilateral amendment of its own statute except to the extent that such variation might be permitted by specific provision of the compact. To some degree, this limitation of a state's freedom to alter its law unilaterally may raise questions. However, if the virtue of a uniform measure is to be found in the identity of the law from state to state, the superior stability produced by a compact should be considered. 3 BILL ANALYSIS C.S.H.B. 3 By: Keffer, Jim Ways & Means Committee Report (Substituted) BACKGROUND AND PURPOSE The Texas Supreme Court held in Neeley v. West Orange-Cove CISD, that the state school finance system relies on revenues derived from a tax that, in effect, is a state property tax prohibited by the Texas Constitution. The court required the legislature to correct the constitutional violation by June 1, 2006. Since many Texas businesses that receive liability protection from the State do not pay the franchise tax, C.S.H.B. 3 raises state revenue by amending Chapter 171, Tax Code, to close the loopholes in the current franchise tax by extending coverage to certain active businesses. At the same time, it broadens the tax base and lowers the rate. RULEMAKING AUTHORITY It is the committee's opinion that rulemaking authority is expressly granted to the comptroller of public accounts in SECTION 1, SECTION 3, and SECTION 15 of the bill. ANALYSIS DEFINITIONS New Section 171.0001, Tax Code, as added by SECTION 1 of the bill, defines new terms, including "affiliated group," "combined group," "controlling interest," "retail trade," "wholesale trade," and "unitary business." The Internal Revenue Code definition is updated to reflect the 1986 code in effect for the federal tax year beginning January 1, 2006. New Section 171.0002, Tax Code, as added by SECTION 1 of the bill, defines a taxable entity. A taxable entity includes a partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity. The term includes a combined group. This section also provides that a joint venture does not include joint operating or co-ownership arrangements meeting the requirements of Treasury Regulation Section 1.761-2(a)(3) that elect out of federal partnership treatment as provided by Section 761(a), Internal Revenue Code. Taxable entity does not include: 1. sole proprietorships; 2. general partnerships owned entirely by natural persons; 3. certain passive entities; and 4. certain entities currently exempt from the franchise tax. In addition, several other types of entities are excluded from the definition, including grantor trusts, estates of natural persons, escrows, passive investment partnerships, family limited partnerships where at least 80 percent of the interests are held by members of the same family and that are passive investment partnerships, certain non-business passive entity trusts, real estate investment trusts (REITs), but only if the REIT does not own real estate directly (other than real estate occupied for business purposes), and real estate mortgage investment conduits (REMICs). C.S.H.B. 3 79(3) New Section 171.0003, Tax Code, defines a "passive entity". A "passive entity" is a general or limited partnership or trust, other than a business trust, where at least 90 percent of federal gross income is from investments, including dividends, interest, distributive shares of partnership income, capital gains, and royalties. A passive entity also cannot receive more than 10 percent of its federal gross income from conducting an active trade or business. The bill also creates an active trade or business test to determine whether a passive entity is a taxable entity. RATES As provided in Section 171.002, Tax Code, as amended by SECTION 1 of the bill, the tax rate is one percent per year of privilege period of taxable margin, except that the rate for taxable entities primarily engaged in retail or wholesale trade is 0.5 percent per year of privilege period of taxable margin. This section also set out a test for determining whether a taxable entity is primarily engaged in retail or wholesale trade. EXEMPTIONS A taxable entity with $300,000 or less in total revenue is exempt from the tax. Under new Section 171.006, Tax Code, as added by SECTION 1 of the bill, the exemption would be indexed to an inflation index every two years beginning in 2009 on January 1 of each odd- numbered year. The Comptroller may adopt rules to make the determination required by Sec. 171.006. SECTION 2 of the bill extends current franchise tax exemptions in Subchapter B, Chapter 171, Tax Code, for corporations to other qualified noncorporate entities. BASIC TAX COMPUTATION The basic formula that a taxable entity uses to calculate the amount that the rate of the tax applies to is to start with its total revenue and choose to deduct either employee compensation, including health, retirement, and workers’ compensation benefits, or cost of goods sold, computed in a manner similar to that used for federal income tax purposes. This amount is capped at 70 percent of the taxable entity's total revenue. Total revenue is determined under Section 171.1011, Tax Code, as added by SECTION 3 of the bill in a number of ways. For instance, for a corporation, total revenue equals line 1c plus lines 4- 10 on Internal Revenue Service (IRS) Form 1120 and subtracting other specified amounts. For partnerships, total revenue equals line 1c plus lines 4-7 on IRS Form 1065, plus lines 2-11 on IRS Form 1065, Schedule K and subtracting other specified amounts. The total revenue for a non corporation or partnership is determined in a manner substantially equivalent to the amount for subdivision (1) or (2) determined by rules that the comptroller shall adopt. The comptroller shall also adopt rules to accomplish the legislative intent prescribed by Section 171.1011 (a) or (b). The comptroller shall adopt rules governing the computation of the actual cost to a health care provider of any uncompensated care provided under Section 171.1011(n)(2) and the audit requirements related to the computation of those costs. Certain exclusions from total revenue are allowed. Cost of goods sold is determined under Section 171.1012, Tax Code, as added by SECTION 3 of the bill. The term “goods” is defined as real or tangible personal property sold in the ordinary course of business and does not include services sold. Cost of goods sold includes all direct costs of acquiring or producing goods, including the cost of labor and materials. It also includes indirect overhead costs related to the goods, but not to exceed four percent of the taxable entity’s total indirect overhead costs. Cost of goods sold does not include selling, distribution, outbound transportation, and advertising costs, to name a few, nor does it include interest, income taxes, and officers’ compensation. If the taxable entity is a lending institution, the entity may subtract as a cost of goods sold an amount equal to interest expense. C.S.H.B. 3 79(3) Compensation is determined under Section 171.1013, Tax Code, as added by SECTION 3 of the bill. The deduction for wages and cash compensation (excluding benefits) is capped at $300,000 per employee (including officers, directors, owners, and partners) and includes wages, salaries, stock options, and net distributive income from entities treated as S corporations and partnerships for federal income tax purposes, but only if the person receiving the distribution is a natural person. The $300,000 cap would be indexed to an inflation index every two years in the same manner used for the small business exemption. The compensation deduction also includes the cost of health, retirement, and workers’ compensation benefits. COMBINED REPORTING Combined reporting and affiliated groups are provided for under Section 171.1014, Tax Code, as added by SECTION 3 of the bill. Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report. Entities with 80 percent or more of property and payroll assigned to locations outside the U.S. would not be included in the combined report. The combined group would be considered a single taxable entity and must elect the same deduction from total revenue. Special procedures govern how a combined group determines its total revenue, cost of goods sold, and compensation. APPORTIONMENT Multistate businesses would determine their Texas portion of the tax base using the same apportionment calculation currently used for franchise tax. The apportionment calculation is the ratio of Texas gross receipts to total gross receipts from the entire business. Receipts excluded from total revenue may not be included in either the receipts of the taxable entity from its business done in Texas or from its entire business. Special apportionment procedures apply to a combined group. CONFORMING CHANGES SECTIONS 4-13 of the bill make conforming changes to Chapter 171, Tax Code, needed to replace the current franchise tax with the reformed tax. For example, the term “corporation” is changed to “taxable entity” throughout the bill, references to the current tax on either earned surplus or taxable capital are deleted, and certain provisions such as forfeiture of the right to transact business in the state that currently apply only to corporations are extended to all taxable entities. CREDITS SECTION 14 of the bill allows a corporation that has any unused tax credits that accrued under Section 171.111, Tax Code (temporary credit on net taxable earned surplus), repealed by the bill, and that the corporation accumulated before the effective date of the bill to claim those unused credits as if Section 171.111, Tax Code, continued in effect. SECTION 15 of the bill repeals all existing franchise tax credits: Subchapter L (wages paid to Texas Department of Criminal Justice work program participants), Subchapter M (wages paid to certain children committed to Texas Youth Commission), Subchapter N (establishing day-care center or purchasing child-care services), Subchapter O (certain research and development activities), Subchapter P (certain job creation activities), Subchapter Q (certain capital investments), Subchapter R (contributions to before and after school programs), Subchapter S (credits limitation), Subchapter T (wages paid to persons with certain disabilities), and Subchapter U (title insurance holding companies). Taxable entities with unused prior credits that have already been earned may continue to apply those credits for a certain period of time depending on the type of credit, as if the former law were continued in effect. The Comptroller shall adopt rules to administer SECTION 15. C.S.H.B. 3 79(3) SECTION 16 of the bill would allow written agreements between the Texas Department of Economic Development and taxpayers effective before June 1, 2006, concerning franchise tax credits to continue. Taxpayers would be allowed to accrue and claim the credits in the manner provided by the agreement for the specified duration. NOT AN INCOME TAX SECTION 17 of the bill specifies that Chapter 171, as amended by the bill, is not an income tax and Pub. L. No. 86-272 does not apply to the tax. TRANSITION PROVISIONS SECTION 18 of the bill provides that the first annual return and payment under the reformed franchise tax would be due on May 15, 2008, for the reporting period beginning on January 1, 2007, and ending on December 31, 2007. Certain exceptions for reporting periods are allowed for taxpayers that have accounting periods that do not correspond to the calendar year. SECTION 19 of the bill requires certain large taxable entities to file an information report with the comptroller by February 15, 2007, including the amount of revenue the reformed franchise tax would have generated in fiscal 2006 if the new law had been in effect. APPEAL SECTION 20 of the bill requires that a suit brought by a taxable entity contending that the reformed franchise tax is unconstitutional must be brought in a district court in Travis County. The judgment of the district court may be reviewed only by direct appeal to the supreme court. APPROPRIATION SECTION 21 of the bill appropriates $2 million out of the general revenue fund to the comptroller of public accounts for the biennium ending August 31, 2007, to implement the tax changes made by the bill and for audit and enforcement activities. SECTION 22 of the bill provides that, except as provided by SECTION 23 of the bill, the bill takes effect January 1, 2008. Those sections of the bill that refer to Section 23 take effect June 1, 2006, if the bill receives the necessary vote to take immediate effect, or September 1, 2006, if it does not. EFFECTIVE DATE The bill takes effect January 1, 2008, except that a SECTION of the bill that provides that it takes effect as provided by SECTION 23 that takes effect June 1, 2006, if the bill receives the necessary vote to take immediate effect. If the bill does not receive the necessary vote for immediate effect that SECTION takes effect September 1, 2006. COMPARISON OF ORIGINAL TO SUBSTITUTE The substitute varies from the original in the following ways: • makes changes in relation to the definition of passive entity in Section 171.0003, Tax Code; • adds a new Section 171.1011(n-1), Tax Code, requiring the comptroller of public accounts to adopt rules relating to the computation and requirements of certain health care costs that are subtracted from a health care provider's total revenue ; • makes clarifying changes in Section 171.1012(i), Tax Code, in relation to the computation of certain cost of goods sold; • makes clarifying changes in relation to the definition of "wages and cash compensation" in Section 171.1013(a), Tax Code; • makes changes in relation to apportioning margin for receipts derived from transactions between individual members of a combined group in Section 171.1055(b), Tax Code; C.S.H.B. 3 79(3) • provides that the written agreement referenced in Section 16 of the bill is an agreement between the taxpayer and the Texas Department of Economic Development or its successor; • makes changes in relation to the exclusion of certain flow-through funds from total revenue in Section 171.1011(f). • adds a new Section 171.1011(g-3) to specify the funds which a taxable entity that provides legal services is required to exclude from its revenue; and • makes grammatical and citation corrections throughout the original bill. C.S.H.B. 3 79(3) HOUSE HB 3 RESEARCH J. Keffer, et al. ORGANIZATION bill analysis 4/24/2006 (CSHB 3 by J. Keffer) SUBJECT: Restructuring the Texas franchise tax COMMITTEE: Ways and Means — committee substitute recommended VOTE: 7 ayes — J. Keffer, Villarreal, Grusendorf, Luna, Ritter, Smithee, Woolley 1 nay — Paxton 1 absent — Edwards WITNESSES: For — Bill Allaway, Texas Taxpayers and Research Association; John Hawkins, Texas Hospital Association; Paul Kennedy, Texas Dental Association; Scott Norman, Texas Association of Builders; Karen Reagan, Texas Federation of Drug Stores; Steve Stagner, Texas Council of Engineering Companies; Heather Vasek, Texas Association for Home Care, Inc.; Kristie Zamrazil, Texas Pharmacy Association Against — Hayes Fuller, Texas Association of Defense Counsel On — Karey Barton, James LeBas, Texas Tax Reform Commission; Chuck Courtney, Texas Retailers Association; John W. Fainter, Jr., Association of Electric Companies of Texas, Inc.; Jay Harvey, Texas Trial Lawyers Association; Steve Kuntz, Glen Rosenbaum, Law Firm Legislative Coalition; David C. Palmer, International Council of Shopping Centers BACKGROUND: Under Tax Code, ch. 171, the state levies the corporate franchise tax, Texas’ primary business tax, in exchange for granting the privilege (franchise) of doing business in Texas. The tax applies only to for-profit corporations and, since 1991, to limited liability companies (LLCs) chartered or organized in Texas, as well as to foreign corporations and LLCs based or doing business in the state. As such, franchise taxpayers include professional corporations, banks, savings and loan associations, state-limited banking associations, and professional LLCs, but not limited partnerships, sole proprietorships, or non-corporate associations. Insurance and open-end investment companies (e.g., mutual funds) and most non-profit corporations are excepted, as are corporations with gross HB 3 House Research Organization page 2 receipts less than $150,000 and firms owing $100 or less in tax. Major exemptions and exclusions include interest earned on federal securities, business loss carryover, and officer/director compensation paid by companies with 35 or fewer shareholders. A dual calculation method determines the amount of tax liability. Taxpayers pay the greater of a 0.25 percent tax on taxable capital (assets’ net worth) or a 4.5 percent tax on earned surplus (modified net income). The income component generates the most revenue and is paid by about 75 percent of franchise taxpayers. In fiscal 2004-05, the franchise tax made up about 7.5 percent of state tax revenue, generating more than $4 billion. For fiscal 2006-07 the tax is projected to increase by 17.2 percent to $4.7 billion, including $2.3 billion in fiscal 2006 and $2.4 billion in fiscal 2007. Franchise tax payments are due on May 15 of each year, and all revenue goes into the general revenue fund. In recent years, some large Texas-based firms have reorganized as partnerships under state law. As such, they no longer must pay the franchise tax. Examples include Dell Computer and SBC Communications (now AT&T). Firms accomplish this by forming wholly owned out-of- state subsidiaries, usually in tax-friendly states such as Delaware – hence, the resulting entity has been nicknamed “the Delaware sub.” Typically, the subsidiaries enter into limited partnerships wherein the general corporate partner owns 0.1 percent of the operating assets in Texas and the limited partners own 99.9 percent. Under the comptroller’s administrative rules, foreign corporations acting as limited partners are not considered to be doing business in Texas for tax purposes and thus are not subject to the franchise tax. The franchise tax liability of the general partner corporation typically is zero because its 0.1 percent interest fails to generate total receipts greater than the $150,000 income threshold. A second accounting method used by some large firms is termed the “Geoffrey” loophole, named after the Toys R Us Inc. giraffe mascot. Under this method, corporations establish a subsidiary in another state that charges the Texas operations for the use of certain intangible assets, such as corporate trademarks. This method diverts money out of the Texas operations, and the franchise tax is applied only to what remains. HB 3 House Research Organization page 3 Insurance Code, ch. 4 imposes insurance premium taxes on the amount of gross premiums written by insurance companies, with the rates varying depending on the type of insurance. In fiscal 2004-05 the state collected $2.4 billion in insurance premium taxes. DIGEST: CSHB 3 would establish a new mechanism for calculating the franchise tax and revise the base of the entities subject to the tax. The revised tax would take effect January 1, 2008. Overview of the revised franchise tax. Under CSHB 3, the base of taxable entities subject to the revised franchise tax would include businesses in Texas that enjoy state liability protection. The bill would exclude sole proprietorships, general partnerships that were owned directly by individual persons, certain unincorporated passive entities that only receive a limited amount of income from active business, and entities such as non-profit organizations that currently are exempt from the franchise tax. Businesses with no more than $300,000, indexed for inflation, in total revenue would be exempt from the tax, as would businesses that owed less than $100 under the tax. The revised tax would be computed by determining a taxable entity’s total revenue. From this amount the entity could choose to deduct either its cost of goods sold or total compensation, up to $300,000 per employee, indexed to inflation. If the entity’s margin after making its deduction was greater than 70 percent of its total revenue, the business would be taxed on only 70 percent of its total revenue. The business then would apportion to Texas the amount of revenue from business done in this state and would subtract any other allowable deductions to determine the entity’s taxable margin. Once the business’s taxable margin had been determined, a rate of 1 percent would be applied to that margin for all taxable entities that were not engaged in retail or wholesale trade. For a taxable entity that was engaged primarily in retail or wholesale trade, a rate of 0.5 percent would be applied to the entity’s taxable margin. Taxable entities. CSHB 3 would define “taxable entity” as a partnership, corporation, banking corporation, savings and loan corporation, limited liability company, business trust, professional association, joint venture, joint stock company, holding company, or other legal entity. The definition of taxable entity would not include: HB 3 House Research Organization page 4 • a sole proprietorship; • a non-corporate general partnership (i.e., a partnership directly owned by one or more individuals); or • a passive entity. The definition of taxable entity also would exclude an entity currently exempt from the existing franchise tax. This would include insurance companies required to pay insurance premium taxes, non-profit corporations, cooperatives, and credit unions. In addition, the definition of taxable entity would exclude an entity that was not a corporation but that would qualify for exemption under current law if it were a corporation, such as a nonprofit organization. A taxable entity would not be subject to the new tax if it owed less than $100 under the tax or if the entity’s total revenue was less than or equal to $300,000. On January 1 of each odd-numbered year beginning in 2009, this $300,000 threshold would be recalculated based on the percent change in the consumer price index during the preceding fiscal biennium, and the resulting amount would be rounded to the nearest $10,000. Exemption for passive entities. Passive entities would be exempt from the new franchise tax. The bill would define “passive entity” as an entity that was a general or limited partnership or trust, other than a business trust, at least 90 percent of whose income came from investments, excluding rent or income received from mineral properties that were under a joint operating agreement in which a member of the group was the operator under that agreement. No more than 10 percent of the passive entity’s federal gross income could come from active business. A royalty interest or non-operating working interest in a mineral right would not be considered “active business.” Compensation payment to individuals for financial and legal services that were necessary for the entity’s operation also woul d not constitute active business. The bill would establish a test to determine whether an entity was conducting active business. Under the test, a business would be considered to have conducted active business if the entity’s activities included operations that earned income and if the entity performed active management and operational functions. Activities performed for the entity by an individual such as an independent contractor would be considered activities performed by the entity if the individual performed services that constituted some part of the entity’s business. If an entity used its assets in HB 3 House Research Organization page 5 the business of a related entity, then that activity would be considered active business. Definition of total revenue. A taxable entity’s tax liability under CSHB 3 would be determined by computing the entity’s “taxable margin.” An entity’s “total revenue” would be the base from which the entity’s taxable margin was calculated. Upon determining an entity’s total revenue, the entity would deduct either cost of goods sold or compensation to determine its taxable margin. For a corporation, partnership, or other taxable entity, total revenue would be the sum of gross receipts and other income such as dividends, interest, rents, royalties, and capital gain income. From this amount, the entity would subtract items such as bad debt, foreign royalties and dividends, deductions allowed by the Internal Revenue Service, and distributive income from partnerships, limited liability corporations, and “S” corporations, and certain other amounts. If a taxable entity had an interest in a passive entity, that taxable entity would include its share of income from the passive entity, but only to the extent that the passive entity’s net income was not generated by a separate taxable entity. Total revenue exclusions. The bill would enumerate several expenses and “flow-through funds,” or funds passed through a taxable entity to another entity, that would be excluded from the total revenue of a taxable entity. This would include specific exclusions relevant to legal services entities and staff leasing entities. A taxable entity belonging to an affiliated group could not exclude such payments if they were made to another member of that group. An amount excluded from total revenue could not be deducted as cost of goods sold or compensation in a taxable entity’s determination of its taxable margin. Dividends from federal obligations and bonds would be excluded from total revenue. Health care deduction. Health care providers could exclude some payments from total revenue for the purposes of calculating their business tax obligation. Providers could exempt the total amount of payments from Medicaid, Medicare, the Children’s Health Insurance Program (CHIP), workers’ compensation, and the TRICARE military health system. In HB 3 House Research Organization page 6 addition, the cost of uncompensated services, at rates set by the comptroller, could be excluded from total revenue as long as audit requirements were met. Health care institutions, including hospitals, assisted living facilities, and others, could exempt 50 percent of those amounts. Determination of taxable margin. A taxable entity’s margin would be determined by deducting either cost of goods sold or compensation from the entity’s total revenue. Once a year, an entity would make an election on its annual report to subtract either cost of goods sold or compensation. If the difference after deduction was less than 70 percent of the entity’s total revenue, that amount would be the entity’s margin. If the difference was greater or equal to 70 percent of the entity’s total revenue, the entity’s margin would be 70 percent of its total revenue. Upon determining its margin, an entity would determine its “apportioned margin” by apportioning to Texas the proportion of business performed in this state, according to the bill’s apportionment rules. From this amount, the entity would subtract any other allowable deductions. The result would be the entity’s “taxable margin.” An entity could change its election of which deduction it chose by filing an amended annual report. Cost of goods sold. If an entity chose the cost of goods sold deduction in determining its taxable margin, the bill would authorize deductions of all direct costs associated with the acquisition or production of goods. These would include costs for such direct expenses as labor, materials, handling costs, storage costs, equipment leasing, depreciation associated with production of the goods, research, design, equipment maintenance, geological exploration costs, taxes stemming from the cost of production, and electricity costs. The bill also would allow for deduction of a contribution to a partnership partially owned by a taxable entity for activities that otherwise would be eligible for deduction as cost of goods sold. This provision would apply only if those costs were related to goods obtained, rather than sold, by the taxable entity. Various other costs also would be deductible, including deterioration and obsolescence of goods, certain preproduction costs, insurance costs related to the goods, utility costs used in production of the goods, quality control costs, and licensing costs. The bill would specify HB 3 House Research Organization page 7 several costs that could not be included in cost of goods sold, including officer compensation. Indirect and administrative overhead costs could be subtracted if the costs were allocated to the production of the goods. Such deductions could not exceed 4 percent of the entity’s total indirect and administrative overhead costs. A lending institution could deduct interest expenses as cost of goods sold. Compensation deduction. If an entity chose the compensation deduction in determining its taxable margin, the bill would authorize the deduction of wages and cash compensation and benefits for each employee of an entity. Wages and cash compensation would include the amount entered in the Medicare wages and tips box on an employees’ W-2 tax form, as well as net distributive income accruing to a natural person from partnerships, trusts, limited liability corporations, and “S” corporations. Stock awards and options also would qualify for deduction as wages and cash compensation. An entity could deduct no more than $300,000 in wages and cash compensation per employee. On January 1 of each odd-numbered year beginning in 2009, the $300,000 cap on the wages and cash compensation deduction would be adjusted based on the percent change in the consumer price index during the preceding fiscal biennium, and the resulting amount would be rounded to the nearest $10,000. In addition to the wages and cash compensation deduction, an entity could deduct all benefits provided to its employees, including workers’ compensation, health care, and retirement benefits. The benefits deduction would not be subject to the $300,000 cap. Calculation of tax. Under the bill, the revised franchise tax would be computed by applying one of two rates to a taxable entity’s taxable margin, depending on the type of business activity in which the taxable entity primarily was engaged. If a taxable entity primarily was engaged in retail or wholesale trade, a rate of 0.5 percent would be applied to the entity’s taxable margin. If the entity was not engaged primarily in retail or wholesale trade, a rate of 1 percent would be applied to the entity’s taxable margin. HB 3 House Research Organization page 8 An entity primarily would be engaged in retail or wholesale trade if: • the total revenue from its retail and wholesale trade activities was greater than its total revenue from other activities; • less than 50 percent of its total revenue in retail or wholesale trade came from the sale of products it produced (excluding eating and drinking establishments); and • the entity did not provide utilities, including telecommunications, electricity, or gas. Combined reporting. Under CSHB 3, a group of two or more taxable entities would have to report as a single entity if the entities were part of an affiliated group as defined by a common ownership test and were engaged in a unitary business. The combined group would determine its total revenue and elect to deduct either cost of goods sold or compensation to establish the group’s taxable margin. Apportionment. A taxable entity’s proportion of business performed in Texas would be apportioned to the state to determine the entity’s tax liability. The taxable entity’s margin would be apportioned to Texas by multiplying the entity’s margin by the quotient of: • the taxable entity’s gross receipts from business done in Texas; divided by • the taxable entity’s gross receipts from its entire business. A combined group would include in its gross receipts from business done in Texas the gross receipts of each taxable entity that was a member of the combined group that had nexus in Texas. In determining a combined group’s total gross receipts, the combined group would include the gross receipts of each entity that was a member of the group, whether or not the member had nexus in Texas. In apportioning margin, exclusions taken by an entity when determining the entity’s total revenue could not be included in the entity’s receipts in Texas or receipts from the entity’s entire business. Receipts from the sale of property between one member of a combined group with nexus in Texas and another member of the combined group with nexus outside Texas would be included in the receipts of business done in Texas of the taxable entity, provided that the member that did not have nexus in Texas resold the property to a purchaser in Texas. HB 3 House Research Organization page 9 Penalties. The comptroller would be authorized to forfeit the right of a taxable entity to transact business in the state in the same manner that the comptroller can forfeit a corporation’s corporate privileges under current law. Transition provisions, reporting, and other provisions. A taxable entity that owed the franchise tax under the bill would have to file an initial informational report with the comptroller and an annual report containing information necessary to compute the tax on the taxable entity. The comptroller would require an information report from each of the 1,000 entities that paid the most franchise tax in calendar year 2005 under the existing franchise tax, the 1,000 entities that had the greatest gross receipts in 2005, and the 1,000 entities with the most employees in the state in 2005. This information would be used by the comptroller to report to the governor, the lieutenant governor, and the Legislature the amount of revenue that would have been generated from the entities if the new franchise tax had been in effect on January 1, 2006. This report would be delivered by April 1, 2007. The bill would establish provisions for the transition of existing franchise taxpayers to the new franchise tax established under the bill. Franchise tax credits existing under current law would be repealed. Certain outstanding credits eligible to be carried forward under current law could be applied to an entity’s tax burden under the bill, including those under a written agreement between a taxpayer and the Department of Economic Development. A lawsuit contending that the new franchise tax established under CSHB 3 was unconstitutional would be heard in Travis County district court. The bill specifies that the franchise tax as amended by CSHB 3 is not an income tax and federal law (Pub. L. No. 86-272) concerning state taxation of income from interstate commerce does not apply. Revenue from the tax imposed under the bill would go into the state’s general revenue fund. The bill would appropriate $2 million in general revenue to the comptroller for fiscal 2006-07 for audit and enforcement activities. The tax imposed under the bill would take effect January 1, 2008, and would apply to reports due on or after that date. HB 3 House Research Organization page 10 The bill would take effect June 1, 2006, if finally passed by a two -thirds record vote of the membership of each house. Otherwise, it would take effect September 1, 2006. SUPPORTERS CSHB 3 would replace the current franchise tax, which has become a SAY: voluntary and divisive corporate income tax, with a fairer, more broadly based business levy. The current franchise tax no longer tracks growth in the state’s economy, mainly because the burgeoning service sector uses business structures not subject to the tax. Avoidance has become commonplace, especially among large corporations that have restructured themselves as out-of-state partnerships to take advantage of the so-called “Delaware sub.” Closing that loophole is made problematic by legitimate out-of-state partnerships doing business in Texas that never have paid the tax. Even if that problem were corrected, the franchise tax has other loopholes. Rather than try to plug this leaky fiscal dike, the state should scrap the franchise tax for a reformed franchise tax based an entity’s margin — a measure of revenue that allows for the deduction of certain business costs. This would raise about $3.4 billion in state revenue in fiscal 2008, and more than $4 billion annually by fiscal 2011, according to the Legislative Budget Board (LBB). A broad-based, low-rate tax based on margins would track economic growth and help the state deal with inflation, providi ng a stable and predictable stream of revenue. The reformed franchise tax or margins tax would balance the state’s revenue needs with the cost of doing business while providing new state revenue that could be used to reduce school property taxes, which are burdensome for Texas families and economically inefficient for Texas businesses. Even though Texas would collect more revenue from businesses under the new tax, businesses would benefit from a significant reduction in property taxes. HB 2 by Pitts, also on today’s calendar, would dedicate to school property tax reduction any increased revenue over current rates generated by a new broad-based business tax enacted during the third called session. By taxing all entities that enjoy the benefit of liability protection from the state, CSHB 3 would return the franchise tax to its original intent. Since liability protection was extended to partnerships in the 1980s, many businesses have been able to reorganize to avoid the corporate franchise HB 3 House Research Organization page 11 tax. Although they contribute nothing to franchise tax revenues, these businesses benefit from the state’s educational system and from other state services. CSHB 3 would correct this disparity by covering service-sector businesses more effectively and would track growth within the Texas economy much more accurately than does the current franchise tax. Texas has a growing population with expanding needs, and CSHB 3 presents a golden opportunity to establish a stable revenue source to pay for state services. A business’s margin as defined under CSHB 3 would be a more appropriate base for the franchise tax than the current base, which requires a firm to pay taxes on the greater of either earned surplus or taxable capital. The bill would provide businesses with a choice of deducting either cost of goods sold or compensation, a feature that would enable businesses with very different structures, expenses, and profit margins to thrive under the tax. While a manufacturing firm that produces goods for sale likely would choose to deduct the costs associated with producing those goods, a service-based business would be able to deduct its primary expense, which is employee wages. The compensation deduction would be a particularly desirable aspect of the reformed franchise tax because a business could reduce its tax liability by offering higher salaries, hiring more employees, and expanding health care benefits. By imposing a lower tax rate of 0.5 percent on retailers and wholesalers, CSHB 3 would take into account the smaller profit margins under which these firms typically operate. While a retailer or wholesaler may collect a large amount of total revenue relative to other entities, only a small percentage of that amount may actually be profit. Since the tax under the bill would use total revenue as part of its base, it would be appropriate to tax firms with historically smaller margins at a lower rate, and doing so would bring the tax liability of those firms into line with other sectors. The bill would use a widely accepted definition of total revenue based on federal corporate and partnership income tax definitions while excluding foreign income and revenue that already had been taxed elsewhere. These provisions are necessary to avoid the double taxation of some types of receipts. The bill’s combined reporting provisions would ensure that entities were not double-taxed on joint assets and also would prevent entities from reorganizing into untaxed structures similar to those that exist under the current franchise tax. HB 3 House Research Organization page 12 The only tax that would allow a firm to escape taxation when it took a loss would be a tax on profit. Due to the constitutional prohibition against taxation of income, a business tax on the profits of partnerships would be unconstitutional without approval by the voters in a statewide referendum. Thus, the state must choose between taxing partnerships or profit, because it cannot do both. The choice of deducting cost of goods sold or compensation provided to a taxable entity would establish the entity’s taxable margin, a concept that is entirely dissimilar to gross receipts. CSHB 3 would establish the most fair and equitable business tax under the limitations provided by the Texas Constitution. By excluding sole proprietorships, the bill would avoid conflict with the constitutional prohibition against an income tax. The attorney general has indicated that this plan would not constitute an income tax and likely would be upheld in court. The bill would provide a reasonable 70 percent limit on the amount of a business’s total revenue that would be subject to taxation. This limit would be fair to a business whose cost of goods sold or compensation deduction did not provide a meaningful limitation on the business’s taxable margin. In addition, a generous small business exemption in the bill would allow a business with less than $300,000 in total revenue to remain exempt from taxation. This exemption would be twice the exemption under the current franchise tax and would be indexed to inflation. The bill would retain Texas’ favorable rules for apportionment of revenue. Under these provisions, Texas isolates and taxes in a straightforward manner business activity done only within the state, an approach favored by many firms that operate in multiple states. The bill would eliminate the unfair “throwback rule,” under which sales of items shipped from a corporation doing business in Texas to a state in which the corporation is not subject to taxation are “thrown back” to Texas and taxed under the franchise tax. Corporations can avoid taxation by locating in a state without a throwback rule and delivering their goods to Texas, escaping taxation in both Texas and the origination state. Repealing the throwback rule would allow Texas to provide an incentive for corporations to locate in the state. The credit for providers of health care services under the state and federally funded programs would serve an important policy goal of HB 3 House Research Organization page 13 encouraging provider participation in these programs. While for-profit health care providers should be required to pay the new tax, the state also should recognize that compensation rates for government-funded programs are very low. Medicaid and Medicare, for example, pay providers between 40 percent and 60 percent of the reimbursement paid by commercial plans. Thus, the bill would ensure that providers who take these partially funded cases would not be taxed excessively. The offset of uncompensated care costs also would encourage health care providers and institutions to continue to serve as a vital part of the Texas safety net, which is very important considering that 25 percent of the state’s population is uninsured. OPPONENTS CSHB 3 would launch an unprecedented and untested business tax scheme SAY: in Texas that is unlike any other in the nation, with unknown economic and legal consequences for the state. By bringing in thousands of firms that currently have no tax liability, the bill could cause a substantial disruption in the state’s economy, potentially undermining the impressive growth in revenue that the sales tax and existing franchise tax have yielded in the last year. Lawsuits challenging the tax would be inevitable, and the resulting legal process could throw the state’s revenue system into question. With all of the uncertainties facing the Texas economy and school finance system, now simply is not the time to adopt a radically revised business tax. With more than $8 billion in surplus revenue available, it is precisely the wrong time to embark on a risky and massive expansion of the business tax. All taxes have economic consequences, and all business taxes ultimately are passed on to consumers in the form of higher prices and lower wages. According to the LBB, CSHB 3 would represent an increase of close to 50 percent in fiscal 2008-09 over revenues that wo uld have been collected under the existing franchise tax. While some businesses would profit from a reduction in property tax liability, many businesses undoubtedly would be worse off under the proposed system. Rather than expanding business taxes to pay for a reduction in school property taxes, the Legislature should expend the balance of the state surplus on property tax reduction and reduce spending on state services to eliminate over- taxation in the future. By using total revenue as the base in calculating the tax, the revised franchise tax under CSHB 3 essentially would be a modified gross receipts tax — an unfair tax that does not take into account a taxpayer’s ability to HB 3 House Research Organization page 14 pay. Even if a business lost money, that entity’s taxable margin would be based on the total revenue of the business. Although a business could deduct either cost of goods sold or compensation, there would be no guarantee that the taxable liability of the entity reasonably was related to an entity’s income. It is possible that an entity that lost money in a given year still could be forced to pay tax to the state. Even if the Legislature significantly reduced school property taxes, CSHB 3 likely would represent a substantial increase in the tax liability of private industry in Texas and would mark a shift in the tax burden from individuals to businesses. The Comptroller’s Office has estimated that the revised franchise tax on average would translate to a levy of 7 percent of business net income. This rate would be substantially higher than the 4.5 percent rate on earned surplus under the existing franchise tax, and the tax would allow for too few deductions. Every industry is unique, and many forms of business have specific costs and assets that might not work under the broad outlines contained in this bill. Offering an exclusion for all government-funded health care programs would fail to recognize that rates for the same service may vary widely among programs and that some providers may be compensated at near market rates. For example, TRICARE may pay more for a service than Medicaid. A better way to encourage participation in government-funded programs would be to adequately reimburse for services in programs under the state’s control, such as Medicaid, CHIP, and workers’ compensation. OTHER A broad-based business tax should apply to all businesses, regardless of OPPONENTS the manner in which they choose to organize. Many sole proprietorships SAY: and partnerships that generate a great deal of business would remain untaxed under CSHB 3. Leaving some organizations untaxed would create an incentive for businesses to reorganize into untaxed entities. In addition, the state would be forgoing a substantial amount of revenue by excluding passive entities from taxation. These entities should be taxed as well, although perhaps at a lower rate. Certain service-sector business such as law firms have almost no cost of goods sold as defined under the bill and would be left with no choice other than the compensation deduction. Because compensation would be capped at $300,000, the taxable margin of many of these firms would be higher than the average margin on which other businesses were taxed. For HB 3 House Research Organization page 15 service-sector professions that fall into this category, additional deductions should be authorized, such as a higher cap on the compensation deduction or an allowance for such expenses as rent, utilities, or employer Social Security contributions. Not all retailers operate under small profit margins, and it would be inappropriate to group them all together and allow them to be taxed at half the rate of other businesses. The bill should provide some test or further refinement of the definition of retailers and wholesalers who would be eligible to apply the 0.5 percent tax rate to the taxable margin. For the sake of equity, the bill should make an allowance for firms whose revenue structures more closely resemble those of firms taxed at the rate of 1 percent. Under Article VIII, Sec. 24(a) of the Texas Constitution, no law enacted by the Legislature could impose a tax on a person's net income, including a person's share of partnership and unincorporated association income, unless a majority of Texas voters approved such a tax in a statewide referendum. CSHB 3 likely would run afoul of this prohibition, gi ven that revenue from unincorporated partnerships would be taxed under the bill. Because a tax would be levied on the margins of unincorporated partnerships from which the income of individuals was derived, a court could find the revised franchise tax under CSHB 3 to be in violation of the personal income tax prohibition. If health care providers are to be granted a tax credit for the cost of uncompensated care under CSHB 3, it only would be fair to offer a similar credit to attorneys who provide pro bono legal services. Just as the health care credit would encourage participation in state and federal health care programs, a credit for attorneys would create an incentive for lawyers to provide vital free and reduced cost legal services to low-income Texans. NOTES: According to the Legislative Budget Board, CSHB 3 would cost the state $2 million in general revenue-related funds in fiscal 2007 due to an appropriation to the comptroller for the performance of audit and enforcement activities. In fiscal 2008-09 the bill would result in a net increase of $6.95 billion in general revenue-related funds. HB 3 as introduced would not have allowed deductions for health care providers of payments from state and federal health care programs and costs of uncompensated care. The committee substitute also made limited HB 3 House Research Organization page 16 changes to sections dealing with passive entities, cost of goods sold, wages and cash compensation, and apportionment. On April 21, the House adopted a Calendars Committee rule requiring all amendments to HB 3 be filed by 5 p.m. Saturday and their fiscal impact be determined by the LBB with assistance from the Comptroller's Office.