Blangers v. Dept. of Revenue & Taxation

JOHNSON, Justice.

This is an income tax case. The primary issue is whether the State of Idaho may impose an income tax on nonresident railway employees on nonstop transcontinental freight trains traveling across the panhandle of Idaho. We agree with the conclusion of the trial court that the laws of Idaho require the employees to pay Idaho income tax, but reverse the decision of the trial court upholding the constitutionality of the income tax on the earnings of these nonresident employees. We conclude that the Idaho law imposing a tax on the income of these employees while they are traveling through Idaho violates the due process clause of the fourteenth amendment and the commerce clause (art. I, § 8, cl. 3) of the United States Constitution.

I.

Facts

Burlington Northern Railroad Company (BN) a federal land grant railroad, employed engineers, brakemen, firemen and conductors (the train crews), all of whom were residents of the state of Washington and not Idaho residents or domiciliaries. In the course of their employment with BN the train crews occupied nonstop transcontinental freight trains (the trains) traveling between Spokane, Washington, and Whitefish or Missoula, Montana, and back to Spokane. The mileage and time spent in Idaho constituted less than fifty percent of the total mileage and time of each of the members of the train crews while they were employed by BN.

The trains were “through” trains that did not perform any switching in Idaho. The trains made no scheduled stops in Idaho. Orders directing the trains came from outside the borders of Idaho. There were no crew changes within Idaho. The train crews neither reported for work nor were they dismissed in Idaho.

*946In the spring of 1983, the train crews received written notice from the Idaho State Tax Commission (the Commission) that they were subject to Idaho income tax. The notice indicated that all taxes due for years prior to 1978 would be waived and no penalties imposed, if they filed returns for the years 1978 through 1982 and paid the income taxes before August 1, 1983.

A class action lawsuit was filed on behalf of the train crews seeking declaratory judgment determining whether the compensation earned while they were traveling through Idaho was subject to Idaho income tax and whether the application of the Idaho income tax statutes to these earning violated provisions of the Idaho Constitution and the United States Constitution.

The parties stipulated to the facts of the case. The trial court ruled that the train crews were subject to Idaho income tax for income earned by them while employed on trains traveling through the state, that the imposition of the tax did not violate provisions of either the Idaho Constitution or the United States Constitution, but that the statute of limitations barred the Commission from imposing a tax prior to 1980.

The train crews appealed the declaratory judgment of the trial court. The Commission cross-appealed the trial court’s decision that the statute of limitations prevented the Commission from assessing any tax against the train crews for any period prior to 1980.

II.

The Idaho Income Tax Statutes Apply to the Compensation of the Train Crews While Employed on Trains Traveling Through the State of Idaho

In 1959 the Idaho Legislature declared its intent “to impose a tax on ... the income of nonresidents which is the result of activity within or derived from sources within this state.” I.C. § 63-3002. This intent has remained unchanged to date and was implemented by a provision imposing a tax “upon that part of the taxable income of any nonresident individual ... derived from sources within the state of Idaho.” I.C. § 63-3024. In 1965 this Court held that a nonresident railroad employee who was employed on a train that made a daily run from a town within Idaho to a town outside Idaho was required to pay income tax on that portion of his income that was allocated to the miles the train traveled in Idaho. Gee v. West, 90 Idaho 173, 409 P.2d 116 (1965). The train crews contend that jn 1965 the Idaho Legislature changed the theory of taxation for nonresidents to a “base of operations” theory. They argue that under this theory, a nonresident is taxed only if the nonresident has a base of operations in the state. For support they cite a concurring opinion in Gee. This contention is not sustained by the Idaho income tax statutes that have been in effect at times pertinent to this case.

From 1976 until 1986 I.C. § 63-3024 imposed a tax “upon that part of the taxable income of any nonresident individual ... derived from sources' within the state of Idaho as set forth in section 63-3027A, Idaho Code.” In 1986 the words “as set forth in section 63-3027A” were changed to “computed as required by section 63-3027A.” 1986 Idaho Sess. Laws, ch. 90, pp. 262, 267. Despite periodic amendments by the legislature of I.C. § 63-3027A since 1976, this statute has continued to provide for the determination of the taxable income of a part-year or nonresident individual. The contention of the train crews that I.C. § 63-3027A has failed to set forth a means of determining what portion of the income of a nonresident is derived from sources within the state of Idaho is fallacious. The purpose of the reference in I.C. § 63-3024 to I.C. § 63-3027A was to provide for a means of computing taxable income, not to determine what portion of the gross income of a nonresident was derived from sources within the state of Idaho.

The portion of the income of a nonresident “derived from sources within the state of Idaho” must be determined by reference to the decisions of this Court in Barraclough v. State Tax Commission, 75 Idaho 4, 266 P.2d 371 (1954) and Gee. These decisions established that where compensation for personal services is in*947volved, the source of income is the location where the services are performed. Therefore, applying the statutes and this Court’s rulings in Barraclough and Gee concerning the source of income for personal services, the compensation of the train crews for the services performed while they pass through Idaho are within the coverage of the Idaho income tax laws.

The regulations of the Commission have been consistent with this result. The challenge of the train crews that these regulations have violated the uniformity requirement of art. 7,. § 5 of the Idaho Constitution is not valid. That section applies only to ad valorem taxes. Johnson v. Diefendorf, 56 Idaho 620, 627, 57 P.2d 1068, 1071 (1936).

Because of our decision, infra, declaring that the application of the Idaho income tax statutes to the income of the train crews while traveling through Idaho is unconstitutional, we do not consider the question of the applicable statute of limitations.

III.

There Is Not A Sufficient Nexus To Sustain Taxation of the Compensation of the Train Crews While Traveling Through Idaho

The train crews contend that their presence in Idaho while traveling on the transcontinental trains is not a sufficient nexus under the due process clause of the fourteenth amendment and the commerce clause of the Constitution of the United States to allow Idaho to subject the compensation they earn while traveling through Idaho to state income taxes. We agree.

The United States Supreme Court has held that “just as a state may impose general income taxes upon its own citizens and residents whose persons are subject to its control, it may, as a necessary consequence, levy a duty of like character, and not more onerous in its effect, upon incomes accruing to nonresidents from their property or business within the state, or their occupations carried on therein.” Shaffer v. Carter, 252 U.S. 37, 52, 40 S.Ct. 221, 225, 64 L.Ed. 445 (1920). There the Court upheld an Oklahoma income tax on an Illinois resident who had engaged in the oil business in Oklahoma “having purchased, owned, developed and operated a number of oil and gas mining leases, and being the owner in fee of certain oil-producing land, in that state.” Id. at 45, 40 S.Ct. at 223. The Court held that the Oklahoma tax was valid under both the due process clause of the fourteenth amendment and the commerce clause. On the same day that Shaffer was decided by the Supreme Court, the Court also issued its opinion in Travis v. Yale & Towne Manufacturing Co., 252 U.S. 60, 40 S.Ct. 228, 64 L.Ed. 460 (1920), sustaining the validity of a New York net income tax imposed on a business, trade, profession or occupation carried on in New York by nonresidents. In Travis the Court upheld the tax against a challenge based on the due process clause of the fourteenth amendment. No challenge was presented before the Supreme Court on the basis of the commerce clause. Id. at 75-76, 40 S.Ct. at 230.

The leading case on the taxation of the personal income of nonresidents by a state since Shaffer and Travis is American Commuters Association, Inc. v. Levitt, 405 F.2d 1148 (2nd Cir.1969). There the Second Circuit upheld the validity of New York state and city laws imposing income taxes on nonresidents who were employed in the city of New York, although they lived in New Jersey and Connecticut and commuted to New York for their work. One of the challenges made by the nonresident commuters to the New York income taxes was under the due process clause of the fourteenth amendment. The Second Circuit cited both Shaffer and Travis in support of its conclusion that the New York tax on the personal income of nonresidents did not run afoul of the due process clause. Id. at 1152. The Court pointed out that the nonresident commuters had “admitted that they receive earned income in New York and already receive the substantial benefit of being able to do business there, a benefit valuable enough to them so that they suffer the ills of commuting in *948order to obtain it.” Id. at 1153. The Court then pointed out:

While so doing business and acquiring personal income thereby, state and city furnish the non-resident commuting worker all the general services furnished residents, such as police and fire protection. The test controlling this case is the test laid down by the Supreme Court in Wisconsin v. J.C. Penney, [311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 (1940) ], where the Court said: “the simple but controlling question is whether the state [or City] has given anything for which it can ask return.” 311 U.S. at 444, 61 S.Ct. at 250. It is unnecessary further to point out that this test has been adequately met.

Id.

Since Shaffer and Travis there has been a plethora of cases decided by the Supreme Court concerning the standards to be applied under the due process clause of the fourteenth amendment and the commerce clause in determining the constitutionality of various other types of taxes imposed by the states on nonresident individuals and corporations. For our purposes in this case, the most significant evolution that has occurred in the decisions of the Supreme Court is the development of the requirement that there be a sufficient nexus between the presence, property or activities of the nonresident and the state attempting to impose the tax in order to survive a challenge under the due process clause or the commerce clause. This evolution culminated in two decisions of the Supreme Court in 1977. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977) and National Geographic Society v. California Board of Equalization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977). In both of these cases the Court synthesized its prior rulings to announce that nexus is a prerequisite before a state may impose a tax on a nonresident. Complete Auto, 430 U.S. at 279, 97 S.Ct. at 1079; National Geographic, 430 U.S. at 556, 97 S.Ct. at 1390. In both cases the Court cited as authority four cases decided by the Court during the period from 1940 through 1964 in support of the nexus requirement. These cases were Wisconsin v. J.C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 85 L.Ed. 267 (1940), Memphis Gas Co. v. Stone, 335 U.S. 80, 68 S.Ct. 1475, 92 L.Ed. 1832 (1948), Northwestern Cement Co. v. Minnesota, 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959), and General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964). An examination of the development of the concept of nexus in these cases and in Complete Auto, and National Geographic leads us to our conclusion in this case.

In J.C. Penney Co. the Court began to formulate the nexus requirement by stating:

A state is free to pursue its own fiscal policies, unembarrassed by the Constitution, if by the practical operation of a tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.
Constitutional provisions are often so glossed over with commentary that imperceptibly we tend to construe the commentary rather than the text. We cannot, however, be too often reminded that the limits on the otherwise autonomous powers of the states are those in the Constitution and not verbal weapons imported into it. “Taxable event,” “jurisdiction to tax,” “business situs,” “extraterritoriality,” are all compendious ways of implying the impotence of state power because state power has nothing on which to operate. These tags are not instruments of adjudication but statements of result in applying the sole constitutional test for a case like the present one. That test is whether property was taken without due process of law, or, if paraphrase we must, whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return.

311 U.S. at 444, 61 S.Ct. at 250.

In applying this formulation the Court upheld a Wisconsin general corporate income *949tax on earnings of corporations chartered by other states when the earnings were attributable to the Wisconsin activities of the corporation. The Court pointed out that “the incidence of the tax as well as its measure is tied to the earnings which the State of Wisconsin has made possible, insofar as government is the prerequisite for the fruits of civilization____” Id. at 446, 61 S.Ct. at 250. The Court found acceptable the application of the Wisconsin tax as applied to dividends declared by foreign corporations in other states out of income derived from property located and business transacted in Wisconsin.

In Memphis Natural Gas Co. the Court disposed of any due process claim by stating succinctly that the gas company’s property was “in the taxing state where the taxable incidents occurred.” 335 U.S. at 86, 68 S.Ct. at 1482. With regard to the commerce clause, the Court considered whether Mississippi could impose a franchise or excise tax on the capital used, invested or employed in the exercise of any power, privilege or right enjoyed by a corporation within the state. Concerning what is now denominated as the nexus standard, the Court stated that the question was whether the tax could be imposed where the activities of the gas company in the state were the maintenance, repair and manning of an interstate gas pipeline. The Court focused on “whether these activities are so much a part of the interstate business as to be under the protection of the Commerce Clause as this Court has construed it.” Id. at 93, 68 S.Ct. at 1482. The Court concluded:

We think that the State is within its constitutional rights in exacting compensation under this statute for the protection it affords the activities within its borders. Of course, the interstate commerce could not be conducted without these local activities. But that fact is not conclusive. These are events apart from the flow of commerce. This is a tax on activities for which the state, not the United States, gives protection and the state is entitled to compensation when its tax cannot be said to be an unreasonable burden or a toll on the interstate business.

Id. at 96, 68 S.Ct. at 1483.

In Northwestern States Portland Cement Company the Court upheld under both the commerce clause and the due process clause net income taxes imposed by Minnesota and Georgia on that portion of a foreign corporation’s net income earned from and fairly apportioned to business activities within each state, even though those activities were exclusively in furtherance of interstate commerce. The Court found that the corporations which had challenged the tax were “sufficiently involved in local events to forge ‘some definite link, some minimum connection’ sufficient to satisfy due process requirements.” 358 U.S. at 465, 79 S.Ct. at 366. (Citation omitted.) The Court found that the corporations engaged in “substantial income-producing activity” in Minnesota and Georgia. Id. In the Minnesota case the Court found that almost half of the corporation’s income was derived from sales in the state that were shown to be promoted by “vigorous and continuous sales campaigns run through a central office located in the State.” Id. With regard to the activities of the corporation in Georgia, the Court stated that while the percent of sales was not available “the course of conduct was largely identical” to that of the corporation in Minnesota. Id.

In General Motors the Court considered the constitutional validity under the commerce clause and the due process clause of a Washington tax imposed on the privilege of engaging in business activities within the state measured by gross wholesale sales of motor vehicles, parts and accessories delivered in the state by General Motors. The Court pointed out that it had decided a long line of cases “holding that an in-state activity may be a sufficient local incident upon which a tax may be based.” 377 U.S. at 447, 84 S.Ct. at 1571. The Court focused on the fact that the divisions of General Motors had district managers, service representatives and other employees who were residents of Washington and who performed substantial services in relation to functions of the company in the *950state, “particularly with relation to the establishment and maintenance of sales, upon which the tax was measured.” Id. In formulating the standard to be used in determining the validity of the tax, the Court stated that it must determine whether there was “ ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-345 [74 S.Ct. 535, 539, 98 L.Ed. 744 (1954).]” Id. at 448, 84 S.Ct. at 1571. In upholding the tax the Court observed:

Although mere entry into a State does not take from a corporation the right to continue to do an interstate business with tax immunity, it does not follow that the corporation can channel its operations through such a maze of local connections as does General Motors, and take advantage of its gain on domesticity, and still maintain the same degree of immunity.

Id.

In Complete Auto after a discussion of the nexus requirement and other standards to be utilized in commerce clause cases involving the taxation of nonresidents, the Court pointed out that “no claim is made that the activity is not sufficiently connected to the State to justify a tax.” 430 U.S. at 287, 97 S.Ct. at 1083. The facts there indicated that General Motors assembled vehicles outside the state of Mississippi that were delivered to dealers in Mississippi. The vehicles were shipped by rail to Jackson, Mississippi, where they were loaded onto trucks and transported to the Mississippi dealers by a Michigan corporation that was paid on a contract basis for the transportation from the railhead to the dealers. The Court upheld sales taxes assessed against the Michigan corporation for sales of transportation services in Mississippi.

In National Geographic the Court affirmed a California Supreme Court decision upholding the imposition upon National Geographic of a use-tax-collection liability measured by mail-order sales of merchandise to customers in California from the District of Columbia and Maryland. National Geographic had maintained offices in San Francisco and Los Angeles since 1956. Each office was originally staffed with one salesman and one secretary. Each office subsequently increased its personnel to four. The basic function of the offices was to solicit advertising for the magazine published by National Geographic. Sales of advertising copy by the two offices aggregated about $1 million annually. 430 U.S. at 554 n. 2, 97 S.Ct. at 1389 n. 2. The Court stated that the question presented by the case was “whether the Society’s activities at the offices in California provided sufficient nexus between the out-of-state seller appellant and the State — as required by the Due Process Clause of the Fourteenth Amendment and the Commerce Clause — to support the imposition upon the Society of a use-tax-collection liability.” Id. at 554, 97 S.Ct. at 1389. The Court rejected the rationale of the California Supreme Court that the “ ‘slightest presence’ ” within a taxing state “ ‘independent of any connection through interstate commerce’ ” would permit a state constitutionally to impose the duty of collecting the use tax generated from mail order purchasers. Id. at 556, 97 S.Ct. at 1390. The Court pointed out that National Geographic’s maintenance of two offices in California and solicitation by employees assigned to those offices of advertising copy in the range of $1 million annually “establish a more substantial presence than the expression ‘slightest presence’ connotes.” Id. The Court held that National Geographic’s “maintenance of two offices in California and activities there adequately establish a relationship or ‘nexus’ between the Society and the State that renders constitutional the obligations imposed” upon National Geographic. Id.

Recent decisions of the Supreme Court confirm that the formulation of the requirement of nexus that culminated in Complete Auto and National Geographic continues to be the standard applied by the Court. E.g., Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987). In Tyler the Court cited National Geo*951graphic and agreed that there was a sufficient nexus to impose a tax on an out-of-state manufacturer where the manufacturer’s sales representatives performed activities in Washington necessary for the maintenance of the manufacturer’s market and protection of its interests in Washington. The Court concurred with the determination of the Washington Supreme Court that “ ‘the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.’ ” Id. 107 S.Ct. at 2822, quoting 105 Wash.2d 318, 715 P.2d 123, 129 (1986).

With these authorities in mind, the question in this case is whether the presence of the train crews in Idaho while traveling through on transcontinental trains that make no scheduled stops is sufficient under the due process clause of the fourteenth amendment and the commerce clause to establish the requisite nexus for imposing an income tax on the compensation earned by the train crews during that time.

The train crews correctly point out that their wages while traveling through Idaho are not attributable to any economic activity within Idaho, and that Idaho markets and commerce do not affect their income in any degree. They are present in Idaho only by virtue of the fact that the train on which they are employed must necessarily traverse the panhandle of this state while moving from Washington to Montana or vice versa. Their mere presence here does not provide the nexus necessary to allow Idaho to tax the income they earn while in transit through the state.

While the Idaho income tax statutes and the decisions of this Court in Barraclough and Gee indicate that for statutory purposes, Idaho is the source of the compensation of the train crews while they are traveling through Idaho, in the sense of the due process clause and the commerce clause, Idaho is not the source of this income, since there is no contribution by Idaho to the production of this income. It would be unfair to allow the state to impose a tax on the income of the train crews earned while they are merely passing through Idaho.

Our decision is consistent with the decision of the Supreme Court of Washington in State of Alaska v. Petronia, 69 Wash.2d 460, 418 P.2d 755 (1966). In that case the Washington Supreme Court upheld an income tax by the state of Alaska on the earnings of seamen while the vessels upon which the seamen were working were within Alaska’s boundaries. The court pointed out the importance of the economic activity generated by the state of Alaska in determining that the contacts of the seamen with Alaska were sufficient to fulfill the nexus requirement:

Probably the most significant benefits in the eyes of these defendant seamen are the wages they contemplated receiving for their services during the course of the vessel’s voyage. The business productivity generated by Alaska was accountable for the wages earned by the defendants when they were in Alaskan waters____ We are satisfied that the benefits of employment afforded by this economic activity of the state of Alaska constituted minimum connections within the rule to avoid a denial of due process under the Fourteenth Amendment to the United States Constitution.

418 P.2d at 758-59.

Merely because the train crews were on the payroll of BN while in transit through Idaho is not a sufficient basis under the due process clause to justify imposing an income tax on these earnings. No business productivity generated by Idaho was accountable for the wages earned by the train crews when they were in Idaho. In addition, using the ultimate test enunciated by the Supreme Court in J.C. Penney Co. Idaho has not given anything to the train crews for which it can ask return. Here, there is no showing that the presence of the train crews in Idaho cause the state, in the words of the Court in J. C. Penney Co., to give “anything for which it can ask return.” 311 U.S. at 444, 61 S.Ct. at 250. It is BN, not the train crews, to which the state has given anything for which it can *952ask return. The train crews do not owe their livelihood to Idaho, but rather to their employment by BN, which transports them through Idaho without stop in the course of their employment.

If the due process clause allows Idaho to tax the income earned by the train crews while in Idaho, then we must be prepared to sustain taxes on the income earned by any person who crosses Idaho by any means without stopping or transacting business here, but who is being compensated while in transit. We are not prepared to say that the constitution permits taxation by the state in this fashion. There is not a sufficient nexus to allow such a tax under either the due process clause or the commerce clause.

IV.

Conclusion

The declaratory judgment of the trial court is reversed.

Costs to appellants.

No attorney fees on appeal.

BAKES, J., concurs. SHEPARD, C.J., concurs in result.