The opinion of the majority holds that the tax in question, as authorized by the statute of Connecticut, "is a tax in the nature of an excise levied against domestic and foreign corporations alike for the privilege of doing business in a corporate capacity within this State," and as such is not in violation of the commerce clause or the due process clause of the United States Constitution.
The case before us concerns a tax levied upon a foreign corporation doing a local business in Connecticut.
There are two classes of so-called privilege or excise taxes upon a foreign corporation. One is a privilege tax in name and fact, — a tax levied for the privilege of doing business in a State other than that of the corporate domicil, and in no sense levied because of, or in relation to, property value. The other is a privilege or excise tax in name, but in fact a property tax levied upon a corporation doing business in a State other than that of its domicil, to compel payment of a tax upon the value of its property or business in that State as a going concern in relation to or in connection with its other property or its entire business, and not covered by the local tax upon the physical property within the State.
The privilege tax proper is a tax upon the right of the foreign corporation to carry on a local business outside the State of its origin.
The foreign corporation engaged partly or chiefly in interstate business, may be required to pay a privilege tax in respect of that business in any State other than that of its domicil where it does a local business. This tax may be a given sum, or it may be measured by its entire capital, or property, or receipts, or sales, or gross *Page 67 profits, or net profits, provided the payment of the tax be not made a condition of the granting of the privilege, and provided further that it appears from the circumstances that the tax is reasonable, that is, that it is what it purports to be, a mere privilege or excise tax, and not a tax which actually has the effect of hampering commerce or taxing property beyond the jurisdiction of the State imposing the tax.
A privilege tax as such, measured by the entire property, or capital, or receipts, or profits, gross or net, of a foreign corporation engaged in a local business within a State other than that of its origin, reaches all its property, its receipts or its profits, including that in other States, and hence must be held unconstitutional, unless the circumstances show that the tax is a reasonable one and laid not upon the property but upon the right of the corporation to carry on a local business. And one of the ways in which the reasonableness and the ultimate purpose of the tax may be determined, is the fixing in the statute of a maximum base sum beyond which amount the percentage cannot be allowed to realize. Such a tax will be held prima facie reasonable unless the circumstances compel another conclusion. An instance of a privilege or excise tax measured by a percentage on capital stock uncontrolled by a named maximum sum and held a violation of the commerce clause, is found in International Paper Co. v. Massachusetts,246 U.S. 135, 38 Sup. Ct. 292. And an instance of a similar tax but its total exaction controlled by a named maximum and held not a violation of the commerce clause, is found in Baltic Mining Co. v.Massachusetts, 231 U.S. 68, 34 Sup. Ct. 15. That the reasonableness of the privilege tax is the test of its validity, appears in General Railway Signal Co. v.Virginia, 246 U.S. 500, 511, 38 Sup. Ct. 360, where a statute providing for a specific fee of $1,000 upon corporations *Page 68 whose capital stock was between one and ten millions of dollars, was upheld upon the basis of the reasonableness of the fee under all the circumstances, although the case was said to be on the line. When the opinions of the later cases are read in conjunction, I think they will be found to hold that the limitation in a statute of a maximum privilege tax removes these constitutional objections unless the maximum be unreasonably high; that the maximum limitation may serve as evidence of the reasonableness of the tax, and that a privilege tax which is reasonable and is not made a condition of the right to do business can never be held to violate the commerce clause or the due process clause. Baltic Mining Co. v. Massachusetts, 231 U.S. 68,34 Sup. Ct. 15; International Paper Co. v. Massachusetts,246 U.S. 135, 142, 38 Sup. Ct. 292; Looney v. Crane Co., 245 U.S. 178, 38 Sup. Ct. 85; GeneralRailway Signal Co. v. Virginia, 246 U.S. 500,38 Sup. Ct. 360.
The majority opinion reiterates that "the tax is a tax on the privilege of doing business in a corporate capacity in this State." Our statute provides no maximum. The greater the real estate and tangible property here to that elsewhere, the greater the amount of tax; and the greater the intangible property outside Connecticut, the greater the tax. The amount to be realized in this case is $12,000; in another case it might be $100,000. Such a tax cannot be held reasonable. The decisions to which I have referred conclusively establish this.
If the majority opinion rested upon this proposition, I might rest my discussion upon what has been said, with the single addition of a discussion of the case ofUnited States Glue Co. v. Oak Creek, 247 U.S. 321,38 Sup. Ct. 499, upon the authority of which the court places its opinion. But the majority opinion goes further. It does not distinguish between these two *Page 69 classes of so-called privilege taxes, and its chiefest argument in support of this tax is that "if the ascertainment of its amount is made dependent in fact on the value of its property within the State, and if it does not exceed the sum which might be leviable directly thereon," the tax may be levied.
Such a tax, though called a privilege tax, is in truth a species of property tax. It is based upon the value of its property within the State; it increases or diminishes as that increases or diminishes. The tax attacked in this proceeding is one laid upon the net income of the plaintiff, a foreign business corporation, engaged in carrying on a local business in Connecticut. The plaintiff does all of its manufacturing in this State, and most of its sales and all of its financial business it transacts outside of this State. Practically, the production side of its business is here, and the commercial side outside Connecticut. All of its property here, and all of its business here, and all of its earnings here, may be taxed separately or in connection with or in relation to the business as a whole, and to the business as a going concern, provided the amount on which the tax is levied fairly represents the value of its property here, or its earnings made here. When the tax under consideration was authorized, the plaintiff's taxes in this State were confined to a direct property tax on its real estate, plant and tangible property on hand at the levy of the tax. Throughout the year preceding the tax levy, the corporation continued manufacturing its goods and sending its product to its different branches outside our State, where it was sold or rented. While these goods were in process of manufacture, or held in stock, or in course of transit, in this State, they were subject to a State tax, justified upon the basis of all taxes, the protection afforded the goods and the business by the taxing government. And the local business may have *Page 70 a value beyond the mere property here, because it is a part of an interstate business. Connecticut should have and does have, the right to levy a tax proportioned to the protection afforded by it to the local business of the foreign corporation. This may be accomplished in a case like this by a tax upon all the product made, or upon the earning power of its business located here, or upon the net income derived from the property made here, based upon the value of the property and business here as a part of and in relation to a going concern engaged in interstate business. United States ExpressCo. v. Minnesota, 223 U.S. 335, 32 Sup. Ct. 211. Some of the decisions and their holding upon this point are the following: It was held in Adams Express Co. v.Ohio State Auditor, 166 U.S. 185, 17 Sup. Ct. 604, that a State statute taxing a corporation having an interstate business may levy the tax not only on the tangible property within the State, but on such portion of the earning power of the property as the property in the State bears toward the whole property. And the local business may be taxed as a going business as a condition upon which the corporation may continue to do business in the State. Baltic Mining Co. v.Massachusetts, 231 U.S. 68-88, 34 Sup. Ct. 15. Although the foreign corporation is engaged in interstate commerce, all of its property within a State is taxable there. Baltic Mining Co. v. Massachusetts, 231 U.S. 68,82, 34 Sup. Ct. 15. And "a legitimate tax" may be laid in a State in part on "the avails or income from the conduct of such commerce." United States ExpressCo. v. Minnesota, 223 U.S. 335, 343,32 Sup. Ct. 211. The capital or earnings, gross or net, of a corporation employed chiefly in interstate commerce, may be taken as a mere measure or index to ascertain the local tax of the foreign corporation doing an interstate business upon its property or its business in the State *Page 71 levying the tax. Baltic Mining Co. v. Massachusetts,231 U.S. 68, 83, 34 Sup. Ct. 15; Wells, Fargo Co. v.Nevada, 248 U.S. 165, 167, 39 Sup. Ct. 62. Such a tax is not a tax upon the property engaged in, or the earnings derived from, interstate commerce; these merely help measure the value of the property or the business of the foreign corporation in the locality of the tax, from which the proper tax is ascertained.Cudahy Packing Co. v. Minnesota, 246 U.S. 450, 454,38 Sup. Ct. 373; Flint v. Stone Tracy Co., 220 U.S. 107,163, 31 Sup. Ct. 342. A tax so measured does not unnecessarily burden commerce and does not tax property outside the jurisdiction imposing the tax. OhioTax Cases, 232 U.S. 576, 34 Sup. Ct. 372.
As I understand the opinion of the court it finally holds that the State may tax "some fractional part of the net income of a foreign corporation engaged in interstate commerce, provided the apportionment is made dependent in fact on the value of its property situated within the State, that the amount of the tax is not excessive regarded as a tax on property within the State, and that there is no discrimination against interstate commerce in the admeasurement or enforcement of the tax." All of the net income may be taken as the measure of a tax upon the value of the property of a foreign corporation in a State where it is doing a local business. With this qualification I am in substantial accord with this proposition.
With that part of the opinion upholding this tax as a privilege tax, as a tax on the privilege of doing business in a corporate capacity in this State, I am not in accord. As a privilege tax as such, the tax cannot be sustained. If the purpose and effect of our statute was to make the tax dependent upon the value of the plaintiff's property here as a going concern, and to measure the tax by the entire net income, I should readily agree *Page 72 that the tax was valid. But whatever its purpose, its effect is not this; and in the final analysis the real difference between the majority and minority of the court is in the holding that the apportionment of this tax is in fact made dependent on the value of its property within our State. The tax should be proportioned to the value of the property and business in our State, for it is to these our State affords protection. The entire net income of a corporation is taxable at its domicil. But that does not prevent Connecticut from levying a tax for the protection it affords to the local business of the plaintiff, and from using the entire net income to measure this by. The value of the property here must limit the tax here, otherwise the tax would be laid on property outside our State, and, as a consequence, burden interstate commerce. "It is, of course, entirely settled that a State cannot, consistently with the Federal control of interstate commerce, lay such taxes, either upon property rights or upon franchises or privileges, as in effect" either directly or by its necessary operation "to burden such commerce."Ohio Tax Cases, 232 U.S. 576, 593, 34 Sup. Ct. 372;International Paper Co. v. Massachusetts, 246 U.S. 135,38 Sup. Ct. 292; United States Express Co. v.Minnesota, 223 U.S. 335, 344, 32 Sup. Ct. 211; WesternUnion Tel. Co. v. Kansas, 216 U.S. 1,30 Sup. Ct. 190.
Similarly it follows that the income earned by property of the corporation outside of Connecticut cannot be taxed here. To tax this income would be to tax property without our jurisdiction and over which our State never acquired jurisdiction, and for which it never furnished protection. The net income of the plaintiff from the goods sold came in part from the work, material, management and capital at its factory plant, and in part from the maintenance of its branches, *Page 73 the sale of its goods, the collection of its accounts, the financing of its business and the maintenance of its purchasing department, and all of these were without this State. Each State where the various parts of this extensive business were carried on had the right to tax the net income from the business earned by that part of the business transacted within it. The goods manufactured in our State and sold outside were taxable here upon their value then; or upon the proportion of the gross or net income which the goods made here had earned. American Mfg. Co. v. St. Louis,250 U.S. 459, 463, 39 Sup. Ct. 522. Rentals obtained outside Connecticut upon goods made here cannot be taxed here. Profits from repairs of machines made outside our State cannot be taxed here. Sales of goods purchased and sold outside the State, never having been a part of the business done here nor the profits made thereon, cannot be taxed here. Dividends, discounts and interest earned outside the State cannot be taxed here. The net income resulting from the care and sale of goods in another jurisdiction which were made here, cannot be taxed here. Sixteen per cent of the gross profits were made elsewhere and clearly are not taxable here. As to the balance, we do not know the exact net profits earned here and elsewhere. But we know that the expenses outside the State were nearly twice the manufacturing cost in Connecticut. It is common knowledge that the selling and commercial side of any manufacturing business costs more than the manufacturing side, and the profits to that side are correspondingly greater. But if we consider them on a parity and proportionate to their cost, we find the net profits to the manufacturing side to be about 28 per cent of the total; to the sales side 56 per cent; to proceeds from rental, repairs, etc., outside Connecticut, 16 per cent. If the net profits approximated the gross *Page 74 profits, Connecticut would be entitled to tax about $400,000 of the net profits. Under the rule adopted by the statute the State taxed about $600,000.
The portion of the net income upon which the tax is to be laid under our statute in the case of a company like the plaintiff, deriving profits principally from the sale or use of tangible personal property, is such proportion as the fair cash value of its real estate and tangible personal property in this State at the close of the fiscal year next preceding, is to the fair cash value of its entire real estate and tangible personal property then owned by it.
In the case at bar, the finding does not specifically detail all of the property of the plaintiff outside the State. But we know that it was a large amount, from the sales made, and we know that a business of its volume will have a large cash balance and open accounts and bills receivable, and patents and contracts, aggregating thousands and probably millions in value.
The interest earned, $29,456, showed that the plaintiff carried a large cash balance. The dividends received indicated a substantial investment account. These intangible assets enabled the plaintiff to do its business in Connecticut and to do a business outside of Connecticut, aggregating gross profits from rentals in the fiscal year of over $600,000; from repairs of over $452,000, and gross profits from merchandise of over $190,000.
All of these elements of gross profits and the income from intangible assets earned outside the State, helped make up the net income upon which the plaintiff's tax was measured.
Omitting the intangible property of the plaintiff outside of Connecticut, diminishes the denominator of the fraction by which the proportion of the net income is found, and as a consequence, since the numerator remains *Page 75 stationary, gives to the State a greater proportion of the net income on which to levy the tax than it is entitled to, for this gives it a proportion of the net income earned by the assets outside our State. The tax laid upon that part of the net income earned outside the State is a tax laid upon the property of a foreign corporation located outside the State, and necessarily burdens commerce.
If the real estate and tangible personal property comprised all of the property of the plaintiff, this proportion would ordinarily measure the tax without discrimination, and if the tax was general and not unreasonable in amount or rate, it would approximate a fair result. But the proportion fixed by the statute holds, although a substantial part, perhaps half or more, of the property from which the net income has been earned, is outside the State. This is the vice of the statute. It permits taxes upon net income earned outside the State.
The majority opinion says the tax imposed in this case is insignificant, only two-tenths of 1% of the gross income, about $12,000, and that such a sum for so great a corporation is a trifle. I do not follow all of the mathematics of the opinion of the court. But whether the figures are correct or not, is not important in this connection. The smallness of the tax does not make the tax constitutional, if in fact it taxes property outside the State levying the tax. Mr. Justice VanDevanter, in International Paper Co. v. Massachusetts, 246 U.S. 135,144, 38 Sup. Ct. 292, thus disposes of this point: "It is thus manifest on the face of all of the cases that they in no way sustained the assumption that because a violation of the Constitution was not a large one it would be sanctioned, or that a mere opinion as to the degree of wrong which would arise if the Constitution were violated was treated as affording a measure of the duty of enforcing the Constitution." *Page 76
The court rests its decision, so far as the commerce clause is concerned, upon United States Glue Co. v.Oak Creek, 247 U.S. 321, 38 Sup. Ct. 499, which it assumes decides, that "under the form of a privilege tax," a State may "tax some fractional part of the net income of a foreign corporation engaged in interstate commerce, provided the apportionment is made dependent in fact on the value of the property situated within the State, that the amount of the tax is not excessive regarded as a tax on property within the State, and that there is no discrimination against interstate commerce in the admeasurement or enforcement of the tax."
I do not find this doctrine announced in the Glue Co. case. That opinion does not, as I think, change or attempt to change the law, which had become practically settled with Western Union Tel. Co. v. Kansas,216 U.S. 1, 30 Sup. Ct. 190, and succeeding cases, upon whose authority this dissent is based.
The only point decided was thus stated by Mr. Justice Pitney, on page 326: "Stated concisely, the question is whether a State, in levying a general income tax upon the gains and profits of a domestic corporation, may include in the computation the net income derived from transactions in interstate commerce without contravening the commerce clause of the Constitution of the United States." The issue concerned the commerce clause, and the due process clause issue, also raised in this case, is quite independent of the commerce clause.International Paper Co. v. Massachusetts, 246 U.S. 135,38 Sup. Ct. 292. The tax could have been sustained as an exercise of control over the net income of its own corporation by the State of its origin. It could have been sustained upon the specific provision of the statute. "The tax shall be assessed . . . upon all income . . . provided, that any person engaged in *Page 77 business within and without the State shall, with respect to income other than that derived from rentals, stocks, bonds, securities or evidences of indebtedness, be taxed only upon that proportion of such income as is derived from business transacted and property located within the State. . . ." Wisconsin Session Laws, 1911, Chap. 658, § 3. This statutory exemption follows the decisions. Our statute contains no such provision; and, as it seems to me, our court treats the case as if this provision were in our statute. And it fails to note the significance of the fact that the question at issue concerned a domestic corporation and did not concern the taxing of a foreign corporation upon profits received by it outside the jurisdiction of the State imposing the tax.
The Wisconsin tax on net income was one substantially in lieu of all other taxes except those on real estate. It included all other forms of property tax, and also all forms of excise tax. The reasoning of Mr. Justice Pitney, that the tax on the net income of this domestic corporation engaged in interstate business is an indirect burden upon commerce and hence valid, does not seem to be applicable to the tax on the net income of a foreign corporation arising from its interstate commerce. And certainly it can have no application to the net income of this corporation which was earned upon that part of the property or business located here.
I conceive that the fundamental justification for a tax upon the net income of a foreign corporation is that the income taxed is subject to the State's jurisdiction and that the tax laid does not hamper commerce. The fact that the tax is merely an indirect burden on commerce, will not save it if the property or income taxed be that of a foreign corporation and the property be located, or the income be earned, outside the State.
The language of Mr. Justice Pitney which the opinion *Page 78 of the court quotes and relies upon as decisive of this case, should be read in connection with the entire opinion, and as read it should be remembered that it was said in reference to a domestic corporation, and of a tax upon income derived from business transacted and property located within the State, and is to be applied to the sole question involved, whether the tax was a burden on commerce. Read and applied as our court reads and applies the Glue Co. case, as it seems to me, it practically treats as overruled the authorities from Western Union Tel. Co. v. Kansas (1909),216 U.S. 1, 30 Sup. Ct. 190, down.
All taxes upon a foreign corporation engaged in local business outside its domicil, are indirect burdens on commerce. When levied on property physically within the State, or imposed upon the privilege of doing business in the State, or levied upon the value of property of the corporation within the State, such taxes may be valid exactions. But when levied upon property outside a State, or when the tax exaction is unreasonable, they are invalid; and it makes no difference whether the measure of the tax be net income or gross income.
The tax on the net income in Peck Co. v. Lowe,247 U.S. 165, 173, 38 Sup. Ct. 432, was a tax upon the net income of a domestic corporation, so far as the United States was concerned, by the country of its domicil; and the tax upon the net income of the United States Glue Company was a tax upon the net income of a domestic corporation by Wisconsin, the State of its domicil. There can be no violation of the commerce clause by a tax laid on the net income of a corporation by the State or country of its domicil. All of such income must respond to the valid exactions of government.
A tax on net income of a foreign corporation proportioned *Page 79 to the earnings in the State imposing the tax does not burden commerce. When the tax goes beyond this and taxes earnings made outside that State, it is a tax upon property outside its jurisdiction and violates the "due process" clause, and as a consequence necessarily burdens commerce.
The authorities from Western Union Tel. Co. v.Kansas, 216 U.S. 1, 30 Sup. Ct. 190, left the subject of taxation, always difficult and somewhat obscure, reasonably clear, and I find it hard to persuade myself as my brethren seem to think, that there has been a determination to substitute a new theory of the indirect burden of the net income tax for the doctrine of those cases. A tax by a State on the gross income or the capital as such, of a foreign corporation, necessarily burdens commerce and taxes property outside the State. The same holding must in logic follow as to net income. "A tax upon a corporation may be proportioned to the income received as well as to the value of the franchise granted or the property possessed." The DelawareRailroad Tax, 85 U.S. (18 Wall.) 206.
I am of the opinion that questions one and two, upon which our advice is asked, should be answered "Yes."