Northwestern States Portland Cement Company v. Minnesota/Opinion of the Court
These cases concern the constitutionality of state net income tax laws levying taxes on the portion of a foreign corporation's net income earned from and fairly apportioned to business activities within the taxing State when those activities are exclusively in furtherance of interstate commerce. No question is raised in either case as to the reasonableness of the apportionment of net income under the State's formulas nor to the amount of the final assessment made. The Minnesota tax was upheld by its Supreme Court, 250 Minn. 35, 84 N.W.2d 373, while the Supreme Court of Georgia invalidated its statute as being violative of 'both the commerce and due-process clauses of the Federal Constitution * * *.' 213 Ga. 713, 101 S.E.2d 197, 202. The importance of the question in the field of state taxation is indicated by the fact that thirty-five States impose direct net income taxes on corporations. Therefore, we noted jurisdiction of the appeal in the Minnesota case, 1958, 355 U.S. 911, 78 S.Ct. 341, 2 L.Ed.2d 272, and granted certiorari in the other, 1958, 356 U.S. 911, 78 S.Ct. 670, 2 L.Ed.2d 585. Although the cases were separately briefed, argued, and submitted, we have, because of the similarity of the tax in each case, consolidated from for the purposes of decision. It is contended that each of the state statutes, as applied, violates both the Due Process and the Commerce Clauses of the United States Constitution. Article 1, § 8, cl. 3; Amend. 14. We conclude that net income from the interstate operations of a foreign corporation may be subjected to state taxation provided the levy is not discriminatory and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same. No. 12.-Northwestern States Portland Cement Co. v. State of Minnesota.
This is an appeal from judgments of Minnesota's courts upholding the assessment by the State of income taxes for the years 1933 through 1948 against appellant, an Iowa corporation engaged in the manufacture and sale of cement at its plant in Mason City, Iowa, some forty miles from the Minnesota border. The tax was levied under § 290.03  of the Minnesota statutes, which imposes an annual tax upon the taxable net income of residents and nonresidents alike. One of four classes taxed by the statute is that of 'domestic and foreign corporations * * * whose business within this state during the taxable year consists exclusively of foreign commerce, interstate commerce, or both.' Minnesota has utilized three ratios in determining the portion of net income taxable under its law.  The first is that of the taxpayer's sales assignable to Minnesota during the year to its total sales during that period made everywhere; the second, that of the taxpayer's total tangible property in Minnesota for the year to its total tangible property used in the business that year wherever situated. The third is the taxpayer's total payroll in Minnesota for the year to its total payroll for its entire business in the like period. As we have noted, appellant takes no issue with the fairness of this formula nor of the accuracy of its application here.
Appellant's activities in Minnesota consisted of a regular and systematic course of solicitation of orders for the sale of its products, each order being subject to acceptance, filling and delivery by it from its plant at Mason City. It sold only to eligible dealers, who were lumber and building material supply houses, contractors and ready-mix companies. A list of these eligible dealers was maintained and sales would not be made to those not included thereon. Forty-eight percent of appellant's entire sales were made in this manner to such dealers in Minnesota. For efficient handling of its activity in that State, appellant maintained in Minneapolis a leased sales office equipped with its own furniture and fixtures and under the supervision of an employee-salesman known as 'district manager.' Two salesmen, including this district manager, and a secretary occupied this three-room office. Two additional salesmen used it as a clearing house. Each employee was paid a straight salary by the appellant direct from Mason City and two cars were furnished by it for the salesmen. Appellant maintained no bank account in Minnesota, owned no real estate there, and warehoused no merchandise in the State. All sales were made on a delivered price basis fixed by the appellant in Mason City and no 'pick ups' were permitted at its plant there. The salesmen, however, were authorized to quote Minnesota customers a delivered price. Orders received by the salesmen or at the Minneapolis office were transmitted daily to appellant in Mason City, were approved there, and acknowledged directly to the purchaser with copies to the salesman.
In addition to the solicitation of approved dealers, appellant's salesmen also contacted potential customers and users of cement products, such as builders, contractors, architects, and state, as well as local government purchasing agents. Orders were solicited and received from them, on special forms furnished by appellant, directed to an approved local dealer who in turn would fill them by placing a like order with appellant. Through this system appellant's salesmen would in effect secure orders for local dealers which in turn were filled by appellant in the usual manner. Salesmen would also receive and transmit claims against appellant for loss or damage in any shipments made by it, informing the company of the nature thereof and requesting instructions concerning the same.
No income tax returns were filed with the State by the appellant. The assessments sued upon, aggregating some $102,000, with penalties and interest, were made by the Commissioner of Taxation on the basis of information available to him.
No. 33.-T. V. Williams, Commissioner v. Stockham Valves & Fittings, Inc.
The respondent here is a Delaware Corporation with its principal office and plant in Birmingham, Alabama. It manufactures and sells valves and pipe fittings through established local wholesalers and jobbers who handle products other than respondent's. These dealers were encouraged by respondent to carry a local inventory of its products by granting to those who did so a special price concession. However, the corporation maintained no warehouse or storage facilities in Georgia. It did maintain a sales-service office in Atlanta, which served five States. This office was headquarters for one salesman who devoted about one-third of his time to solicitation of orders in Georgia. He was paid on a salary-plus-commission basis while a full-time woman secretary employed there received a regular salary only. She was 'a source of information' for respondent's products, performed stenographic and clerical services and 'facilitated communications between the * * * home office in Birmingham, * * * (the) sales representative * * * and customers, prospective customers, contractors and users of (its) products.' Respondent's salesman carried on the usual sales activities, including regular solicitation, receipt and forwarding of orders to the Birmingham office and the promotion of business and good will for respondent. Orders were taken by him, as well as the sales-service office, subject to approval of the home office and were shipped from Birmingham direct to the customer on an 'f.o.b. warehouse' basis. Other than office equipment, supplies, advertising literature and the like, respondent had no property in Georgia, deposited no funds there and stored no merchandise in the State.
Georgia levies a tax  on net incomes 'received by every corporation, foreign or domestic, owning property or doing business in this State.'  The Act defines the latter as including 'any activities or transactions' carried on within the State 'for the purpose of financial profit or gain' regardless of its connection with interstate commerce. To apportion net income, the Act applies a three-factor ratio based on inventory, wages and gross receipts. Under the Act the State Revenue Commissioner assessed and collected a total of $1,478.31 from respondent for the taxable years 1952, 1954 and 1955, and after claims for refund were denied the respondent filed this suit to recover such payments. It bases its right to recover squarely upon the constitutionality of Georgia's Act under the Commerce and the Due Process Clauses of the Constitution of the United States.
That there is a 'need for clearing up the tangled underbrush of past cases' with reference to the taxing power of the States is a concomitant to the negative approach resulting from a case-by-case resolution of 'the extremely limited restrictions that the Constitution places upon the states. * * *' State of Wisconsin v. J. C. Penney Co., 1940, 311 U.S. 435, 445, 61 S.Ct. 246, 250, 85 L.Ed. 267. Commerce between the States having grown up like Topsy, the Congress meanwhile not having undertaken to regulate taxation of it, and the States having understandably persisted in their efforts to get some return for the substantial benefits they have afforded it, there is little wonder that there has been no end of cases testing out state tax levies. The resulting judicial application of constitutional principles to specific state statutes leaves much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation. This Court alone has handed down some three hundred full-dress opinions spread through slightly more than that number of our reports. As was said in Miller Bros. Co. v. State of Maryland, 1954, 347 U.S. 340, 344, 74 S.Ct. 535, 538, 98 L.Ed. 744, the decisions have been 'not always clear * * * consistent or reconcilable. A few have been specifically overruled, while others no longer fully represent the present state of the law.' From the quagmire there emerge, however, some firm peaks of decision which remain unquestioned.
It has long been established doctrine that the Commerce Clause gives exclusive power to the Congress to regulate interstate commerce, and its failure to act on the subject in the area of taxation nevertheless requires that interstate commerce shall be free from any direct restrictions or impositions by the States. Gibbons v. Ogden, 1824, 9 Wheat. 1, 6 L.Ed. 23. In keeping therewith a State 'cannot impose taxes upon persons passing through the state, or coming into it merely for a temporary purpose' such as itinerant drummers. Robbins v. Taxing District, 1887, 120 U.S. 489, 493-494, 7 S.Ct. 592, 594, 30 L.Ed. 694. Moreover, it is beyond dispute that a State may not lay a tax on the 'privilege' of engaging in interstate commerce, Spector Motor Service v. O'Connor, 1951, 340 U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573. Nor may a State impose a tax which discriminates against interstate commerce either by providing a direct commercial advantage to local business, Memphis Steam Laundry Cleaner v. Stone, 1952, 342 U.S. 389, 72 S.Ct. 424, 96 L.Ed. 436; Nippert v. City of Richmond, 1946, 327 U.S. 416, 66 S.Ct. 586, 90 L.Ed. 760, or by subjecting interstate commerce to the burden of 'multiple taxation,' Michigan-Wisconsin Pipe Line Co. v. Calvert, 1954, 347 U.S. 157, 74 S.Ct. 396, 98 L.Ed. 583; Adams Mfg. Co. v. Storen, 1938, 304 U.S. 307, 58 S.Ct. 913, 82 L.Ed. 1365. Such impositions have been stricken because the States, under the Commerce Clause, are not allowed 'one single tax-worth of direct interference with the free flow of commerce.' Freeman v. Hewit, 1946, 329 U.S. 249, 256, 67 S.Ct. 274, 279, 91 L.Ed. 265.
On the other hand, it has been established since 1918 that a net income tax on revenues derived from interstate commerce does not offend constitutional limitations upon state interference with such commerce. The decision of Peck & Co. v. Lowe, 247 U.S. 165, 38 S.Ct. 432, 62 L.Ed. 1049, pointed the way. There the Court held that though true it was that the Constitution provided 'No Tax or Duty shall be laid on Articles exported from any State,' Art. I, § 9, still a net income tax on the profits derived from such commerce was not 'laid on articles in course of exportation or on anything which inherently or by the usages of commerce is embraced in exportation or any of its processes * * *. At most, exportation is affected only indirectly and remotely.' Id., 247 U.S. at pages 174-175, 38 S.Ct. at page 434. The first case in this Court applying the doctrine to interstate commerce was that of United States Glue Co. v. Town of Oak Creek, 1918, 247 U.S. 321, 38 S.Ct. 499, 62 L.Ed. 1135. There the Court distinguished between an invalid direct levy which placed a burden on interstate commerce and a charge by way of net income derived from profits from interstate commerce. This landmark case and those usually cited as upholding the doctrine there announced, i.e., Underwood Typewriter Co. v. Chamberlain, 1920, 254 U.S. 113, 41 S.Ct. 45, 65 L.Ed. 165, and Memphis Natural Gas Co. v. Beeler, 1942, 315 U.S. 649, 62 S.Ct. 857, 858, 86 L.Ed. 1090, dealt with corporations which were domestic to the taxing State (United States Glue Co. v. Town of Oak Creek, supra), or which had 'established a 'commercial domicile" there, Underwood Typewriter Co. v. Chamberlain, supra; Memphis Natural Gas Co. v. Beeler, supra.
But that the presence of such a circumstance is not controlling is shown by the cases of Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 1924, 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282, and Norfolk & W.R. Co. v. State of North Carolina, 1936, 297 U.S. 682, 56 S.Ct. 625, 80 L.Ed. 977. In neither of these cases was the taxpayer a domiciliary of the taxing State, incorporated or with its principal place of business there, though each carried on substantial local activities. Permitting the assessment of New York's franchise tax measured on a proportional formula against a British corporation selling ale in New York State, the Court held in Bass, Ratcliff & Gretton, Ltd., supra, that 'the Company carried on the unitary business of manufacturing and selling ale, in which its profits were earned by a series of transactions beginning with the manufacture in England and ending in sales in New York and other places-the process of manufacturing resulting in no profits until it ends in sales-the State was justified in attributing to New York a just proportion of the profits earned by the Company from such unitary business.' Id., 266 U.S. at page 282, 45 S.Ct. at page 84. Likewise in Norfolk & W.R. Co., supra, North Carolina was permitted to tax a Virginia corporation on net income apportioned to North Carolina on the basis of mileage within the State. These cases stand for the doctrine that the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs. In fact, in Bass, Ratcliff & Gretton the operations in the taxing State were conducted at a loss, and still the Court allowed part of the over-all net profit of the corporation to be attributed to the State. A reading of the statute in Norfolk & W.R. Co. reveals further that one facet of the apportionment formula was specifically designed to attribute a portion of the interstate hauls to the taxing State.
Any doubt as to the validity of our position here was entirely dispelled four years after Beeler, in a unanimous per curiam in West Publishing Co. v. McColgan, 328 U.S. 823, 66 S.Ct. 1378, 90 L.Ed. 1603, citing the four cases of Beeler, United States Glue Co., both supra, Interstate Busses Corp. v. Blodgett, 1928, 276 U.S. 245, 48 S.Ct. 230, 72 L.Ed. 551, and International Shoe Co. v. State of Washington, 1945, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95. The case involved the validity of California's tax on the apportioned net income of West Publishing Company, whose business was exclusively interstate. See 27 Cal.2d 705, 166 P.2d 861, 862. While the statement of the facts in that opinion recites that 'The employees were given space in the offices of attorneys in return for the use of plaintiff's books stored in such offices,' it is significant to note that West had not qualified to do business in California and the State's statute itself declared that the tax was levied on income derived from interstate commerce within the State, as well as any arising intrastate. The opinion was not grounded on the triviality that office space was given West's soliciters by attorneys in exchange for the chanceful use of what books they may have had on hand for their sales activities. Rather, it recognized that the income taxes arose from a purely interstate operation.
'In relying on the foregoing cases for the proposition that a foreign corporation engaged within a state solely in interstate commerce is immune from net income taxation by that state, plaintiff (West Publishing Co.) overlooks the distinction made by the United States Supreme Court between a tax whose subject is the privilege of engaging in interstate commerce and a tax whose subject is the net income from such commerce. It is settled by decisions of the United States Supreme Court that a tax on net income from interstate commerce, as distinguished from a tax on the privilege of engaging in interstate commerce, does not conflict with the commerce clause.' 27 Cal.2d 705, 708-709, 166 P.2d 861, 863. (Citations omitted.)
We believe that the rationale of these cases, involving income levies by States, controls the issues here. The taxes are not regulations in any sense of that term. Admittedly they do not discriminate against nor subject either corporation to an undue burden. While it is true that a State may not erect a wall around its borders preventing commerce an entry, it is axiomatic that the founders did not intend to immunize such commerce from carrying its fair share of the costs of the state government in return for the benefits it derives from within the State. The levies are not privilege taxes based on the right to carry on business in the taxing State. The States are left to collect only through ordinary means. The tax, therefore, is 'not open to the objection that it compels the company to pay for the privilege of engaging in interstate commerce.' Underwood Typewriter Co. v. Chamberlain, supra, 254 U.S. at page 119, 41 S.Ct. at page 46. As was said in State of Wisconsin v. Minnesota Mining & Mfg. Co., 1940, 311 U.S. 452, 453, 61 S.Ct. 253, 254, 85 L.Ed. 274, 'it is too late in the day to find offense to that (commerce) Clause because a state tax is imposed on corporate net income of an interstate enterprise which is attributable to earnings within the taxing state * * *.'
While the economic wisdom of state net income taxes is one of state policy not for our decision, one of the 'realities' raised by the parties is the possibility of a multiple burden resulting from the exactions in question. The answer is that none is shown to exist here. This is not an unapportioned tax which by its very nature makes interstate commerce bear more than its fair share. As was said in Central Greyhound Lines of New York v. Mealey, 1948, 334 U.S. 653, 661, 68 S.Ct. 1260, 1265, 92 L.Ed. 1633, 'it is interstate commerce which the State is seeking to reach and * * * the real question (is) whether what the State is exacting is a constitutionally fair demand by the State for that aspect of the interstate commerce to which the State bears a special relation.' The apportioned tax is designed to meet this very requirement and 'to prevent the levying of such taxes as will discriminate against or prohibit the interstate activities or will place the interstate commerce at a disadvantage relative to local commerce.' Id., 334 U.S. at page 670, 68 S.Ct. at page 1270. Logically it is impossible, when the tax is fairly apportioned, to have the same income taxed twice. In practical operation, however, apportionment formulas being what they are, the possibility of the contrary is not foreclosed, especially by levies in domiciliary States.  But that question is not before us. It was argued in Northwest Airlines v. State of Minnesota, 1944, 322 U.S. 292, 64 S.Ct.950, 952, 88 L.Ed. 1283, that the taxation of the entire fleet of its airplanes in that State would result in multiple taxation since other States levied taxes on some proportion of the full value thereof. The Court rejected this contention as being 'not now before us' even though other States actually collected property taxes for the same year from Northwest upon 'some proportion' of the full value of its fleet.  Here the records are all to the contrary. There is nothing to show that multiple taxation is present. We cannot deal in abstractions. In this type of case the taxpayers must show that the formula places a burden upon interstate commerce in a constitutional sense. This they have failed to do.
It is also contended that Spector Motor Service v. O'Connor, 1951, 340 U.S. 602, 71 S.Ct. 508, 509, 95 L.Ed. 573, requires a contrary result. But there it was repeatedly emphasized that the tax was 'imposed upon the franchise of a foreign corporation for the privilege of doing business within the State * * *.' Thus, it was invalid under a long line of precedents, some of which we have mentioned.  It was not a levy on net income but an excise or tax placed on the franchise of a foreign corporation engaged 'exclusively' in interstate operations. Therefore, with the exception of Beeler, heretofore mentioned, the Court made no reference to the net-income-tax cases which control here. We do not construe that reference as intended to impair the validity of the Beeler opinion Nor does it reach our problem. The taxes here, like that in West Publishing Co. v. McColgan, supra, are based only upon the net profits earned in the taxing State. That incidence of the tax affords a valid 'constitutional channel' which the States have utilized to 'make interstate commerce pay its way.' In Spector the incidence was the privilege of doing business, and that avenue of approach had long been declared unavailable under the Commerce Clause. As was said in Spector, 'taxes may be imposed although their payment may come out of the funds derived from petitioner's interstate business, provided the taxes are so imposed that their burden will be reasonably related to the powers of the State and (are) nondiscriminatory.' 340 U.S. at page 609, 71 S.Ct. at page 512. We find that the statutes here meet these tests.
Nor will the argument that the exactions contravene the Due Process Clause bear scrutiny. The taxes imposed are levied only on that portion of the taxpayer's net income which arises from its activities within the taxing State. These activities form a sufficient 'nexus between such a tax and transactions within a state for which the tax is an exaction.' State of Wisconsin v. J. C. Penney Co., supra, 311 U.S. at page 445, 61 S.Ct. at page 250. It strains reality to say, in terms of our decisions, that each of the corporations here was not sufficiently involved in local events to forge 'some definite link, some minimum connection' sufficient to satisfy due process requirements. Miller Bros. Co. v. State of Maryland, 1954, 347 U.S. 340, 344-345, 74 S.Ct. 535, 539, 98 L.Ed. 744. See also Ott v. Miss. Valley Barge Line Co., 1949, 336 U.S. 169, 69 S.Ct. 432, 93 L.Ed. 585; International Shoe Co. v. State of Washington, 1945, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95, and West Publishing Co. v. McColgan, supra. The record is without conflict that both corporations engage in substantial income-producing activity in the taxing States. In fact in No. 12 almost half of the corporation's income is derived from the taxing State's sales which are shown to be promoted by vigorous and continuous sales campaigns run through a central office located in the State. While in No. 33 the percent of sales is not available, the course of conduct was largely identical. As was said in State of Wisconsin v. J. C. Penney Co., supra, the 'controlling question is whether the state has given anything for which it can ask return.' Since by 'the practical operation of (the) 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 * * *' it 'is free to pursue its own fiscal policies, unembarrassed by the Constitution * * *.' Id., 311 U.S. at page 444, 61 S.Ct. at page 250.
^1 § 290.03:
'Classes of taxpayers. An annual tax for each taxable year, computed in the manner and at the rates hereinafter provided, is hereby imposed upon the taxable net income for such year of the following classes of taxpayers:
'(1) Domestic and foreign corporations not taxable under section 290.02 which own property within this state or whose business within this state during the taxable year consists exclusively of foreign commerce, interstate commerce, or both;
'Business within the state shall not be deemed to include transportation in interstate or foreign commerce, or both, by means of ships navigating within or through waters which are made international for navigation purposes by any treaty or agreement to which the United States is a party; * * *.' Minn.Stat.1945, § 290.03, M.S.A.
^2 Minn.Stat. (1945) § 290.19, M.S.A.
^3 Ga.Code Ann. (1937), § 92-3102.
'Rate of taxation of corporations.-Every domestic corporation and every foreign corporation shall pay annually an income tax equivalent to five and one-half per cent. of the net income from property owned or from business done in Georgia, as is defined in section 92-3113: * * *'
Ga.Code Ann. (1937), § 92-3113.
'Corporations, allocation and apportionment of income.-The tax imposed by this law shall apply to the entire net income, as herein defined, received by every corporation, foreign or domestic, owning property or doing business in this State. Every such corporation shall be deemed to be doing business within this State if it engages within this State in any activities or transactions for the purpose of financial profit or gain, whether or not such corporation qualifies to do business in this State, and whether or not it maintains an office or place of doing business within this State, and whether or not any such activity or transaction is connected with interstate or foreign commerce. * * *'
^4 The tax on corporations is part of a general scheme of income taxation which Georgia imposes on individuals (§ 92-3101), corporations (§ 92-3102), and fiduciaries (§ 92-3103).
^5 In Standard Oil Co. v. Peck, 1952, 342 U.S. 382, 72 S.Ct. 309, 96 L.Ed. 427, we struck down Ohio's ad valorem property tax on vessels domiciled there but plying in interstate trade because it was not apportioned.
^6 The Court nevertheless pointed out that such payments did 'not abridge the power of taxation of * * * the home State.' 322 U.S. at page 295, 64 S.Ct. at page 952.
^7 See also Alpha Portland Cement Co. v. Commonwealth of Massachusetts, 1925, 268 U.S. 203, 216, 45 S.Ct. 477, 480, 69 L.Ed. 916, where this Court, striking down a Massachusetts excise tax on a foreign corporation engaged exclusively in interstate commerce, noted that '(t)he right to lay taxes on tangible property or on income is not involved; * * *'
Furthermore, none of the cases which the dissent relies on for the proposition that '(N)o State has the right to lay a tax on interstate commerce in any form * * *' was a net income tax case. In fact, all involved taxes levied upon corporations for the privilege of engaging in interstate commerce. This Court has consistently held that the 'privilege' of engaging in interstate commerce cannot be granted or withheld by a State, and that the assertion of state power to tax the 'privilege' is, therefore, a forbidden attempt to 'regulate' interstate commerce. Cf. Murdock v. Commonwealth of Pennsylvania, 1943, 319 U.S. 105, 112-113, 63 S.Ct. 870, 874-875, 87 L.Ed. 1292.