Railway Express Agency v. Virginia (358 U.S. 434)/Opinion of the Court
Once again the effort of the Commonwealth of Virginia to levy a tax against express agencies is before us for decision. Nearly five years ago this Court struck down as a 'privilege tax' violative of the Commerce Clause of the Federal Constitution its tax statute under which was laid an assessment on appellant's 'privilege of doing business' in Virginia.  Railway Express Agency v. Commonwealth of Virginia, 1954, 347 U.S. 359, 74 S.Ct. 558, 98 L.Ed. 757. Subsequently the Virginia General Assembly enacted the Act here involved levying a 'franchise tax' on express companies, measured by gross receipts from operations within Virginia, in lieu of all other property taxes on intangibles and rolling stock. In due course an assessment against appellant was made thereunder for 1956. Both the State Corporation Commission, which has jurisdiction of such levies in Virginia, and the Commonwealth's highest court have upheld the validity of the new law as well as the assessment made thereunder, Railway Express Agency v. Commonwealth of Virginia, 199 Va. 589, 100 S.E.2d 785. Appellant levels a dual attack, the first being that the statute is a 'privilege tax' and like the former one violates the Commerce Clause; or, secondly, that in any event the assessment under it is calculated in such a manner as to deprive appellant of its property without due process of law in violation of the Fourteenth Amendment. On appeal we noted probable jurisdiction, 1958, 356 U.S. 929, 78 S.Ct. 772, 2 L.Ed.2d 760. We believe that Virginia has eliminated the Commerce Clause objections sustained against its former tax law. While the tax is in lieu of other property taxes which Virginia can legally assess and should be their just equivalent in amount, Postal Telegraph Cable Co. v. Adams, 1895, 155 U.S. 688, 696, 15 S.Ct. 268, 269, 39 L.Ed. 311, we will not inquire into the exactitudes of the formula where appellant has not shown it to be so baseless as to violate due process. Nashville, C. & St. L.R. v. Browning, 1940, 310 U.S. 362, 60 S.Ct. 968, 84 L.Ed. 1254. The failure of the appellant to furnish, in its return, certain necessary information showing its gross receipts allocated to Virginia, called for under the statute and requested by the Commonwealth, has left the correct amount unobtainable by the latter except by some method of approximation and places the burden on appellant to come forward with affirmative evidence of extraterritorial assessment.
Background and Activity of Appellant in Virginia.
Since the opinion in the former appeal, supra, 347 U.S. at pages 360-361, 74 S.Ct. at pages 559-560, relates the factual details concerning appellant's operations in Virginia, we believe it sufficient to say here that it is a Delaware corporation, owned by 68 of the railroads of the United States. It is engaged in both an interstate and intrastate express business throughout the Nation, save in Virginia, where a constitutional provision bars foreign corporations from possessing or exercising any of the powers or functions of public service corporations. There it operates a wholly owned subsidiary, a Virginia corporation, which carries on its intrastate functions within the Commonwealth. Appellant's Virginia business is thus of an exclusively interstate nature. Through exclusive contract arrangements with 177 of the railroads of the Nation appellant is the sole operator of express facilities on their lines, including Virginia. It pays therefor all of its net income, thus achieving one of the stated purposes of the agreement-that appellant '* * * shall have no net taxable income.' In turn, appellant's Virginia subsidiary pays all of its net income over to it for the privilege of exercising appellant's exclusive contracts in intrastate business in the Commonwealth. Appellant owns property within Virginia, its return filed with the Commonwealth for tax purposes showing $120,110.70 in cash on deposit; automotive equipment and trucks $262,719.63; real estate of the value of $32,850; and office equipment listed at $42,884.83.
The Commonwealth has a comprehensive tax structure covering public service corporations.  It empowers local governments to levy ad valorem taxes on the 'dead' value of all real property and tangible personal property, except rolling stock, located within their respective jurisdictions. This leaves free for state purposes taxes on rolling stock, money and other intangibles, and the 'live' or 'goint-concern' value of the business in Virginia. We are concerned only with the state tax which is levied on the franchises of express companies. It provides  in pertinent part that
'(e)ach express company * * * shall * * * pay to the State a franchise tax which shall be in lieu of taxes upon all of its other intangible property and in lieu of property taxes on its rolling stock.'
The franchise tax is measured by 'the gross receipts derived from operations within' Virginia which is deemed
'to be all receipts on business beginning and ending within this State and all receipts derived from the transportation within this State of express transported through, into, or out of this State.'
The State Corporation Commission is directed, after notice, to assess the franchise tax on the basis of a report to be filed by the company involved or, in case of its failure to file such report, the Commission is to base the assessment 'upon the best and most reliable information that it can procure.'
The Issues Under the Statute.
First, let us clear away the dead underbrush of the old law. The new tax is not denominated a license tax laid on the 'privilege of doing business in Virginia'; nor is it 'in addition to the property tax' levied against appellant, nor a condition precedent to its engaging in interstate commerce in the Commonwealth. The General Assembly has made crystal-clear that the tax is now a franchise tax laid on the intangible property of appellant, and is levied 'in lieu of taxes upon all of its other intangible property and * * * rolling stock.' The measure of the tax is on gross receipts, fairly apportioned, and, as to appellant, is laid only on those 'derived from the transportation within this State of express transported through, into, or out of this State.'
Appellant concedes that the Commerce Clause does not prohibit the States from levying a tax on property owned by a concern doing an interstate business. It agrees that it has rolling stock and money in the Commonwealth, as well as intangibles, including its exclusive express privileges with the railroads. It readily admits that the latter agreements are 'valuable contract rights' and contribute a principal element to the 'going concern value' of its business in the Commonwealth. Subsuming that a valid tax levy might be levied on such intangibles, it argues, however, that the incidence of the tax is on appellant's privilege to carry on an exclusively interstate business in Virginia rather than on intangible property. Our sole question under the Commerce Clause is whether the tax in practical operation is on property or on privilege.
The due process issue is entangled with appellant's failure to file, in its report, data covering its gross receipts allocated to Virginia.  Failing to do this the State Corporation Commission used a formula which in effect ascribed to Virginia the proportion of such receipts as the mileage of carriers within Virginia bore to the total national mileage of the same lines.  Appellant contends that the assessment made in this manner is violative of due process and that the resulting amount of tax levied was confiscatory.
In any event, appellant argues, the 'in lieu' provisions of the law, as applied to it, are invalid. Admitting that it had cash, intangibles and rolling stock that were subject to a state tax but which suffered none because of the 'in lieu' provisions of this law, it contends that the tax assessed under the latter was no just equivalent of the 'in lieu' taxes but was greatly in excess thereof and violative of due process.
Validity of the Law Under the Commerce Clause.
As we have pointed out, the statute levies a franchise tax in lieu of all taxes on 'other intangible property' and rolling stock. (Emphasis added.) This leaves no room for doubt that the General Assembly intended to levy a tax upon appellant's intangibles. Moreover, supporting this interpretation, both the State Commission and the Supreme Court of Appeals have construed it as a tax on appellant's intangible property and 'going concern' value. This trinity of agreement by three state agencies, though not conclusive, has great weight in our determination of the natural and reasonable effect of the statute. Railway Express Agency v. Commonwealth of Virginia, supra; Spector Motor Service v. O'Connor, 1951, 340 U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573; Cudahy Packing Co. v. State of Minnesota, 1918, 246 U.S. 450, 38 S.Ct. 373, 62 L.Ed. 827; United States Express Co. v. State of Minnesota, 1912, 223 U.S. 335, 346, 32 S.Ct. 211, 215, 56 L.Ed. 459. This is not to say that a legislature may effect a validation of a tax, otherwise unconstitutional, by merely changing its descriptive words. Lawrence v. State Tax Commission, 1932, 286 U.S. 276, 280, 52 S.Ct. 556, 557, 76 L.Ed. 1102; Galveston, H. & San Antonio R. Co. v. State of Texas, 1908, 210 U.S. 217, 227, 28 S.Ct. 638, 640, 52 L.Ed. 1031. One must comprehend, however, the difference between the use of magic words or labels validating an otherwise invalid tax and their use to disable an otherwise constitutional levy. The latter this Court has said may sometimes be done. Railway Express Agency v. Commonwealth of Virginia, supra, 347 U.S. at page 364, 74 S.Ct. at page 561; Spector Motor Service v. O'Connor, supra, 340 U.S. at page 607, 71 S.Ct. at page 511; McLeod v. J. E. Dilworth Co., 1944, 322 U.S. 327, 330, 64 S.Ct. 1023, 1025, 88 L.Ed. 1304.
Appellant buttresses its argument with reasoning that a tax on 'going concern' value just cannot be measured by fairly apportioned gross receipts. While it may be true that gross receipts are not the best measure, it is too late now to question its constitutionality. Illinois Cent. R. Co. v. State of Minnesota, 1940, 309 U.S. 157, 60 S.Ct. 419, 84 L.Ed. 670; Great Northern R. Co. v. State of Minnesota, 1929, 278 U.S. 503, 49 S.Ct. 191, 73 L.Ed. 477; Pullman Co. v. Richardson, 1923, 261 U.S. 330, 43 S.Ct. 366, 67 L.Ed. 682; Cudahy Packing Co. v. State of Minnesota, 1918, 246 U.S. 450, 38 S.Ct. 373, 62 L.Ed. 827; United States Express Co. v. State of Minnesota, 1912, 223 U.S. 335, 32 S.Ct. 211, 56 L.Ed. 459; Wisconsin & M.R. Co. v. Powers, 1903, 191 U.S. 379, 24 S.Ct. 107, 48 L.Ed. 229. These decisions are still in good standing on our books. Even on the former appeal this Court used the following language:
'Of course, we have held, and it is but common sense to hold, that a physical asset may fluctuate in value according to the income it can be made to produce. A live horse is worth more than a dead one, though the physical object may be the same, and a smooth-going automobile is worth more than an unassembled collection of all its parts. The physical facilities used in carrying on a prosperous business are worth more than the same assets in bankruptcy liquidation or on sale by the sheriff. No one denies the right of the State, when assessing tangible property, to use any fair formula which will give effect to the intangible factors which influence real values. Adams Express Co. v. Ohio State Auditor,  166 U.S. 185, 17 S.Ct. 604, 41 L.Ed. 965. But Virginia has not done this.' 347 U.S. at page 364, 74 S.Ct. at page 561.
We feel that Virginia has now done just that.
We are not convinced by appellant's 'boot strap' argument that the express privileges it enjoys have no value to it because all of its net income by agreement with the railroads is paid over to them. We believe it more accurate to rely on its admission that 'No one would question the fact that Appellant's exclusive express privileges on the railroads are valuable contract rights.' This concession, when taken in the light of the expressed purpose of appellant that the payment of its net income for the use of the express privileges was solely to make certain 'that the Express Company shall have no net taxable income,' exposes the frivolous nature of this contention. We are not so blinded to business realities as to permit such a manipulation of the finances of appellant, the railroads' wholly owned subsidiary, to frustrate the Commonwealth in its effort to collect an otherwise fair tax.
Nor is there any substance to the contention that since Virginia could not prohibit appellant from engaging in its exclusively interstate business, it therefore may not tax 'good will' or 'going concern' value which is built up thereby. We need only cite some of the cases of this Court holding to the contrary: Great Northern R. Co. v. State of Minnesota, 1929, 278 U.S. 503, 49 S.Ct. 191, 73 L.Ed. 477; Pullman Co. v. Richardson, 1923, 261 U.S. 330, 43 S.Ct. 366, 67 L.Ed. 682; Cudahy Packing Co. v. State of Minnesota, 1918, 246 U.S. 450, 38 S.Ct. 373, 62 L.Ed. 827; United States Express Co. v. State of Minnesota, 1912, 223 U.S. 335, 32 S.Ct. 211, 56 L.Ed. 459; Adams Express Co. v. Ohio, 165 U.S. 194, 17 S.Ct. 305, 41 L.Ed. 683 (rehearing 1897, 166 U.S. 185, 17 S.Ct. 604, 41 L.Ed. 965); Western Union Telegraph Co. v. Taggart, 1896, 163 U.S. 1, 16 S.Ct. 1054, 41 L.Ed. 49; Cleveland, C., C. & St. L.R. Co. v. Backus, 1894, 154 U.S. 439, 14 S.Ct. 1122, 38 L.Ed. 1041.
Validity of the Tax Under the Due Process Clause.
In view of the fact that appellant failed to file the required information as to its gross receipts, thus placing an almost insurmountable burden on the Commonwealth to ascertain them, it is necessary that appellant make an affirmative showing that the mileage method used by Virginia is so palpably unreasonable that it violates due process. This is has failed to do. Appellant rests its argument not on facts and figures covering its actual gross income in Virginia but on comparative statistics based on tangible assets. It points out that during the taxable year the value of its tangible assets in Virginia ($475,065) was only 0.6% of its total assets ($79,700,426), while the amount of gross receipts apportioned to Virginia by the State Corporation Commission was 1.7% ($6,499,519) of its total gross receipts ($387,241,764).
The difference in the two percentages, appellant contends, must represent intangible values on which Virginia cannot operate because located outside of its jurisdiction. This syllogism does not take into account the facts of business life. Tangible assets in Virginia may produce much more income than like assets elsewhere. Death Valley Scotty generated much less gross from his desert sightseeing wagon than did his counterpart in Central Park. The utter fallacy of using tangible assets as the test of going-concern value here is demonstrated by the fact that appellant's tangible assets in Virginia depend entirely on whether it elects to retain title to tangible property or place it in the name of its subsidiary, the Virginia company. By placing them in the Virginia company it could thus, on a tangible asset formula, escape all tax on its intangibles.
There is nothing in the record even to indicate that the tangible assets that appellant carries in its own name in Virginia did not actually generate the amount of gross receipts attributed to it by the State Corporation Commission. In this connection, we note that 1.9% of appellant's total contract mileage was located there. Even where taxpayers have attempted to show through evidence, as this appellant has not, that a given apportionment formula effected an appropriation of more than that to which the State was entitled, this Court has required "clear and cogent evidence' that it results in extraterritorial values being taxed.' Butler Bros. v. McColgan, 1942, 315 U.S. 501, 507, 62 S.Ct. 701, 704, 86 L.Ed. 991; Norfolk & Western R. Co. v. State of North Carolina, 1936, 297 U.S. 682, 688, 56 S.Ct. 625, 628, 80 L.Ed. 977; cf. Bass, Ratcliff & Gretton Ltd., v. State Tax Comm'n, 1924, 266 U.S. 271, 282-284, 45 S.Ct. 82, 84-85, 69 L.Ed. 282. As this Court said in Nashville, C. & St. L.R. v. Browning, 1940, 310 U.S. 362, 365-366, 60 S.Ct. 968, 970-971, 84 L.Ed. 1254:
'In basing its apportionment on mileage, the Tennessee Commission adopted a familiar and frequently sanctioned formula. Pullman's Palace-Car Co. v. Commonwealth of Pennsylvania, 141 U.S. 18, 11 S.Ct. 876, 35 L.Ed. 613; State of Maine v. Grand Trunk Ry. Co., 142 U.S. 217, 12 S.Ct. 121, 163, 35 L.Ed. 994; Pittsburgh, C., C. & St. L. Ry. Co. v. Backus, 154 U.S. 421, 14 S.Ct. 1114, 38 L.Ed. 1031; Branson v. Bush, 251 U.S. 182, 40 S.Ct. 113, 64 L.Ed. 215. See 2 Cooley on Taxation, pp. 1660-1664. Its asserted inapplicability to the particular situation is rested on petitioner's evidence as to the comparative revenue-producing capacity of its lines in and out of Tennessee. But both the Commission and the Supreme Court of the state thought that this evidence, however weighty, was insufficient to displace the relevance of the formula. In a matter where exactness is concededly unobtainable and the feel of judgment so important a factor, we must be on guard lest unwittingly we displace the tax officials' judgment with our own. Certainly we cannot say that the combined judgment of Commission, Board, and state courts is baseless.' (Emphasis added.)
Appellant's final argument is to the effect that the tax in question, in the amount of $139,739.66, is 'no just equivalent' of the tax 'in lieu of which' it was levied, and therefore violates the Due Process Clause. This argument is based upon a false premise which can be quickly disposed of. Appellant states that under Virginia's system of segregation of property for state and local taxation the only property which the Commonwealth had the power to tax was cash on hand and on deposit and appellant's rolling stock, which, under the old rates, would have yielded a tax of $679.77. Appellant is clearly in error. As we read the Virginia statutes, and as they were construed below, the Commonwealth (as contrasted with the local) government also had the power to tax the 'going concern' value of all of appellant's Virginia property, as well as its other intangible property rights such as its valuable express privileges. Thus, the new tax is not only in lieu of the previous tax on rolling stock and cash on hand, but also reaches intangible rights of great value which since Railway Express, supra, had escaped taxation altogether.
It follows from what we have said that the tax is valid, and the judgment below is therefore affirmed.
^1 Va.Code, 1950, § 58-547.
^2 See Va.Const. § 170; and Va.Code 1950, §§ 58-9, 58-10.
^3 Va.Code 1950, § 58-546 et seq., as amended by Va.Acts 1956, c. 612.
^4 In its return, appellant stated that it was 'unable' to ascertain its gross receipts from express transported 'through, into or out of' the Commonwealth. The record contains testimony to this effect by one of appellant's officers. The record also shows, from one of appellant's own exhibits, that since 1931 the tax year in question is the only year in which appellant has been 'unable' to report this information. From 1931 to 1953, appellant managed to find a way of compiling or computing and reporting such data, and in only 7 of these 23 years did the Commonwealth disagree with appellant's figures. Due to the downfall of the old tax in Railway Express Agency v. Commonwealth of Virginia, supra, there was no reporting requirement for 1954 and 1955. Under the new tax, for 1956, appellant made no attempt to present evidence to show what reductions should be made in the Commission's figures, nor did it explore the possibility of an agreement about it as it apparently had in prior years. Cf. Cohan v. Commissioner of Internal Revenue, 2 Cir., 1930, 39 F.2d 540, 543-544. Instead, it relied completely upon its claim that the tax was unconstitutional.
^5 Actually, the amounts paid to such carriers for Virginia traffic were ascertained by that method. Since the carrier payments represent only net receipts, the Virginia gross receipts were determined by applying to the Virginia carrier payments the ratio that its total gross receipts bore to its total carrier payments.
^6 Parenthetically, it might be noted that the Adams case involved a 'going concern' valuation of $488,265 as compared to a 'dead' valuation of property in the amount of $28,438. 165 U.S. 194, 237, 17 S.Ct. 305, 315, 41 L.Ed. 683.