Untitled Texas Attorney General Opinion ( 1983 )

The Attorney General of Texas
October 28, lV83
JIM MATTOX
Attorney General
Supreme Court Building
Honorable Bob Bullock Opinion No..JM-83
P. 0. aox 12546
Comptroller of Public Accounts
Austin. TX. 78711-2548 P. 0. Box 2243 Re: Constitutionality of
5121475-2501 Austin, Texas 78767 section 182.042 of the Tax
Telex 9101674-1367 Code
Telecopier 51214750266
Dear Mr. Bullock:
1607 Main St.. Suite 1400
Dallas. TX. 75201-4709 YOU ask whether section 182.042 of the TSX Code is
2141742J3944 constitutional. The section imposes s gross receipts tax on foreign
car companies on business done in this state. Citing the recent
4624 Alberta Ave., Suite 160
United States Supreme Court case of Western and Southern Life
El Paso. TX. 79905-2793 Insurance Company V. State Board of Equalization of California, 451
- 9151533-3464 U.S. 648 (1981). you assert that section 182.042 of the Tax Code is
unconstitutional on its face because it imposes a gross receipts tax
,--II Dallas Ave., Suite 202
on car companies residing or incorporated outside this state only and
Hws,on, TX. 77002-6986
not on Texas companies engaged in identical activities. We agree and
7131650-0666 conclude that a court would declare that section 182.042 of the Tax
Code violates the equal protection clause of the fourteenth amendment
to the United States Constitution.
606 Broadway. Suite 312
Lubbock. TX. 79401-3479
6061747.5238
Section 182.041 of the Tax Code sets forth the following:
9182.041. Definitions
4309 N. Tenth. Suite B
McAllen. TX. 78501.1665
In this subchapter:
51216624547
(1) 'Car company' means a person who:
200 Main Plaza. Suite 400
San Antonio. TX. 76205-2797 owns a stock car, refrigerator or fruit
(A)
512/225-4191
car of any kind, tank car of any kind, coal car
of any kind, furniture car, cormnonbox csr, or
An Equal Opportunity/ flat car; and
Affirmative Action Employer
(B) leases or charges mileage for the use
of the car.
(2) 'Business' mean6 the leasing of or
charging mileage for the use of the car.
Section 182.042 of the Tax Code provides the following:
p. 349
Honorable Bob Bullock - Page 2 (JM-83)
S182.042. Imposition and Rate of Tax
(a) A tax is imposed on each car company
residing or incorporated outside this state on the
gross receipts from business done in this state.
(b) The tax rate is three percent of the gross
receipts. (Emphasis added).
Sections 182.041 and 182.042 of the Tax Code are merely the
codification of an occupation tax first enacted at Acts 1907,
Thirtieth Legislature. 1st Called Session, at page 479, as article
7062, V.T.C.S. Article 7062, V.T.C.S., was subsequently repealed and
re-enacted as section 11.04 of Title 122 "Taxation" at Acts 1959,
Fifty-sixth Legislature, 3rd Called Session, chapter 1, at page 303.
The three enactments are substantially identical; each imposes the tax
upon foreign car companies only and not on Texas companies engaged in
identical activities. There has been no court challenge to the
statute's constitutionality; the issue here, then, is one of first
impression.
In Western and Southern Life Insurance Company v. State Board of
Equalization of California, 451 U.S. 648 (1981) [hereinafter Western],
the United States Supreme Court upheld the constitutionality of a
California retaliatory insurance ;ax against the charge that it
violated the equal protection clause of the fourteenth amendment to
the United States Constitution. The state of California, in addition
to imposing a premiums tax on both foreign and domestic insurance
companies doing business in California, also imposed a retaliatory tax
on a foreign insurer when that insurer's state of incorporation
imposed higher taxes on California insurers doing business in that
stats than California would otherwise impose on that state's insurers
doing business in California.
A line of early Supreme Court cases held that a state may attach
essentially any conditions it chooses upon the grant of the privilege
to do business within that state. See, e.g., New York V. Roberts. 171
U.S. 658 (1898); Horn Silver Mining Company V. New York, 143 U.S. 305
(1892); Pembina Consolidated Silver Mining & Milling Co. v.
Pennsylvania, 125 U.S. 181 (1888). Philadelphia Pine Association V.
New York, 119 U.S. 110 (1886); Paul V. Virginia, 75 U.S. 168 (1869).
HOWaVer, this doctrine, first enunciated in Paul V. Virginia, supra,
"as rejected shortly after the turn of the century. see, e.g.,
Southern Railway Company V. Greene, 216 U.S. 400 (1910); Pullman
Company V. Kansas, 216 U.S. 56 (1910); Western Union Telegraph Company
v. Kansas, 216 U.S. 1 (1910). While acknowledging that a line of
subsequent cases apparently resurrected the Paul V. Virginia doctrine,
see, Prudential Insurance Company V. Benjamin, 328 U.S. 408 (1946);
Lincoln National Life Insurance Company V. Read, 325 U.S. 673 (1945),
p. 350
Honorable Bob Bullock - Page 3 (JM-831
the Court in Western, 451 U.S. 664, quoting Hanover Fire Insurance
Company V. Harding, 272 U.S. 494. 511 (1926), declared that,
[wlith respect to the general tax burden on
business, 'the foreign corporation stands equal,
and is to be clsssified with domestic corporations
of the same kind.'
The Court in Western, 451 U.S. 664-65, then restated the doctrine
first set forth in Frost 8 Frost Trucking Company V. Railroad
Commission of Texas, 271 U.S. 583, 593-94 (1926):
It is not necessary to challenge the proposition
that, as a general rule, the state, having power
to deny a privilege altogether, may grant it upon
such conditions as it sees fit to impose. But the
power of the state in that respect is not
unlimited; and one of the limitations is that it
mY not impose conditions which require the
relinquishment of constitutional rights. If the
state m=Y compel the surrender of one
constitutional right as a condition of its favor.
it may, in like manner, compel a surrender of all.
It is inconceivable that guaranties embedded in
the Constitution of the United States may thus be
manipulated out of existence.
The Court in Western imposed a traditional equal protection "rational
basis" test:
We consider it now established that, whatever the
extent of a State's authority to exclude foreign
corporations from doing business within its
boundaries, that authority does not justify
imposition of more onerous taxes or other burdens
on foreign corporations than those imposed on
domestic corporations, unless the disrrimination
between foreign and domestic corporations bears a
rational relation to a legitimate state purpose.
451 U.S. at 667-68.
The test was formulated in the following way:
In determining whether a challenged classification
IS rationally related to achievement of a
legitimate state purpose, we must answer two
questions: (1) Does the challenged legislation
have a legitimate purpose?, and (2) Was it
p. 351
Honorable Bob Bullock - Page 4 (JM-83)
reasonable for the law makers to believe that use
of the challenged classification would promote
that purpose?
451 U.S. at 668. The Court went on to answer both questions in the
affirmative. We believe, however, that a court, employing this same
test in a challenge to section 182.042 of the Tax Code would not so
find. We conclude that section 182.042 fails the first test.
In Western, the Court declared that the purpose of the
retaliatory insurance tax was to promote the interstate business of
domestic insurers by deterring other states from enacting
discriminatory or excessive taxes.
Since the amount of revenue raised by the
retaliatory tax is relatively modest . . . and
impetus for passage of the tax comes from the
nationwide insurance industry, it is clear that
the purpose is not to generate revenue at the
expense of out-of-state insurers, but to apply
pressure on other States to maintain low taxes on
California insurers.
451 U.S. 669-70. The court concluded that there could be no doubt
that the promotion of domestic industry by deterring barriers to
interstate business is a legitimate state purpose. In this instance,
however, we have discovered no indication from any source that the
occupation tax at issue seeks to deter barriers to interstate
commerce. In fact, we can discern no purpose for the tax other than
to provide a means to regulate the entry of foreign car companies into
the state and to provide a means to generate revenue for the state.
We think it significant that the tax imposed by section 182.042
only upon foreign car companies does not serve to equalize or
compensate the tax burden already borne by Texas car companies. See,
*, Southern Railway Company v. Greene, supra. For example, the
franchise tax is imposed on foreign and domestic corporations alike.
Tax Code, §§lll.OOl et seq. See Colonial Pipeline Company v. Traigle,
421 U.S. 100 (1975); Ford Motor Company v. Beauchamp, 308 U.S. 331
(1940). reh'g denied 388 U.S. 640 (1945). Indeed, none of the
remaining business taxes impose a tax on only foreign corporations
doing business in Texas: the taxes are imuosed on foreien and domestic
corporations or activities alike. See g' enerally, Tax Code, §§151.001
through 203.001.
We conclude that section 189.042 of the Tax Code, by imposing a
gross receipts tax on foreign car companies only, while not imposing a
tax on Texas companies engaged in identical activities, violates the
p. 352
Honorable Bob Bullock - Page 5 (JM-83)
equal protection clause of the fourteenth amendment to the United
States Constitution and is unconstitutional.
SUMMARY
Section 18sL.42 of the Tax Code, which imposes
a gross receipts tax on car companies residing or
incorporated outside this state only and not on
Texas companies engaged in identical activities,
violates the equal protection clause of the
fourteenth amendment to the United States
Constitution and is unconstitutional.
JIM MATTOX
Attorney General of Texas
TOM GREEN
First Assistant Attorney General
DAVID R. RICHARDS
Executive Assistant Attorney General
Prepared by Jim Moellinger
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Rick Gilpin, Chairman
Jon Bible
Colin Carl
Susan Garrison
Jim Moellinger
Nancy Sutton
p. 353