The Pullman Co. v. Commissioner of Taxation

The question here is whether relator is exempt, under Mason St. 1927, § 2278, as to taxes paid for the years 1934 and 1936, from the provisions of § 2 of the franchise tax act (L. 1933, c. 405), and whether it is exempt under the same act as amended by Ex. Sess. L. 1937, c. 3, as to tax so paid for the year 1937, from the provisions of the said franchise tax act.

Prior to 1906, the constitution of Minnesota provided for the taxation of sleeping car companies in the form of a gross receipts tax. Minn. Const. art. 9, § 17. The so-called "wide open" tax amendment of 1906 repealed art. 9, § 17. There remained, then, in the constitution no provision for the imposition of a gross earnings tax on sleeping car companies. This court, however, in State v. Wells Fargo Co. 146 Minn. 444, 454, 179 N.W. 221, 222, held:

"* * * The power to tax property in this manner is, in our opinion, inherent in the state, unless some constitutional provision deprives the state of the power. Before the adoption of the amendment of 1906, the provision of section 1, art. 9, that all taxes 'shall be as nearly equal as may be' restricted the taxing power of the legislature, and it was deemed necessary to adopt section 17 in order to preserve the right of imposing this form of taxation. But the amendment of 1906, providing that 'taxes shall be uniform upon the same class of subjects' is, in our opinion, broad enough to permit the taxation of express companies in a class by themselves, and by this form of taxation. Section 17 was omitted from the amendment of 1906 because no longer necessary."

The above case involved the taxation of express companies on a gross receipts basis, but of course it applies equally to sleeping car companies.

Mason St. 1927, § 2277, defines sleeping car companies. Section 2278, which imposes upon them a gross earnings tax, provides that "upon such gross earnings such sleeping car company shall pay into the state treasury of this state, inlieu of all taxes and assessments upon all taxable property, ofsaid company within this state, a sum of money equal to five per cent of the gross earnings * * *." This section was amended by Ex. Sess. L. 1937, c. 3, to read "in lieu of all ad valorem taxes upon all taxable property of said company within this state * * *." (Amendment indicated by italics.) Relator contends that it has fulfilled all its tax obligations to the state by the payment of a gross receipts tax as provided for in the statutes above set out. The state insists that relator is also subject to the franchise tax imposed by L. 1933, c. 405, § 2, which provides:

"There is hereby imposed on every domestic and foreign corporation an annual tax for the privilege of existing as acorporation or of transacting any local business within thisstate during any part of its taxable year, measured by its taxable net income for such year, computed in the manner and at the rates hereinafter provided." (Italics supplied.)

Section 5 of the same act exempts certain corporations and organizations from taxation under the act. Relator and other gross earnings taxpayers are not included in this list.

Relator urges that the franchise tax imposed by c. 405, § 2, is a property tax and that the gross earnings tax which it pays is in lieu of all ad valorem taxes upon all its taxable property within the state and thus, also, in lieu of a franchise tax. It therefore becomes necessary at the outset to determine whether such franchise tax is a property tax.

There can be no doubt that a state may impose constitutionally upon a foreign corporation engaged in interstate and intrastate transportation a tax for the privilege of carrying on the intrastate business measured by a percentage of the income therefrom, even though the carrier uses the same instrumentalities and employes in conducting both kinds of commerce and pays a state ad valorem tax on those instrumentalities. Pacific T. T. Co. v. Tax Comm.297 U.S. 403, 56 S. Ct. 522, 80 L. ed. 760, 105 A.L.R. 1, and Annotation; Southern Ry. Co. v. Watts, 260 U.S. 519,43 S. Ct. 192, 67 L. ed. 375; 51 Am. Jur., Taxation, §§ 845 to 853. The two taxes relate to distinct and different subjects. The subject of an ad valorem tax is property, and that of an excise tax is a right or privilege. 51 Am. Jur., Taxation, § 292; 2 Cooley, Taxation (4 ed.) § 849.

In view of the nature of the property of certain corporations, their gross earnings are used as a practical and convenient measure in computing the tax to be levied against them. This tax still remains a property tax. In M. St. L. R. Co. v. Koerner, 85 Minn. 149, 150, 88 N.W. 430, 431, this court in speaking of the gross earnings tax said:

"It has long been settled by the decisions of this state that the gross earnings tax law was not intended to change the character of the tax, but, for the purpose of certainty, was intended to change the method of computation. The amount required to be paid still remains a tax upon the railroad property, and not against the corporation." State v. U.S. Express Co. 114 Minn. 346,131 N.W. 489, 37 L.R.A. (N.S.) 1127; Railway Express Agency, Inc. v. Holm, 180 Minn. 268, 271, 230 N.W. 815, 816; State v. M. St. L. R. Co. 204 Minn. 250, 253, 283 N.W. 244, 245.

And in State v. The Pullman Co. 146 Minn. 458, 460,179 N.W. 224, this court, speaking of the tax on the property of express and sleeping car companies, said:

"* * * Each statute intends a property tax measured by gross earnings and each is a lieu tax in the sense that while the basis of assessment is different the property is taxed by exacting a contribution based on gross earnings and cannot be further burdened. It is still a property tax."

In State v. Wells Fargo Co. 146 Minn. 444, 456,179 N.W. 221, 223, supra, this court also discussed the nature of a gross earnings tax as follows:

"A gross earnings tax is not required to be an exact equivalent of the ad valorem tax imposed on other property. If there must be a valuation of the property taxed and an exact comparison of results, then the whole purpose of the gross earnings tax is defeated, for it is usually resorted to because, as to the property involved, it is not practicable to make such a valuation or to impose an ad valorem tax."

In Railway Express Agency, Inc. v. Holm, 180 Minn. 268, 271,230 N.W. 815, 816, supra, the court again said that the gross earnings tax is a property tax, and specifically stated that "It is not an ad valorem tax."

The gross earnings tax is in lieu of property taxes and is in fact a property tax measured by a percentage of gross earnings. But it is important to keep in mind that we have said it is a property tax because it is in lieu of ad valorem taxes on property. As said in State v. Fawkes, 210 Minn. 587, 589,299 N.W. 666, 667:

"* * * We must always bear in mind that the gross earnings tax is a tax upon property and that the earnings are merely the convenient yardstick or measure by which that property tax is determined. It is just as much a property tax as if it were assessed ad valorem."

Chapter 405, § 2, imposes on domestic and foreign corporations an annual tax "for the privilege of existing as a corporation or of transacting any local business within this state * * * measured by its taxable net income for such year, * * *." The domestic corporation is taxed for the privilege of existing as a corporation, and a foreign corporation, such as relator here, is taxed for the grant of the privilege of transacting local business within the state. Thus, the domestic corporation is taxed for the privilege of "being" and the foreign corporation for the privilege of "doing." The tax on these privileges is measured by the taxable net income of the corporations. I am of the opinion that the franchise tax is clearly not a property, but an excise tax, and that therefore the provisions of Ex. Sess. L. 1937, c. 3, which make the gross earnings tax on sleeping car companies a tax "in lieu of all advalorem taxes" (italics supplied) do not make the imposition of such gross earnings tax a tax in lieu also of the franchise tax provided for in c. 405, § 2.

There can be no objection upon constitutional or other grounds to the imposition of both a gross earnings tax and an excise or privilege tax on a foreign corporation engaged in the sleeping car business within the state, unless the so-called excise or privilege tax is in fact a second property tax, because there is no legal obstacle to the imposition of both taxes, except the proscription against other property taxes (the gross earnings tax is a property tax) upon the taxable property of such companies resulting from the provisions of the statute imposing the gross earnings tax that such companies shall pay such tax in lieu of all taxes upon all their taxable property within the state. Here, that is the basis of the objection to the tax in question.

In Bemis Bro. Bag Co. v. Wallace, 197 Minn. 216,266 N.W. 690, and State v. Duluth, Missabe Northern Ry. Co. 207 Minn. 618,292 N.W. 401, this court held that the franchise tax provided for in L. 1933, c. 405, § 2, was a property tax. This holding is contrary to the great weight of authority. 2 Cooley, Taxation (4 ed.) §§ 826, 841, 845, 858, 861; 51 Am. Jur., Taxation, §§ 809, 811.

It is the general rule that a franchise tax, such as is provided for in L. 1933, c. 405, § 2, is not a tax on the property of the corporation, but an excise tax upon the privilege to exist as a corporation and the privilege of doing business. Tremont Suffolk Mills v. City of Lowell,178 Mass. 469, 59 N.E. 1007; A. J. Tower Co. v. Commonwealth,223 Mass. 371, 374, 111 N.E. 966, 968; North Jersey St. Ry. Co. v. Jersey City, 73 N.J.L. 481, 63 A. 833; City of Newark v. Tunis,81 N.J.L. 45, 57, 78 A. 1066, 1071; State ex rel. Marquette Hotel Inv. Co. v. State Tax Comm. 282 Mo. 213, 234, 221 S.W. 721,726; State v. Pierce Petroleum Corp. 318 Mo. 1020, 1027,2 S.W.2d 790, 794; City of Chicago v. Chicago City Ry. Co.245 Ill. App. 473; United North South Development Co. v. Heath (Tex.Civ.App.) 78 S.W.2d 650, 652; New York ex rel. United States A. P. P. Co. v. Knight, 174 N.Y. 475, 478, 67 N.E. 65,66, 63 L.R.A. 87; In re Commercial Safe Deposit Co. 148 Misc. 527,266 N.Y. S. 626; Educational Films Corp. v. Ward (D.C. N Y) 41 F.2d 395, 397; Pacific Co. Ltd. v. Johnson,212 Cal. 148, 298 P. 489, 492; American States Water Service Co. v. Johnson, 31 Cal. App. 2d 606, 612, 88 P.2d 770, 773; State v. Clement Nat. Bank, 84 Vt. 167, 179, 78 A. 944, 949, Ann. Cas. 1912d 22; Commonwealth v. Columbia G. E. Corp. 336 Pa. 209,217-221, 8 A.2d 404, 410-411, 131 A.L.R. 927; State v. Pullman-Standard Car Mfg. Co. 235 Ala. 493, 500,179 So. 541, 546, 117 A.L.R. 498; Hollingsworth Whitney Co. v. State, 241 Ala. 96, 98, 1 So. 2d 387, 388; International Paper Co. v. Curry, 243 Ala. 228, 9 So. 2d 8; Union Steam Pump Sales Co. v. Secretary of State, 216 Mich. 261, 264,185 N.W. 353, 354; Underwood Typewriter Co. v. Chamberlain,94 Conn. 47, 55, 108 A. 154, 157; Home Ins. Co. v. New York,134 U.S. 594, 606, 10 S. Ct. 593, 597, 33 L. ed. 1025, 1031.

As a general rule, it may be asserted that a property tax is one imposed upon property as such or upon the taxpayer because of the ownership of property. Ordinarily, a property tax is measured by the amount of property owned by the taxpayer on a given day and not by the total amount owned by him during the year. The value of the property is determined by periodical assessments, and the taxes voted are spread against the property in proportion to its value. Liability for the tax does not depend on an act of the taxpayer. It does not arise because of his use or disuse of the property. The exaction is absolute; the liability exists in any event. Also, provision is usually made for sale of the property to enforce the tax. 51 Am. Jur., Taxation, §§ 29-32. See, Standard Clothing Co. v. Wolf, 219 Minn. 128, 17 N.W.2d 329. Our statutes relating to property taxes impose them in the manner mentioned. While gross earnings taxes imposed in lieu of property taxes at first blush seem to be an exception, they are not so. They are imposed because of the ownership of property. Because the percentage of the gross earnings is deemed to be an approximation of ad valorem taxes, it has been adopted as a convenient measure of the tax.

On the other hand, an excise tax is not assessed against particular property. An excise tax is one imposed on the performance of an act, the enjoyment of a privilege, the engaging in an occupation, or upon the manufacture, sale, or consumption of commodities. Ordinarily, it is imposed directly by the legislature without assessment of the subjects involved and is measured by the amount of business done, the value of the privilege, or by a sum fixed by the legislature itself. In most cases, the voluntary activity of the taxpayer with respect to the privilege or the manufacture, sale, or consumption of goods creates liability for the tax. 51 Am. Jur., Taxation, §§ 33-35. As said in § 35:

"An excise and a property tax, when the two approach each other, ordinarily may be distinguished by the respective methods adopted of laying them and fixing their amounts. If a tax is imposed directly by the legislature without assessment, and its sum is measured by the amount of business done or the extent to which the conferred privileges have been enjoyed or exercised by the taxpayer, irrespective of the nature or value of the taxpayer's assets, it is regarded as an excise. Although an excise or privilege tax, like a property tax, is passed to raise revenue, it is to be distinguished from property taxation in that it is imposed upon the right to exercise a privilege, and its payment is invariably made a condition to the exercise of the privilege involved."

Here, the tax is imposed upon the exercise of a privilege, not the ownership of property. It is imposed directly by the statute without assessment and without regard to the value of the instrumentalities employed by the taxpayer in the exercise of the privilege. Liability for the tax is in personam and can arise only from the voluntary activity of the taxpayer in exercising the privilege with respect to which the tax is imposed. If no local business is transacted, there is no tax. If local business is transacted, there is a tax, the amount of which depends upon the amount of business transacted. In Security Sav. Com. Bank v. District of Columbia,51 Ohio App. D. C. 316, 317, 279 F. 185, 186, where it was held that a tax upon incorporated savings banks measured by a percentage of their gross earnings for the privilege of doing business within the District of Columbia was a franchise or excise and not a property tax, the court said:

"It will be observed that the paragraph we are considering imposes upon the corporation the duty of paying the tax, and provides that the amount shall be determined by the sum of the gross earnings. If there are no earnings, there will be no tax, no matter how much property the corporation may own, and there will be no earnings unless business is done. The amount of the tax fluctuates with the quantity of business transacted, and is measured by it. This indicates an intention to tax the doing of business, and not the property; hence the tax is a franchise tax. Thus reasons the Supreme Court of the United States in the decisions just referred to.

"In the Spreckels Case [192 U.S. 397, 411, 24 S. Ct. 376,380, 48 L. ed. 496, 501] we find this language:

" 'Clearly the tax is not imposed upon gross annual receiptsas property, but only in respect of the carrying on or doingthe business of refining sugar. It cannot be otherwise regarded because of the fact that the amount of the tax is measured by the amount of the gross annual receipts.' [Italics supplied.]

"Here the tax is measured by the amount of the gross earnings."

In 51 Am. Jur., Taxation, § 809, the writer of the text, in discussing the taxes upon the franchise of corporations, makes this statement:

"Although franchise taxes have been defined as 'a tax upon the privilege of doing business under corporate organization,' taxes upon the franchise of corporations fall into at least five different classes: (1) organization taxes, or fees exacted of domestic corporations for the grant of corporate powers; (2) excises levied periodically, usually annually, upon the franchise of domestic corporations; (3) excises charged foreign corporations for the privilege of entering and doing business within the state; (4) excises upon special privileges enjoyed by particular corporations; and (5) ad valorem taxes on franchises as property. These taxes are not necessarily alternative, but may be concurrent. Thus, a property tax may be imposed on a corporate franchise, and an excise may also be imposed on the right to incorporate in the first instance and annually thereafter as the right to continue corporate existence. * * * There may, however, be such a thing as a double taxation of corporate franchises which will offend constitutional principles."

The franchise tax under c. 405, § 2, is clearly not an organization tax or fee exacted of domestic corporations for the grant of corporate power, as set out in (1) of the above classification, nor is it an excise upon special privileges as set out in (4) of the above classification, nor an ad valorem tax on franchises as property set out in (5). The taxes provided for in c. 405 come within (2) "excises levied periodically, usually annually, upon the franchise of domestic corporations" and (3) "excises charged foreign corporations for the privilege of entering and doing business within the state."

In 2 Cooley, Taxation (4 ed.) § 824, it is stated that taxes on franchises are divisible into (a) excises and (b) property taxes. And in § 826 the writer discusses the distinction between these two taxes in the following language:

"The term 'franchise tax,' as generally used, has no definite legal meaning. It may mean either an excise or a property tax. Generally, however, the term is used as meaning an excise, as distinguished from a property tax, imposed on franchises and consisting of a more or less arbitrary sum having little or no connection with the actual value, although such a tax, even when an excise, is often measured, at least to some extent, by the amount of property or earnings of the corporation. At the same time, a tax on a franchise or franchises of a corporation, as property, and imposed according to the rules relating to taxation of property rather than those governing excise taxes, is sometimes referred to as a 'franchise tax.' "

And in § 837 it is said:

"The term 'excise tax,' as used herein, means a privilege tax as distinguished from a property tax. A franchise tax may take the form of an excise or the form of a property tax. * * * and it is sometimes difficult to determine whether a tax on corporate franchises is an excise or a property tax. * * * So-called franchise taxes are generally held to be an excise tax rather than a property tax, * * *."

Continuing, in § 841 it is stated:

"A tax imposed on a foreign corporation for the privilege of doing business in the state is an excise and not a property tax, although the amount thereof is measured by the capital stock, property in the state, earnings, dividends or the like."

In 18 Minn. L.Rev. 93, 94, Prof. Henry Rottschaefer in discussing the then recently enacted state income tax statute says:

"The statute imposes two types of tax that are quite distinct in their legal character. That imposed on corporations by section 2 is a privilege tax measured for any given taxable year by the taxable net income for such year. The tax in the case of a Minnesota corporation is on the privilege of existing as a corporation during any part of the taxable year. This state cannot tax a foreign corporation on that privilege since such corporation does not derive that privilege from it. The tax on it is for the privilege, derived from this state, of transacting within it any local business during any part of a taxable year."

Although the franchise tax act itself (c. 405) does not state whether the tax being imposed is a property tax or an excise, its wording clearly favors an interpretation that it is an excise. It reads (§ 2):

"There is hereby imposed on every domestic and foreign corporation an annual tax for the privilege of existing as a corporation or of transacting any local business within the state * * *." (Italics supplied.)

The tax for the privilege is measured by its taxable net income.

If my impression is correct that the tax imposed by L. 1933, c. 405, § 2, is an excise tax and not a property tax, then, naturally it would follow that insofar as this view contravenes what was said by this court in Bemis Bro. Bag Co. v. Wallace,197 Minn. 216, 266 N.W. 690, and State v. Duluth, Missabe Northern Ry. Co. 207 Minn. 618, 292 N.W. 401, these cases should be overruled.

The case of State v. Duluth G. W. Co. 76 Minn. 96,78 N.W. 1032, 57 L.R.A. 63, supra, is not in point. That case does not hold that a tax upon a foreign corporation's privilege of exercising a corporate franchise measured by income from local business, as here, is a property or any other particular sort of tax, for the obvious reason that no such question was there involved. Nor did the court, for the same reasons, decide whether a tax upon the privilege of exercising a corporate franchise was generically a property or excise tax. On the contrary, the only question there involved was whether what unquestionably was a separate ad valorem property tax on a corporate franchise was double taxation because of the fact that the franchise had been taxed already as part of the personal property of the corporation by being included in the value of its intangibles. The corporations there involved were taxed on their personal property under G. S. 1894, § 1530, which provided a procedure for reaching for tax purposes all tangible and intangible property of a corporation, including its franchises.Id. § 1524, provided for the taxation of franchises as such as personal property. With some amendments not here material, these sections now are respectively Minn. St. 1945, §§ 273.51 and 273.49 (Mason St. 1927, §§ 2021 and 2019). They relate to the assessment of personal property for purposes of ad valorem taxation. They have nothing to do with excise taxes on either corporations or their franchises. The question for decision was not whether a tax upon the privilege of exercising a corporate franchise was a property or an excise tax, but rather whether, since the franchises of the corporations were taxed once under § 1530 as personal property upon an ad valorem basis, the legislative intent was to tax the franchises a second time under § 1524 by an ad valorem tax on them separately as personal property. The gist of the decision on this point is found in the following language (76 Minn. 104, 78 N.W. 1033,57 L. 11. A. 70):

"* * * It would be wholly unreasonable to assume that the legislature would adopt the scheme of reaching the franchises and other intangible property of a corporation through the taxation of its capital stock, and at the same time turn around and specifically tax as a separate item of personal property, and deduct from the value of the stock, the very intangible property which they were endeavoring to reach through the taxation of the stock. Sections 1524 and 1530 must be read and construed together; and, doing so, the fourteenth subdivision of the former section, providing for listing and assessing franchises as a specific and separate item of personal property, was intended to apply only to franchises owned by private persons or others not falling within the provisions of section 1530."

While the court held that franchises are intangible property and may be taxed as such (76 Minn. 103, 78 N.W. 1033,57 L.R.A. 69), it was not decided that an excise could not be laid on the exercise of a corporate franchise. In fact, while the able and distinguished counsel for defendants contended that the corporate franchises could not be taxed separately as property, they conceded that a valid excise could be imposed upon them. Counsel said (76 Minn. 99,78 N.W. 1033): "A franchise tax in the nature of an excise tax may undoubtedly be laid." (Italics supplied.) Of course, counsel conceded only what is the correct rule of law. There is nothing in the decision to the contrary. It would be unthinkable that the court should decide a question not before it, and then not only contrary to well-established rules of law, but what was conceded upon the argument to be such.

Of course, corporate franchises may be taxed as property. Likewise, an excise tax may be imposed for the privilege of exercising a corporate franchise. Whether a particular tax is a property or excise tax depends on whether it is imposed on the franchise as property or upon the privilege of exercising the franchise. The fact, as here, that the tax is not computed upon the franchise as property based upon a valuation thereof, but in terms is imposed upon the exercise of the franchise and is measured by the business done, shows that the tax is an excise and not a property tax. 51 Am. Jur., Taxation, §§ 31-35, 808-811. The instant tax is therefore clearly an excise.

Relator is taxed under the provisions of a gross earnings tax. If the tax provided for in c. 405 is an excise tax, it is again being taxed, but not on the same property. There is here no double taxation. In 51 Am. Jur., Taxation, § 292, it is stated:

"The principle that the imposition of both an excise tax on a privilege, activity, occupation, or calling and an ad valorem tax on property used in the exercise, conduct, or performance of such calling, privilege, or activity is not invalid as double taxation is generally recognized. The principle is bottomed on the theory that the subject of ad valorem taxation is property and that of excise taxation is a right or privilege, and that consequently, the requirement frequently made essential to the existence of double taxation in the unconstitutional sense, namely, that both impositions must be against the same taxable subject, is lacking."

And in § 294:

"* * * it does not constitute unlawful duplicate taxation to impose taxes simultaneously * * * on the corporate property and the franchise to exist or act as a corporation * * *."

In 2 Cooley, Taxation (4 ed.) § 849, the author states:

"* * * The importance of determining whether a franchise tax is a property tax or an excise tax also relates to the rules governing so-called double taxation, since there is no double taxation where one tax is a property tax and the other is an excise tax."

As it is my opinion that L. 1933, c. 405, § 2, imposes an excise tax and that double taxation does not result from the imposition of such a tax, although relator is subject to the gross earnings tax, I respectfully dissent.