State ex rel. Froedtert Grain & Malting Co. v. Tax Commission

The following opinion was filed March 3, 1936:

Fowler, J.

The suit is brought directly in this court to procure a declaratory judgment as to the constitutionality of sec. 3, ch. 505, Laws of 1935, as amended by ch. 552, Laws of 1935, which imposes a two-and-a-half-per-cent tax on the transaction by which corporate dividends are declared and received out of income derived from property located and business transacted within this state. The relator is a Wisconsin corporation doing business in this state and Minnesota. The majority of its stockholders are nonresidents. The tax is deductible by the corporation from the dividends declared and payable by the corporation to the tax commission. It is declared by the statute to be a tax “for the privilege of declaring and receiving dividends.” The full text of the section as amended is printed in the margin.¹

The relator contends that the statute is void because, (1) it purports to impose a tax on something that is “nonexistent;” because (2) it impairs the obligation of contracts contrary to sec. 10, art. I, of the United States constitution; because (3) it violates the due process clause of the Fourteenth amendment to the United States constitution; because (4) it violates the equal privilege clause of the Fourteenth amendment; and because ( 5 ) it is so indefinite and uncertain as to be incapable of enforcement.

(1) It is claimed in several of the briefs filed in opposition to the tax imposed by the statute that the statute is void for attempting to impose a privilege tax on something that is not a privilege, but a right. Under some dictionary definitions this might be true, but the word “privilege,” as used in the statutes taxing privileges, is used as synonymous with right. Many cases are cited in Words and Phrases to this effect: Vol. 6 (First Series), p. 5583; vol. 3 (Second Series), p. 1206; vol. 6 (Third Series), p. 131; vol. 3 (Fourth Series), p. 178. This court has so construed the word in the inheritance tax cases. Nunnemacher v. State, 129 Wis. 190, 108 N. W. 627; Beals v. State, 139 Wis. 544, 121 N. W. 347; Estate of Bullen, 143 Wis. 512, 128 N. W. 109; State ex rel. Kempsmith v. Widule, 161 Wis. 389, 154 N. W. 695; Estate of Stephenson, 171 Wis. 452, 177 N. W. 579. It is true that some courts and text writers have made the broad statement that a privilege tax cannot be imposed on the right to own property. Freiberg Co. v. Dawson (D. C.), 274 Fed. 420, 434; Prof. Beals in 37 Harvard Law Review, 1. This may be so in the abstract, but it is not, and never has been so, in the concrete. Taxes were early imposed on the right to own carriages. They are now universally imposed on the right to own automobiles. They are imposed on the right to own dogs. The briefs in opposition to the tax are largely beside the case, because they do not recognize the true nature of the tax. .The tax is a privilege tax, or an excise tax, one form of which is a tax imposed on the transfer of property. The federal government in its stamp taxes imposes a tax on the right to transfer property by deed; it formerly imposed a tax on the right to transfer funds in banks by check; it imposes taxes on the transfer of property by inheritance or will. These taxes are best characterized as a tax on the transaction involved. The power of the state to impose excise taxes is under our system of dual sovereignty as broad as the power of the federal government. True, taxation must not conflict with the Fourteenth amendment, but that we will consider later. “The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. It reaches to every trade or occupation; to every object of industry, use, or enjoyment; to every species of possession.” Cooley, Const. Lim. (7th ed.) p. 678. A sales tax in one view is but a tax on the right to buy — to receive — the thing sold, but is better viewed as a tax on the right to consummate the transaction of sale. There are, according to- Cooley on Taxation (4th ed.), § 38, three kinds of taxes: Property taxes, capitation or poll taxes, and excises. - Excise taxes are defined in Cooley, Const. Lim. (7th ed.) p. 680, as taxes “laid upon the manufacture, sale, or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges.” This definition is quoted with approval in Flint v. Stone Tracy Co. 220 U. S. 107, 31 Sup. Ct. 342, 55 L. Ed. 389. An excise tax is a privilege tax, as distinguished from a property or capitation 'tax. 2 Cooley, Taxation (4th ed.), § 837; Black v. State, 113 Wis. 205, 218, 89 N. W. 522. All taxes, not property taxes or capitation taxes are excise or privilege taxes. The word “privilege” is broad enough to cover any species of tax except these two and is used with such effect in our constitutional provision covering taxation:

“The rule of taxation shall be uniform, and taxes shall be levied upon such property with such classifications as to forests and minerals, including or separate or severed from the land, as the legislature shall prescribe. Taxes may also be imposed on incomes, privileges and occupations, which taxes may be graduated and progressive, and reasonable exemptions may be provided.” Sec. 1, art. VIII, Wis. Const.

Much stress is laid in the briefs filed upon the declaration of the statute that the tax is imposed “for the privilege of declaring and receiving dividends.” It is contended that the language imposes a tax upon the recipient of the dividend. The language is perhaps susceptible to the construction that the legislature so considered it. But it is immaterial how the legislature considered it. The legislature cannot by its mere designation change the nature of the tax. Whatever the designation in the act may be, it is for the court to determine the nature and effect of the tax and uphold it or void it according as its nature and effect as determined may require. McCallen Co. v. Com. of Massachusetts, 279 U. S. 620, 49 Sup. Ct. 432, 73 L. Ed. 874; Ed. Schuster & Co. v. Henry, 218 Wis. 506, 261 N. W. 20.

However the legislature may have regarded the tax, we have no difficulty in construing the statute as imposing an excise or privilege tax upon the transaction involved of transferring the dividends from the corporation to its stockholders.

(2) It is contended in several of°the briefs in opposition to the tax that the statute is unconstitutional because it impairs the obligation of the contract of the corporation with its stockholders, especially as to its preferred stockholders. The point urged is that a state has granted a charter to a corporation covering the right to pay dividends to its stockholders ; that the right is a contract right, as a charter is a contract; and that this state cannot impair that right by imposing a special tax on the exercise of it. The defendant argues that this contention is effectively met by the holding of the United States supreme court in Travis v. Yale & Towne Mfg. Co. 252 U. S. 60, 40 Sup. Ct. 228, 64 L. Ed. 460, that the statute therein involved did not impair 'the contract obligations of the employer. That statute imposed a tax on salaries earned within the state of New York and required, as to nonresident employees, that the employer deduct the tax from the salaries paid and made the employer liable for its amount. The opinion in that case states, page 77, that there was no averment that any such contract existing before the passage of the New York act required salaries to be paid in the state of the nonresident’s residence, or contained any other provision conflicting with the provision for withholding salaries. This implies that the obligation to pay salaries was not impaired by the withholding provision of the statute, although it rested on contracts that existed prior to the enactment of the statute. The obligation to pay dividends is the pre-existing contract obligation it is claimed the instant statute impairs. We do npt see that this obligation differs from the contract obligation to pay salaries involved in the case cited. If the latter obligation was not impaired by the New York statute, the former is not by our statute. As in the Travis Case, supra, there is here no allegation that the dividends involved are payable at the stockholder’s residence. Dividends are payable where the directors determine. 5 Thompson, Corporations, 5298. They are not necessarily payable at the residence of the stockholder. If the Trains Case be considered as not reaching the precise point involved, the point is covered by the general proposition that if the state has the power to tax, no pre-existing contract in relation to the subject of the tax can operate to invalidate taxation of the subject under the contract clause of the United States constitution. Chanler v. Kelsey, 205 U. S. 466, 27 Sup. Ct. 550, 51 L. Ed. 882; State v. Mollier, 96 Kan. 514, 152 Pac. 771, L. R. A. 1916C, 551; Royal Mineral Asso. v. Lord (D. C.), 13 Fed. (2d) 227, 229.

(3) (a) It is claimed that if the tax be considered valid as to residents of the state it is unconstitutional as to nonresident stockholders as an attempt to- tax nonresidents over whom the state has no jurisdiction. Such taxation is taking property without due process. First Nat. Bank v. State of Maine, 284 U. S. 312, 52 Sup. Ct. 174. The basis of this claim is that when the dividend is declared it becomes a debt due from the corporation to the stockholder and as such is taxable only by the state of the stockholder’s residence. State ex rel. Manitowoc Gas Co. v. Tax Comm. 161 Wis. 111, 152 N. W. 848, and Newport Co. v. Tax Comm. 219 Wis. 293, 261 N. W. 884, are cited in support of this contention.

If the tax were considered as a property tax, or as a tax imposed on the nonresident, this would be correct. But the tax is an excise tax, a tax on the transaction involved. It is an excise tax imposed on the devolution of income, derived from transaction of business within the state, which is confessedly a proper subject of taxation. It is as much subject to an excise tax as is an inheritance tax, and the supreme court of the United States recognizes such taxes as not violating the United States constitution. Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 18 Sup. Ct. 594, 42 L. Ed. 1037. We perceive no substantial difference between the two classes of devolution, or the two transactions involved in the devolution of the subject of the transfer. The income involved in the Manitowoc Gas Co. Case, supra, was interest due from the gas company to the nonresident on the company’s bonds. The income was held not taxable against the nonresident under our normal income tax law. The statute involved in that case imposed a tax “upon such income as is derived from sources within the state or within its jurisdiction.”. Dividends derived from business transacted within the state constitute income derived as stated in that statute, and in the instant statute, in a sense that interest paid by a corporation does not. Interest paid may not have been earned at all. It may have been borrowed. And if earned it may not have been earned within the state, or not wholly earned therein. Income as used in the statute is synonymous with earnings. Interest paid is not. It is to be noted that the tax imposed on the salaries of nonresidents involved in the Travis Case, supra, was held not to impose a personal liability upon the nonresident employee. The tax, except as to , a feature not involved herein, was upheld as a sequestration at their source of payment of earnings properly taxable which is precisely and only what the instant statute does.

(3) (b) It is contended in some of the briefs filed that the tax must be held to be a property tax under the rule of the United States supreme court in Dawson v. Kentucky Distilleries & Warehouse Co. 255 U. S. 288, 41 Sup. Ct. 272. 65 L. Ed. 638. A statute of Kentucky by its terms imposed a tax on whiskey of a stated sum per gallon when it was withdrawn from a bonded warehouse. The tax was held in the case cited to be a property tax because imposed by reason of the ownership of property computed on the value of the thing taxed. No transfer of property, no devolution of title, was involved in the transaction. The transaction was the mere removal of one’s own property from the place where it was required by the United States government to be kept. It is claimed that on the same basis the instant tax must be so construed. If it is an excise tax as distinguished from a property tax, this does not follow. Excise taxes may be measured by the amount involved in the transaction covered. Every sales tax is so measured. A tax on a dividend so measured, notwithstanding the measure of it, remains an excise tax. People v. Home Ins. Co. 92 N. Y. 328; Home Ins. Co. v. New York, 134 U. S. 594, 10 Sup. Ct. 596. -In the opinion of the United States supreme court in the above-entitled case it is said, page 600:

“As its [the state’s] .revenues to meet its expenses are lessened in one direction, it may look to any other property as sources of revenue, which is not exempted from taxation. Its action in this matter is not the subject of judicial inquiry in a federal tribunal.”

The opinion cites Delaware Railroad Tax Case, 18 Wall. 206, 231, and California v. Central Pacific R. Co. 127 U. S. 1, 14, 8 Sup. Ct. 1073, in support of the proposition, and quotes from the opinion in the former:

“And the manner in which its [the franchise’s] value shall be assessed and the rate of taxation, however arbitrary or capricious, are mere matters of legislative discretion.”

The tax involved in the case cited was one expressly declared against the corporations. But the United States supreme court is authority for so considering the instant tax. It was held in Barnes v. Philadelphia & R. R. Co. 17 Wall. (84 U. S.) 294, 306, that a tax of five per cent on dividends declared by railroad and canal companies, due or payable to stockholders, including nonresidents, imposed by act of congress, which authorized the companies to .deduct the amount of the tax from the dividends paid, was a tax against the corporation. The Travis Case, supra, so ruled in effect as to the New York statute. If the tax in the latter imposed no personal liability on the employee, and did impose such liability directly on the employer, it was in effect a tax 'directly on the employer. Upon like reason the instant tax may be considered as in effect imposed against the corporation.

(3) (c) It is claimed in some of the briefs opposing the tax that in requiring the corporation to withhold the tax from the dividend to each of its stockholders the statute imposes upon the corporations a burden of labor and incidental expense that renders it violative of the prohibition of the United States and state constitutions against taking property without due process and without compensation. This point is sufficiently met by the Travis Case, supra.

(4) What is said above under (3) covers in a general way the equality clause of the Fourteenth amendment as well as the due process clause. This clause “does not deprive the states of the power to adjust their systems of taxation in accordance with their own ideas of public policy.” 12 C. J. p. 1151, § 881, and cases cited to note 57. “The rule of equality, in respect to the subject, only requires the same means and methods to be applied impartially to all the constituents of each class, so that the law shall operate equally and uniformly upon all persons in similar circumstances.” Kentucky Railroad Tax Cases, 115 U. S. 321, 337, 6 Sup. Ct. 57, 63, 29 L. Ed. 414. The instant statute, whether considered from the viewpoint of the corporation or its stockholders, is within this requirement. A state transfer tax on sales of stock was upheld as not proscribed by the Fourteenth amendment in Hatch v. Reardon, 204 U. S. 152, 27 Sup. Ct. 188. A succession tax was upheld in Orr v. Gilman, 183 U. S. 278, 22 Sup. Ct. 213, and in this case it was held that the construction of the act as given by the New York court must be accepted by the federal courts. An inheritance tax statute was upheld in Beers v. Glynn, 211 U. S. 477, 29 Sup. Ct. 186. And in Keeney v. New York, 222 U. S. 525, 32 Sup. Ct. 105, a state transfer tax on transfers of property between parties alive was upheld. In this case it was held that the fact that the amount of the tax was based on the value of the property transferred did not operate to constitute the tax a property tax. “An excise on transfers . . . does not lose that character because the amount to be paid is determined by the values conveyed.” Page 534 of the opinion, citing Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 18 Sup. Ct. 594.

(5) It is contended in one of the briefs filed that the statute involved is so- indefinite and uncertain in its terms as to be void independent of constitutional objections. This contention is based on paragraph (4) of the statute, which provides, among other things, that the amount of income attributable to the state shall be computed in accordance with the provisions of ch. 71, Stats. This chapter provides the method of determining the amount of business done within this state by foreign corporations under the general normal income tax law. It also provides that dividends, in absence of proof to the contrary, shall be presumed to have been made out of earnings attributable to this state during the preceding year; and that if a corporation declaring a dividend has sustained a loss during the preceding year the tax commission on application shall determine the portion payable from surplus that was derived from business done within the state. In this connection the “Income Tax Regulations” of the Wisconsin Tax Commission are referred to. The attack here under consideration seems to be based more upon alleged indefiniteness and uncertainties of these regulations than on the statute. No doubt the administration of the normal income tax statute, as applied to^ corporate income due to business transacted within the state, presents many difficulties of administration. So far none have proved unsurmountable, as far as the acts of the commission that have come before this court show. We see no ground for fearing greater difficulties under the instant statute than under the normal income tax statute. The administration of the statute, in the first instance, is up to the Tax Commission. We shall not assume that the problems of administration will be impossible of solution.

We believe that the above covers all of the substantial objections to the tax imposed by the statute presented by the briefs filed in opposition to it, eight in number, comprising two hundred eighty-four printed pages. That all would be specifically treated is hardly to be expected. To do so would extend the opinion to undesirable limits.

Much of the briefs filed in opposition to the tax imposed by the statute involved is devoted to criticisms of the statute as unjust and of its alleged economic and administrative vices. Arguments along these lines do not present a justicia-ble question. Even if these criticisms are meritorious, the defects claimed in these respects cannot be considered by the court. The court can only determine as to the power of the legislature to enact the statute. It cannot pass upon its desirability or wisdom, or allow its views as to these matters to influence its judgment. Criticisms on these grounds can only properly be presented to and considered by the legislature.

By the Court. — It is declared and adjudged that sec. 3, of ch. 505, Laws of 1935, as amended by ch. 552, Laws of 1935, does not violate the constitution of the state of Wisconsin or the constitution of the United States, and is valid.

A motion for a rehearing was denied, with $25 costs, on April 28, 1936.

1 Section 3. Privilege Dividend Tax. (1) For the privilege of declaring and receiving dividends, out of income derived from property located and business transacted in this state, there is hereby imposed a tax equal to two and one-half per centum of the amount of such dividends declared and paid by all corporations (foreign and local) after the passage and publication of this act and prior to July 1, 1937. Such tax should be deducted and withheld from such dividends payable to residents and nonresidents by the payor corporation.

(2) Every corporation required to deduct and withhold any tax under this section shall, on or before the last day of the month following the payment of the dividend, make return thereof and pay the tax to the tax commission, reporting such tax on the forms to be prescribed by the tax commission.

(3) Every such corporation hereby made liable for such tax, shall deduct the amount of such tax from the dividends so declared.

(4) In the case of corporations doing business within and without the state of Wisconsin, such tax shall apply only to dividends declared and paid out of income derived from business transacted and property located within the state of Wisconsin. The amount of income attributable to this state shall be computed in accordance with the provisions of chapter 71. In the absence of proof to the contrary such dividends shall be presumed to have been paid out of earnings of such corporation attributable to Wisconsin under the provisions of chapter 71, for the year immediately preceding■ the payment of such dividend. If a corporation had a loss for the year prior to the payment of the dividend, the tax commission shall upon application, determine the portion of such dividend paid out of corporate surplus and undivided profits derived from business transacted and property located within the state.

(5) Dividends paid by a subsidiai'y corporation to its parent shall not be subject to the tax herein imposed provided that the subsidiary and its parent report their income for taxation under the provisions of chapter 71 on a consolidated income return basis, or both corporations report separately.

(6) The provisions of this section shall not apply to dividends declared and paid by a Wisconsin corporation out of its income which it has reported for taxation under the provisions of chapter 71, to the extent that the. business of such corporation consists in the receipts of dividends from which a privilege dividend tax has been deducted and withheld and the distribution thereof to its stockholders.

(7) For the purposes of this section dividends shall be defined as in section 71.02, except that the tax herein imposed shall not apply to stock dividend or liquidating dividends.

(8) The tax hereby levied, if not paid within the time herein provided, shall become delinquent and when delinquent shall be subject to a penalty of two per cent on the amount of the tax and interest at the rate of one-half per cent per month until paid.

(9) The tax hereby imposed shall, when collected by the tax commission, be paid by it into the state treasury.