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CRS Annotated Constitution

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Corporate Privilege Taxes.—Since the tax is levied not on property but on the privilege of doing business in corporate form, a domestic corporation may be subjected to a privilege tax graduated according to paid–up capital stock, even though the latter represents capital not subject to the taxing power of the State.102 By the same token, the validity of a franchise tax, imposed on a domestic corporation engaged in foreign maritime commerce and assessed upon a proportion of the total franchise value equal to the ratio of local business done to total business, is not impaired by the fact that the total value of the franchise was enhanced by property and operations carried on beyond the limits of the State.103 However, a State, under the guise of taxing the privilege of doing an intrastate business, cannot levy on property beyond its borders; therefore, as applied to foreign corporations, a license tax based on[p.1655]authorized capital stock is void,104 even though there be a maximum to the fee,105 unless apportioned according to some method, as, for example, a franchise tax based on such proportion of outstanding capital stock as it represented by property owned and used in business transacted in the taxing State.106 An entrance fee, on the other hand, collected only once as the price of admission to do an intrastate business, is distinguishable from a tax and accordingly may be levied on a foreign corporation on the basis of a sum fixed in relation to the amount of authorized capital stock (in this instance, a $5,000 fee on an authorized capital of $100,000,000).107

A municipal license tax imposed as a percentage of the receipts of a foreign corporation derived from the sales within and without the State of goods manufactured in the city is not a tax on business transactions or property outside the city and therefore does not violate the due process clause.108 But a State lacks jurisdiction to extend its privilege tax to the gross receipts of a foreign contracting corporation for work done outside the taxing State in fabricating equipment later installed in the taxing State. Unless the activities which are the subject of the tax are carried on within its territorial limits, a State is not competent to impose such a privilege tax.109

A tax on chain stores, at a rate per store determined by the number of stores both within and without the State is not unconstitutional as a tax in part upon things beyond the jurisdiction of the State.110

Individual Income Taxes.—Consistent with due process of law, a State annually may tax the entire net income of resident individuals from whatever source received,111 and that portion of a nonresident’s net income derived from property owned, and from any business, trade, or profession carried on, by him within its borders.112 Jurisdiction, in the case of residents, is founded upon the rights and privileges incident to domicile, and, in the case of non[p.1656]residents, upon dominion over either the receiver of the income or the property or activity from which it is derived and upon the obligation to contribute to the support of a government which renders secure the collection of such income. Accordingly, a State may tax residents on income from rents of land located outside the State and from interest on bonds physically without the State and secured by mortgage upon lands similarly situated113 and from a trust created and administered in another State, and not directly taxable to the trustee.114 The fact that another State has lawfully taxed identical income in the hands of trustees operating therein does not necessarily destroy a domiciliary State’s right to tax the receipt of income by a resident beneficiary. “The taxing power of a state is restricted to her confines and may not be exercised in respect of subjects beyond them.”115 Likewise, even though a nonresident does no business within a State, the latter may tax the profits realized by the nonresident upon his sale of a right appurtenant to membership in a stock exchange within its borders.116

Corporate Income Taxes: Foreign Corporations.—A tax based on the income of a foreign corporation may be determined by allocating to the State a proportion of the total.117 However, such a basis may work an unconstitutional result if the income thus attributed to the State is out of all appropriate proportion to the business there transacted by the corporation. Evidence may always be submitted which tends to show that a State has applied a method which, albeit fair on its face, operates so as to reach profits which are in no sense attributable to transactions within its jurisdication.118 Nevertheless, a foreign corporation is in error when it contends that due process is denied by a franchise tax measured by income, which is levied, not upon net income from intrastate business alone, but on net income justly attributable to all classes of business done within the State, interstate and foreign,[p.1657]as well as intrastate business.119 Inasmuch as the privilege granted by a State to a foreign corporation of carrying on local business supports a tax by that State on the income derived from that business, it follows that the Wisconsin privilege dividend tax, consistent with the due process clause, may be applied to a Delaware corporation, having its principal offices in New York, holding its meetings and voting its dividends in New York, and drawing its dividend checks on New York bank accounts. The tax is imposed on the “privilege of declaring and receiving dividends” out of income derived from property located and business transacted in the State, equal to a specified percentage of such dividends, the corporation being required to deduct the tax from dividends payable to resident and nonresident shareholders and pay it over to the State.120

Insurance Company Taxes.—A privilege tax on the gross premiums received by a foreign life insurance company at its home office for business written in the State does not deprive the company of property without due process,121 but a tax is bad when the company has withdrawn all its agents from the State and has ceased to do business, merely continuing to be bound to policyholders resident therein and receiving at its home office the renewal premiums.122 Also violative of due process is a state gross premium tax imposed on a nonresident firm, doing business in the taxing jurisdiction, which purchased coverage of property located therein from an unlicensed out–of–state insurer which consummated the contract, serviced the policy, and collected the premiums outside that taxing jurisdiction.123 Distinguishable therefrom is the following tax which was construed as having been levied, not upon annual premiums nor upon the privilege merely of doing business during the period that the company actually was within the State, but upon the privilege of entering and engaging in business, the percentage “on the annual premiums to be paid[p.1658]throughout the life of the policies issued.” By reason of this difference a State may continue to collect such tax even after the company’s withdrawal from the State.124

A State which taxes the insuring of property within its limits may lawfully extend its tax to a foreign insurance company which contracts with an automobile sales corporation in a third State to insure its customers against loss of cars purchased through it, so far as the cars go into possession of a purchaser within the taxing State.125 On the other hand, a foreign corporation admitted to do a local business, which insures its property with insurers in other States who are not authorized to do business in the taxing State, cannot constitutionally be subjected to a 5% tax on the amount of premiums paid for such coverage.126 Likewise a Connecticut life insurance corporation, licensed to do business in California, which negotiated reinsurance contracts in Connecticut, received payment of premiums thereon in Connecticut, and was there liable for payment of losses claimed thereunder, cannot be subjected by California to a privilege tax measured by gross premiums derived from such contracts, notwithstanding that the contracts reinsured other insurers authorized to do business in California and protected policies effected in California on the lives of residents therein. The tax cannot be sustained whether as laid on property, business done, or transactions carried on, within California, or as a tax on a privilege granted by that State.127

When policy loans to residents are made by a local agent of a foreign insurance company, in the servicing of which notes are signed, security taken, interest collected, and debts are paid within the State, such credits are taxable to the company, notwithstanding that the promissory notes evidencing such credits are kept at the home office of the insurer.128 But when a resident policyholder’s loan is merely charged against the reserve value of his policy, under an arrangement for extinguishing the debt and interest thereon by deduction from any claim under the policy, such credit is not taxable to the foreign insurance company.129 Premiums due from residents on which an extension has been granted by foreign companies also are credits on which the latter may be taxed by the State of the debtor’s domicile;130 the mere fact that the insurers[p.1659]charge these premiums to local agents and give no credit directly to policyholders does not enable them to escape this tax.131


Footnotes

102 Kansas City Ry. v. Kansas, 240 U.S. 227 (1916) ; Kansas City, M. & B. R.R. v. Stiles, 242 U.S. 111 (1916) .
103 Schwab v. Richardson, 263 U.S. 88 (1923) .
104 Western Union Tel. Co. v. Kansas, 216 U.S. 1 (1910) ; Pullman Co. v. Kansas, 216 U.S. 56 (1910) ; Looney v. Crane Co., 245 U.S. 178 (1917) ; International Paper Co. v. Massachusetts, 246 U.S. 135 (1918) .
105 Cudahy Co. v. Hinkle, 278 U.S. 460 (1929) .
106 St. Louis S. W. Ry. v. Arkansas, 235 U.S. 350 (1914) .
107 Atlantic Refining Co. v. Virginia, 302 U.S. 22 (1937) .
108 American Mfg. Co. v. St. Louis, 250 U.S. 459 (1919) . Nor does a state license tax on the production of electricity violate the due process clause because it may be necessary, to ascertain, as an element in its computation, the amounts delivered in another jurisdiction. Utah Power & Light Co. v. Pfost, 286 U.S. 165 (1932) .
109 James v. Dravo Contracting Co., 302 U.S. 134 (1937) .
110 Great Atlantic & Pacific Tea Co. v. Grosjean, 301 U.S. 412 (1937) .
111 Lawrence v. State Tax Comm’n, 286 U.S. 276 (1932) .
112 Shaffer v. Carter, 252 U.S. 37 (1920) ; Travis v. Yale & Towne Mfg. Co., 252 U.S. 60 (1920) .
113 New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937) .
114 Maguire v. Trefy, 253 U.S. 12 (1920) .
115 Guaranty Trust Co. v. Virginia, 305 U.S. 19, 23 (1938) .
116 New York ex. rel. Whitney v. Graves, 299 U.S. 366 (1937) .
117 Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113 (1920) ; Bass, Ratcliff & Gretton Ltd. v. Tax Comm’n 266 U.S. 271 (1924) . The Court has recently considered and expanded the ability of the States to use apportionment formulae to allocate to each State for taxing purposes a fraction of the income earned by an integrated business conducted in several States as well as abroad. Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978) ; Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980) ; Exxon Corp. v. Department of Revenue, 447 U.S. 207 (1980) . Exxon refused to permit a unitary business to use separate accounting techniques that divided its profits among its various functional departments to demonstrate that a State’s formulary apportionment taxes extraterritorial income improperly. Bair, supra, at 276–80, implied that a showing of actual multiple taxation was a necessary predicate to a due process challenge but might not be sufficient.
118 Hans Rees’ Sons v. North Carolina, 283 U.S. 123 (1931) .
119 Matson Nav. Co. v. State Board, 297 U.S. 441 (1936) .
120 Wisconsin v. J.C. Penney Co., 311 U.S. 435, 448–49 (1940) . Dissenting, Justice Roberts, along with Chief Justice Hughes and Justices McReynolds and Reed, stressed the fact that the use and disbursement by the corporation at its home office of income derived from operations in many States does not depend on and cannot be controlled by, any law of Wisconsin. The act of disbursing such income as dividends, he contended is “one wholly beyond the reach of Wisconsin’s sovereign power, one which it cannot effectively command, or prohibit or condition.” The assumption that a proportion of the dividends distributed is paid out of earnings in Wisconsin for the year immediately preceding payment is arbitrary and not borne out by the facts. Accordingly, “if the exaction is an income tax in any sense it is such upon the stockholders (many of whom are nonresidents) and is obviously bad.” See also Wisconsin v. Minnesota Mining Co., 311S 452 (1940).
121 Equitable Life Soc’y v. Pennsylvania, 238 U.S. 143 (1915) .
122 Provident Savings Ass’n v. Kentucky, 239 U.S. 103 (1915) .
123 State Bd. of Ins. v. Todd Shipyards, 370 U.S. 451 (1962) .
124 Continental Co. v. Tennessee, 311 U.S. 5, 6 (1940) (emphasis added).
125 Palmetto Ins. Co. v. Connecticut, 272 U.S. 295 (1926) .
126 St. Louis Compress Co. v. Arkansas, 260 U.S. 346 (1922) .
127 Connecticut General Co. v. Johnson, 303 U.S. 77 (1938) .
128 Metropolitan Life Ins. Co. v. City of New Orleans, 205 U.S. 395 (1907) .
129 Orleans Parish v. New York Life Ins. Co., 216S 517 (1910).
130 Liverpool & L. & G. Ins. Co. v. Orleans Assessors, 221 U.S. 346 (1911) .
131 Orient Ins. Co. v. Assessors of Orleans, 221 U.S. 358 (1911) .
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