303 U.S. 573 (1938), 435, New York Rapid Transit Corp. v. City of New York

Docket Nº:No. 435
Citation:303 U.S. 573, 58 S.Ct. 721, 82 L.Ed. 1024
Party Name:New York Rapid Transit Corp. v. City of New York
Case Date:March 28, 1938
Court:United States Supreme Court

Page 573

303 U.S. 573 (1938)

58 S.Ct. 721, 82 L.Ed. 1024

New York Rapid Transit Corp.


City of New York

No. 435

United States Supreme Court

March 28, 1938

        Argued February 7, 1938



        1 Since carriers or other utilities with the right of eminent domain, the use of public property, special franchises, or public contracts, have many points of distinction from other businesses, including relative freedom from competition, they may for purposes of taxation be classed separately. P. 578.

        2. Utilities subject to supervision by the New York Department of Public Service, including those engaged in transportation of persons or property and those furnishing gas, electricity, steam, water, communication by telegraph or telephone, were subjected by local laws of the City of New York to privilege taxes of 3% of their gross incomes. The laws were enacted for short periods under authority from the state legislature, and the proceeds were earmarked for use exclusively in relieving the unemployed in the City. Transit companies operating in the City assailed the levies under the due process and equal protection clauses of the Fourteenth Amendment, and the contract clause of the Federal Constitution.


        (1) It is not a valid objection that the taxpayers are defined by reference to the classification previously established by the New York Public Service Law, rather than by specific reference in the taxing law itself to the character of their businesses. P. 579.

        (2) Separate classification of the utilities taxed is justifiable, upon the grounds that they enjoy a special measure of statutory protection from competition; that they are required to make financial reports to public authority which are of administrative convenience in ascertaining and collecting such taxes, and that the revenues of such utilities, furnishing indispensable services, may be subject to relatively little fluctuation, even in times of depression. P. 580.

        (3) The facts that the transit companies have a low margin of net income, and that, because of contracts with the City, they cannot pass on the added tax burden by increasing their charges, are fortuitous, and do not render the taxes arbitrary and unreasonably

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discriminatory against them as compared with the other utilities or with business in general. P. 581.

        The legislature is not required to make meticulous adjustments in an effort to avoid incidental hardships.

        (4) Taxes on gross receipts, rather than on net income, are justified upon the ground of convenience in administration and because of the close relation of the volume of transactions in a business to cost of its supervision and protection by government. Stewart Dry Goods Co. v. Lewis, 294 U.S. 550, distinguished. P. 582.

        (5) The fact that the tax is levied for the specific purpose of relieving conditions (unemployment) to which the utilities taxed bear no special relation does not render it unconstitutional. P. 584.

        (6) Within the meaning of the rule that classification must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, the "object" in this case is the raising of the revenue. That an appropriation of the funds for relief is part of the same legislation is not significant; it is not constitutionally necessary that the classification for the tax be related to the appropriation of the proceeds. P. 585.

        (7) The laws under consideration do not violate the due process clause of the Fourteenth Amendment. P. 587.

        3. To sustain a claim of contractual tax exemption, the language must be clear and express. P. 593.

        4. In deciding a case under the contract clause, this Court determines for itself the existence and meaning of the contract, but, in so doing, it leans toward agreement with the courts of the State and accepts their judgment unless manifestly wrong. P. 593.

        5. In a contract between the City of New York and a transit corporation, the City agreed to construct certain railroads and the company to contribute to their cost and equipment and to reconstruct and build additions to its own railroads. The City leased the railroads it agreed to construct to the company, and the company agreed to operate them, in conjunction with its own as one system, for a designated fare. The gross receipts were to be pooled; deductions were to be made, in their order, first to reimburse the company for specified expenses and outlays, including taxes, and then to reimburse the City for certain interest and amortization charges, and the remainder was to be divided equally between the City and the company. The tax deduction included

all taxes . . . of every description (whether on physical property, stock or securities, corporate or other franchises, or otherwise)

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assessed or which may hereafter be assessed against the Lessee in connection with . . . the operation of the . . . Railroad.

        At the time of making the contract, the taxing power of the City was confined to special assessments for public improvements and ad valorem taxes on real estate and on special franchises granted by the City. Later, under new power acquired from the legislature, the City levied a privilege tax of 3% of the gross receipts.


        (1) That the collection of such tax was not in violation of the contract, but in accordance with its express terms. Pp. 588, 591.

        (2) The contract may not be construed as limiting the taxes deductible from gross receipts to those which the City was authorized to impose when the contract was made. P. 591.

        275 N.Y. 258, 454; 9 N.E.2d 858; 11 id. 293, affirmed.

        Appeals from judgments of the Supreme Court of New York, entered on remittitur from the Court of Appeals. These were actions to recover from the City large sums exacted as taxes. The Special Term of the Supreme Court held the taxes void; the Appellate Division affirmed, 251 A.D. 710; 296 N.Y.S. 1006, 1012; the Court of Appeals upheld the taxes and reversed the judgments.

        REED, J., lead opinion

        MR. JUSTICE REED delivered the opinion of the Court.

        The question for decision is the constitutional validity of Local Laws of the City of New York, Local Law No. 21 (published as No. 22), p. 151 of 1934, as amended by Local Law No. 2, p. 94, of 1935, and extended by Local Law No. 30, p. 157 of 1935, which provide, § 2, that, "for the privilege of exercising its franchise or franchises, or of holding property, or of doing business in

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the City of New York," an excise tax shall be paid by every "utility" doing business in the City of New York during 1935 and the first six months of 1936.

        "Utility" is defined, § 1(e), to include "any person subject to the supervision of either division of the department of public service," and every person, whether or not subject to such supervision, engaged "in the business of furnishing or selling to other persons gas, electricity, steam, water, refrigeration, telephony and/or telegraphy" or service in these commodities. Each utility is required to pay a tax "equal to three percentum of its gross income" received during the effective period of the Local Laws, with a minor variation not here assailed for utilities not subject to the specified supervision.1 The Local Laws specify that all revenues from the tax

shall be deposited in a separate bank account or accounts, and shall be available and used solely and exclusively for the purpose of relieving the people of the City of New York from the hardships and suffering caused by unemployment.

        Section 14. The Local Laws, admittedly passed under authority granted by the state Legislature,2 are assailed under the United States Constitution. For convenience, we shall discuss the contentions of the New York Rapid Transit Corporation alone, as determination of the objections

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raised by it is conclusive of those advanced by the Brooklyn and Queens Transit Corporation.

       The New York Rapid Transit Corporation operates rapid transit railroads in the City of New York under a contract known as contract No. 4, dated March 19, 1913, made pursuant to the New York Rapid Transit Act Laws 1891, c. 4, as amended, between its predecessor (New York Municipal Railway Corporation) and the City. As a common carrier engaged in the operation of rapid transit railroads, the corporation is under the supervision of the transit commission, the head of the metropolitan division of the state department of public service. Accordingly, but under protest, it paid the taxes imposed by the Local Laws set out above for the months January, 1935, to June, 1936, inclusive. [58 S.Ct. 724] It brought this action against the City of New York to recover the amounts paid, § 1,408,697, with interest, on the ground that the Local Laws are unconstitutional. The case arises on the City's motion to dismiss the complaint.

        The Supreme Court of New York, Special Term, denied the motion to dismiss the complaint, and found that the Local Laws denied equal protection because of gross inequality of burden in comparison with other utilities. This order was affirmed by the Appellate Division of the Supreme Court, without opinion, on a 3-2 vote (251 A.D. 710, 296 N.Y.S. 1006). The Court of Appeals reversed (275 N.Y. 258, 9 N.E.2d 858), upheld the Local Laws against all attacks, and ruled that the complaint did not state a cause of action. Appeal was taken to this Court under § 237(a) of the Judicial Code, 28 U.S.C. § 344(a).

        The corporation challenges the Local Laws as violative of the equal protection and...

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