Boston Stock Exchange v. State Tax Commission

• Decision Date: 21 October 1975
• Parties: , 337 N.E.2d 758 BOSTON STOCK EXCHANGE ex al., Appellants, v. STATE TAX COMMISSION et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 308

375 N.Y.S.2d 308

37 N.Y.2d 535, 337 N.E.2d 758

BOSTON STOCK EXCHANGE ex al., Appellants, v. STATE TAX COMMISSION et al., Respondents.

Court of Appeals of New York.

Oct. 21, 1975.

Roger Pascal, Chicago, Ill., of the Illinois Bar, admitted pro hac vice, Milton H. Cohen and Allan Horwich, Chicago, Ill., for appellants.

Louis J. Lefkowitz, Atty. Gen. (Robert W. Bush and Ruth Kessler Toch, Albany, of counsel), for respondents.

Adrian P. Burke, Corp. Counsel, New York City (Samuel J. Warms and Robert J. Metzler, II, New York City, of counsel), for the City of New York, amicus curiae.

WACHTLER, Judge.

Since the turn of the century this State has levied a stock transfer tax (Tax Law, § 270). Recently the law was amended to reduce the tax on sales by nonresidents and to fix a maximum tax on all bulk sales within the State (Tax Law, § 270-a). The appellants, all of whom are stock exchange located outside New York, seek a judgment declaring section 270-a unconstitutional on the grounds that it denies them equal protection of the laws, and discriminates against interstate commerce in violation of the commerce clause (U.S.Const. art. I, § 8.) ¹

At Special Term the defendant tax commission unsuccessfully argued that the State courts lacked subject matter jurisdiction, that the appellants lacked standing and that the complaint failed to state a cause of action. The Appellate Division modified, agreeing that the courts had subject matter jurisdiction and that the appellants had the requisite standing to raise the issues but found that the statute did not viola the Constitution as alleged. Accordingly they dismissed the complaint on the merits (45 A.D.2d 365, 357 N.Y.S.2d 116). The order of the Appellate Division should be affirmed.

Section 270 of the Tax Law imposes a tax 'on all sales, or agreements to sell, or memoranda of sales and all deliveries or transfers of shares or certificates of stock'. The tax depends on the value of the stock, the maximum tax being 5 cents per share. When the sale is made within the State, the tax may be levied on any of these events, but no more than one of them (20 NYCRR 440.2). When the sale and all the accompanying negotiations occur outside the State--as on one of the appellants' exchanges--no tax is due unless the stock is transferred in New York by a local transfer agent or upon the corporate books (see, e.g., Matter of Monarch Life Ins. Co. v. State Tax Comm., 32 N.Y.2d 850, 346 N.Y.S.2d 272, 299 N.E.2d 684).

The constitutionality of this statute, originally enacted in 1905, has been sustained on several occasions against claims that it violated due process, equal protection (Hatch v. Reardon, 204 U.S. 152, 27 S.Ct. 188, 51 L.Ed. 415) and the commerce clause (O'Kane v. State of New York, 283 N.Y. 439, 28 N.E.2d 905; cf. Hatch v. Reardon, supra). It is now well settled that the commerce clause does not prohibit the States from levying a tax on the transfer of property within the State (International Harvester Co. v. Department of Treasury, 322 U.S. 340, 348, 64 S.Ct. 1019, 88 L.Ed. 1313; cf. Freeman v. Hewit, 329 U.S. 249, 258, 67 S.Ct. 274, 91 L.Ed. 265). Thus far the parties are agreed--the basic tax is constitutionally valid.

In 1966 complaints reached the Legislature that the transfer tax was driving business from the State. Specifically the New York exchanges complained that although brokers in other States charged the same commissions, transactions on the New York exchanges were placed at a disadvantage because none of the States in which the competing exchanges were located imposed a tax on stock sales or transfers. After extensive investigation the Legislature found that 'the tax on transfers * * * is an important contributing element to the diversion of sales to other areas to the detriment of the economy of the state. Furthermore, in the case of transactions involving large blocks of stock, recognition must be given to the ease of completion of such sales outside the state of New York without the payment of any tax. In order to encourage the effecting by nonresidents of the state of New York of their sales within the state of New York and the retention within the state of New York of sales involving large blocks of stock, a separate classification of the tax on sales by nonresidents of the the state of New York and a maximum tax for certain large block sales are desirable' (L.1968, ch. 827). Accordingly the Legislature amended the tax law, adding section 270-a, which reduces the tax by 50% When a nonresident sells stock within the State. And when any shareholder, resident or nonresident, sells a large block of stock within the State, the tax due is limited to a maximum of $350. ²

If section 270-a is invalidated, the prior tax scheme would again become effective (L.1968, ch. 827, § 11) and the appellants would be restored to their position of economic superiority.

First we consider the appellants' argument that the statute violates the equal protection clause 'because it establishes an arbitrary classification dependent upon the place of sale.' The equal protection clause is often invoked in support of a claim that a State taxing scheme is arbitrary. This is a familiar argument and the general principles are well settled.

It has been repeatedly held that 'in taxation, even more than in other fields, legislatures possess the greatest freedom in classification' (Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 408, 84 L.Ed. 590) and that the equal protection 'clause imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of state taxation' (Allied Stores of Ohio v. Bowers, 358 U.S. 522, 526, 527, 79 S.Ct. 437, 440, 3 L.Ed.2d 480). To succeed on the equal protection argument, the appellants must not only overcome the presumption of constitutionality which attaches to every state (Madden v. Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590, Supra) but must also establish that there is no 'conceivable state of facts which would support' the classification (Carmichael v. Southern Coal Co., 301 U.S. 495, 509, 57 S.Ct. 868, 872, 81 L.Ed. 1245; Lawrence v. State Tax Comm., 286 U.S. 276, 52 S.Ct. 556, 76 L.Ed. 1102; Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351). The burden is on the one challenging the statute 'to negative every conceivable basis which might support it' (Madden v. Kentucky, supra, 309 U.S. at p. 88, 60 S.Ct. at p. 408).

Initially we note, as did the Appellate Division, that the place of sale is not always the determining factor under the statute in question. If a small sale is involved the full tax must be paid unless the seller is a nonresident. Thus the statute also distinguishes between residents and nonresidents in favor of the latter. The avowed purpose, as the legislative history indicates, was to encourage nonresidents to sell on the New York exchanges. Similar legislation has been consistently upheld 'and (it) appears to be entirely settled that a statute which encourages the location within the State of needed and useful industries by exempting them, though not also others, from its taxes is not arbitrary and does not violate the Equal Protection Clause of the Fourteenth Amendment' (Allied Stores of Ohio v. Bowers, 358 U.S. 522, 528, 79 S.Ct. 437, 441, 3 L.Ed.2d 480).

The Appellate Division also found that the distinction between in-State and out-of-State sales could be justified on the ground that '(t)ransactions made in New York are less susceptible to tax evasion than those made outside' (45 A.D.2d p. 369, 357 N.Y.S.2d p. 120). They found that Madden v. Kentucky (supra) supported this conclusion and we agree. In that case the State imposed an Ad valorem tax of 10 cents per $100 on deposits in local banks, but taxed deposits in out-of-State banks at 50 cents per $100. Although the amount of tax was based on an out-of-State event, the court found that the classification was not arbitrary within the meaning of the equal protection clause since 'The treatment accorded the two kinds of deposits may have resulted from the differences in the difficulties and expenses of tax collection' (Madden, 309 U.S. 83, 90, 60 S.Ct. 406, 409, 84 L.Ed. 590, Supra).

Here, of course, the Legislature noted that tax evasion was one of the factors which prompted the enactment of section 270-a. But even if their motives had been more subtly stated, or completely unstated, the fact remains that this is a conceivable basis for the distinction. The Legislature, of course, is not required to 'record a complete catalogue of the considerations which move its members to enact laws' (Carmichael, 301 U.S. 495, 510, 57 S.Ct. 868, 872, 81 L.Ed. 1245, Supra; see, also, Lehnhausen, 410 U.S. 356, 93 S.Ct. 1001, 35 L.Ed.2d 351, Supra).

Finally the appellants argue that the distinction between sales made within the State and sales completed elsewhere discriminates against interstate commerce. The commerce clause, of course, imposes additional limitations on the States' taxing powers and 'restrictions inimical to the commerce clause should not be approved simply because they facilitate in some measure enforcement of a valid tax' (Toomer v. Witsell,334 U.S. 385, 406, 68 S.Ct. 1156, 1167, 92 L.Ed. 1460). The question in oth words is no longer whether the distinction...