429 U.S. 318 (1977), 75-1019, Boston Stock Exchange v. State Tax Commission

Docket Nº:No. 75-1019
Citation:429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514
Party Name:Boston Stock Exchange v. State Tax Commission
Case Date:January 12, 1977
Court:United States Supreme Court
 
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Page 318

429 U.S. 318 (1977)

97 S.Ct. 599, 50 L.Ed.2d 514

Boston Stock Exchange

v.

State Tax Commission

No. 75-1019

United States Supreme Court

Jan. 12, 1977

Argued November 2, 1976

APPEAL FROM THE COURT OF APPEALS OF NEW YORK

Syllabus

A New York statute imposing a transfer tax on securities transactions, if part of the transaction occurs in New York, was amended in 1968 so that transactions involving an out-of-state sale are taxed more heavily than most transactions involving a sale within the State. The amendment provides for two deviations from the prior uniform application of the statute under which a transaction involving a sale and transfer of shares in New York was taxed the same as a transaction involving an in-state transfer but an out-of-state sale: (1) transactions by nonresidents of New York are afforded a 50% reduction in the tax rate when the transaction involves an in-state sale; and (2) the total tax liability of any taxpayer (resident or nonresident) is limited to $350 for a single transaction when it involves a New York sale. The purpose of the amendment was to provide relief from the competitive disadvantage thought to be created by the transfer tax for New York stock exchanges, as against out-of-state exchanges. Appellant "regional" stock exchanges brought action in state court against appellee State Tax Commission and its members challenging the constitutionality of the 1968 amendment under the Commerce Clause. The trial court denied the Commission's motion to dismiss, but on appeal the amendment was declared to be constitutional.

Held: The amendment discriminates against interstate commerce in violation of the Commerce Clause. Pp. 328-337.

(a) No State, consistent with the Commerce Clause, may "impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business," Northwestern Cement Co. v. Minnesota, 358 U.S. 450, 458. P. 329.

(b) Because it imposes a greater tax liability on out-of-state sales than on in-state sales, the transfer tax, as amended, falls short of the substantially evenhanded treatment demanded by the Commerce Clause, the extra tax burden on out-of-state sales neither compensating for a like burden on in-state sales nor neutralizing an economic advantage previously enjoyed by appellant exchanges as a result of the unamended statute. Pp. 329-332.

(c) The diversion of interstate commerce and diminution of free

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competition in securities, sales created by the 1968 amendment are wholly inconsistent with the free trade purpose of the Commerce Clause. With respect to residents, the discriminatory burden of the maximum tax on out-of-state sales promotes intrastate transactions at the expense of interstate commerce to out-of-state exchanges. With respect to nonresidents, both the maximum tax and the rate reduction provisions discriminate against out-of-state sales, and the fact that this discrimination is in favor of nonresident, in-state sales which may also be considered as interstate commerce, does [97 S.Ct. 602] not save the amendment from Commerce Clause restrictions. Pp. 333-336.

37 N.Y.2d 535, 337 N.E.2d 758, reversed and remanded.

WHITE, J., delivered the opinion for a unanimous Court.

WHITE, J., lead opinion

MR. JUSTICE WHITE delivered the opinion of the Court.

In this case, we are asked to decide the constitutionality of a recent amendment to New York State's longstanding tax on securities transactions. Since 1905, New York has imposed a tax (transfer tax) on securities transactions, if part of the transaction occurs within the State. In 1968, the state legislature amended the transfer tax statute so that transactions involving an out-of-state sale are now taxed more heavily than most transactions involving a sale within the State. In 1972, appellants, six "regional" stock exchanges located outside New York,1 filed an action in state court

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against the State Tax Commission of New York and its members. The Exchanges' complaint alleged that the 1968 amendment unconstitutionally discriminates against interstate commerce by imposing a greater tax burden on securities transactions involving out-of-state sales than on transactions of the same magnitude involving in-state sales.2 The State Supreme Court denied the Commission's motion to dismiss the action, and the Commission appealed. The Appellate Division reversed and ordered that the Commission's motion be granted to the extent of entering a judgment declaring the 1968 amendment to be constitutional.3 45 App.Div.2d

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365, 357 N. .Y. S.2d 116 (1974). The New York Court of Appeals affirmed the order, 37 N.Y.2d 535, 337 N.E.2d 758 (1975), and we noted probable jurisdiction of the Exchanges' appeal, 424 U.S. 964 (1976).

I

New York Tax Law § 270.1 (McKinney 1966) provides that "all sales, or agreements to sell, or memoranda of sales and all deliveries or transfers of shares or certificates of stock" in any foreign or domestic corporation are subject to the transfer tax.4 Administrative regulations promulgated with respect to

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the transfer tax provide that the tax applies if any one of the five taxable events occurs within New York, regardless of where the rest of the transaction takes place, and that, if more than one taxable event occurs in the State, only one tax is payable on the entire transaction. 20 N.Y.C.R.R. 940.2 (1976). For transactions involving sales, the rate of tax depends on the selling price per share and the total tax liability is determined by the number of shares sold.5 N.Y.Tax Law § 270.2 (McKinney 1966). Thus, under the unamended version of § 270, a transaction involving a sale and a transfer of shares in New York was taxed the same as a transaction involving an in-state transfer but an out-of-state sale. In both instances, the occasion for the tax was the occurrence of at least one taxable event in the State, the rate of tax was

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based solely the. price of the securities, and the total tax was determined by the number of shares sold. The Exchanges do not challenge the constitutionality of § 270.6

[97 S.Ct. 604] None of the States in which the appellant Exchanges are located taxes the sale or transfer of securities. During the 1960's, the New York Stock Exchange became concerned that the New York transfer tax created a competitive disadvantage for New York trading, and was thus responsible for the growth of out-of-state exchanges.7 In response to

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this concern and fearful that the New York Stock Exchange would relocate outside New York, the legislature, in 1968, enacted § 270-a to amend the transfer tax by providing for two deviations from the uniform application of § 270 when one of the taxable events, a sale, takes place in New York. First, transactions by nonresidents of New York are afforded a 50% reduction ("nonresident reduction") in the rate of tax when the transaction involves an in-state sale. Taxable transactions by residents (regardless of where the sale is made)8 and by nonresidents selling outside the State do not benefit from the rate decrease. Second, § 270-a limits the total tax liability of any taxpayer (resident or nonresident) to $350 (maximum tax) for a single transaction when it involves a New York sale. If a sale is made out-of-State,

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the § 270 tax rate applies to an in-state transfer (or other taxable event) without limitation.9

[97 S.Ct. 605] The reason for the enactment of § 270-a and the intended

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effect of the amendment are clear from the legislative history. With respect to the amendment, the legislature found:

The securities industry, and particularly the stock exchanges located within the state, have contributed importantly to the economy of the state and its recognition as the financial center of the world. The growth of exchanges in other regions of the country, and the diversion of business to those exchanges of individuals who are nonresidents of the state of New York, require recognition that the tax on transfers of stock imposed by article twelve of the tax law 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

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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 state of New York and a maximum tax for certain large block sales are desirable.

1968 N.Y.Laws, c. 827, § 1. In granting executive approval to § 27a, then Governor Nelson Rockefeller confirmed that the purpose of the new law was to "provide long-term relief from some of the competitive pressures from outside the State."10 The Governor

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announced that, as [97 S.Ct. 606] a result of the transfer tax amendment, the New York Stock Exchange intended to remain in New York.

Appellant Exchanges contend that the legislative history states explicitly what is implicit in the operation of § 270-a: the amendment imposes an unequal tax burden on out-of-state sales in order to protect an in-state business. They argue that this discrimination is impermissible under the Commerce Clause. Appellees do not dispute the statements of the legislature and the Governor that § 270-a is a measure to reduce out-of-state competition with an in-state business. They agree, however, with the holding of the Court of Appeals that the legislature has chosen a nondiscriminatory, and therefore...

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