Adams Mfg Co v. Storen

• Decision Date: 16 May 1938
• Docket Number: No. 641,641
• Citation: 304 U.S. 307,58 S.Ct. 913,82 L.Ed. 1365,117 A.L.R. 429
• Parties: J. D. ADAMS MFG. CO. v. STOREN, Chief Administrative Officer of Treasury, et al
• Court: U.S. Supreme Court

304 U.S. 307

58 S.Ct. 913

82 L.Ed. 1365

J. D. ADAMS MFG. CO.

v STOREN, Chief Administrative Officer of Treasury, et al.

No. 641.

Argued March 30, 31, 1938.

Decided May 16, 1938.

Messrs. Frederick E. Matson and Harry T. Ice, both of Indianapolis, Ind., for appellant.

Messrs. A. J. Stevenson, Asst. Atty. Gen., and Joseph P. McNamara, Deputy Atty. Gen., for appellees.

Mr. Justice ROBERTS delivered the opinion of the Court.

In this case we are called upon to determine whether the Indiana Gross Income Tax Act of 1933,¹ as construed and applied, burdens interstate commerce and impairs the obligation of contract in contravention of article 1, sections 8 and 10, of the Constitutio o f the United States.

Section 1 declares that the phrase 'gross income' as used in the Act means, inter alia, gross receipts derived from trades, businesses, or commerce, and receipts from investment of capital, including interest. Section 2 imposes a tax ascertained by the application of specified rates to the gross income of every resident of the State and the gross income of every nonresident derived from sources within the State. Section 6 exempts 'So much of such gross income as is derived from business conducted in commerce between this state and other states of the United States, or between this state and foreign countries, to the extent to which the State of Indiana is prohibited from taxing under the Constitution of the United States of America.'

The appellant, an Indiana corporation, manufactures road machinery and equipment and maintains its home office, principal place of business, and factory in the State. It sells 80 per cent. of its products to customers in other states and foreign countries upon orders taken subject to approval at the home office. Shipments are made from the factory and payments are remitted to the home office. Pursuant to a practice of investing surplus funds not immediately required in its business, the appellant owns and receives interest upon bonds and notes of Indiana municipal corporations which, at the time they were issued, were declared by statute to be exempt from taxation.

Upon the adoption of the Act, the appellant filed a petition in a State circuit court in which, after reciting these facts, it alleged that the appellees were demanding that it report and pay taxes upon income received in interstate and foreign commerce and income received as interest upon securities exempted from taxation by the State law and that these demands, together with penalties specified in the statute for failure to make return and pay the tax, would be enforced unless prevented by the judgment of the court. The prayer was for a declaratory judgment that the Act, as construed and applied by the appellees, is unconstitutional. After issue joined the facts were stipulated and the court made findings and entered a judgment in favor of the appellant. The Supreme Court of Indiana reversed the judgment holding that the tax demanded does not unconstitutionally burden the interstate commerce in which appellant is engaged and does not impair the obligation of any contract of the State exempting municipal securities from taxation.²

1. Will the threatened imposition of the tax on the gross income from the appellant's sales in interstate commerce contravene article 1, section 8, of the Constitution, which reposes in Congress power to regulate interstate and foreign commerce?

The title of the Act declares that it is a revenue measure imposing a tax upon 'the receipt of gross income.' The statute defines gross income as meaning the gross receipts derived from trades, businesses, or commerce. The Supreme Court of Indiana in its opinion states: 'The statute here under consideration levies a tax upon all who are domiciled within the state, based upon the privilege of domicile, and transacting business, and receiving gross income, within the state, and measured by the amount of gross income.'³

The tax is not an excise for the privilege of domicile alone, since it is levied upon the gross income of nonresidents from sources within the State. Nor is it for the transaction of business since in many instances it hits the receipt of income by one who conducts no business. It is not a charter fee or a franchise fee measured by the value of goods manufactured or the amount of sales such as the State would be competent to demand from domestic or foreign corporations for the privilege conferred.⁴ It is not an excise upon the privieg e of producing or manufacturing within the State, measured by volume of production or the amount of sales.⁵ It is not a tax in lieu of ad valorem taxes upon property, which would be inoffensive to the commerce clause,⁶ since the appellant pays local and state taxes upon its property within the State and it appears that these, as respects appellant and others similarly situated, have not been reduced. The Act, moreover, is silent as to the tax being in lieu of property taxes. The opinion of the Supreme Court suggests that the statute was adopted as part of a scheme for the reduction of local property taxes and the substitution of a gross income tax but, as appellant points out, provision for reduction of property taxes was made by legislation passed in 1932.⁷

The regulations issued by the Department of the Treasury, pursuant to authority granted by the Act, treat the exaction as a gross receipts tax;⁸ and the Attorney General says in his brief that it is a privilege tax upon the receipt of gross income. We think this a correct description.

We conclude that the tax is what it purports to be—a tax upon gross receipts from commerce. Appellant's sales to customers in other states and abroad are interstate and foreign commerce. The Act, as construed, imposes a tax of one per cent. on every dollar received from these sales.

The vice of the statute as applied to receipts from interstate sales is that the tax includes in its measure, without apportionment, receipts derived from activities in interstate commerce; and that the exaction is of such a character that if lawful it may in substance be laid to the fullest extent by states in which the goods are sold as well as those in which they are manufactured. Interstate commerce would thus be subjected to the risk of a double tax burden to which intrastate commerce is not exposed, and which the commerce clause forbids.⁹ We have repeatedly held that such a tax is a regulation of, and a burden upon, interstate commerce prohibited by article 1, section 8, of the Constitution.¹⁰ The opinion of the State Supreme Court stresses the generality and nondiscriminatory character of the exaction but it is settled that this will not save the tax if it directly burdens interstate commerce. ¹¹

The State court and the appellees rely strongly upon American Manufacturing Company v. St. Louis, 250 U.S. 459, 39 S.Ct. 522, 63 L.Ed. 1084, as supporting the tax on appellant's total gross receipts derived from commerce with citizens of the State and those of other states or foreign countries. But that case dealt with a municipal license fee for pursuing the occupation of a manufacturer in St. Louis. The exaction was not an excise laid upon the taxpayer's sales or upon the income derived from sales. The tax on the privilege for the ensuing year was measured by a percentage of the past year's sales.¹² The taxpayer had during the preceding year removed some of the goods manufactured to a warehouse in another state and, upon sale, delivered them from the warehouse. It contended that the city was without power to include these sales in the measure of the tax for the coming year. The court held, however, that the tax was upon the privilege of manufacturing within the state and it was permissible to measure the tax by the sales price of the goods produced rather than by their value at the date of manufacture. If the tax there city consideration had been a sales tax the city could not have measured it by sales consummated in another state. That the tax in the present case is not a tax on the manufacture but a tax on gross sales, is evident from the regulations promulgated pursuant to the Act and confirmed by an amendment of the state adopted in 1937 under which, if the appellant had shipped its products to another state and thence sold them (as did the American Manufacturing Company), the receipts from the sales would be exempt from the gross income reached by the Act.¹³

So far as the sale price of the goods sold in interstate commerce includes compensation for a purely intrastate activity, the manufacture of the goods sold, it may be reached for local taxation by a tax on the privilege of manufacturing, measured by the value of the goods manufactured,¹⁴ or by other permissible forms of levy upon the intrastate transaction.¹⁵ It is because the tax, forbidden as to interstate commerce, reaches indiscriminately and without apportionment, the gross compensation for both interstate commerce and intrastate activities that it must fail in its entirety so far as applied t r eceipts from sales interstate.

We hold that, as respects the appellant's sales of its manufactured product in interstate and foreign commerce, the statute cannot constitutionally be enforced.

2. Will the imposition of the tax in respect of interest on the bonds of Indiana municipalities violate article 1, section 10, of the Constitution of the United States?

By an Act of March 9, 1903, entitled 'An Act to exempt from taxation all bonds, notes and other evidences of interest-bearing debt issued by the State or by municipal corporations,' it was provided: 'That all bonds, notes and other evidences of indebtedness hereafter issued by the State of Indiana or by municipal corporations within the State upon which the said State or the said municipal corporations pay interest shall be exempt from taxation.'¹⁶ By an Act of March 11, 1919, tax laws of the State were codified and the Act of 1903 was incorporated without change as...