Citizens Telephone Company v. Oramel Fuller

• Decision Date: 10 June 1913
• Docket Number: No. 284,284
• Citation: 229 U.S. 322,33 S.Ct. 833,57 L.Ed. 1206
• Parties: CITIZENS' TELEPHONE COMPANY, Appt., v. ORAMEL B. FULLER, Auditor General of the State of Michigan
• Court: U.S. Supreme Court

229 U.S. 322

33 S.Ct. 833

57 L.Ed. 1206

CITIZENS' TELEPHONE COMPANY, Appt.,

v ORAMEL B. FULLER, Auditor General of the State of Michigan.

No. 284.

Argued and submitted May 2, 1913.

Decided June 10, 1913.

Messrs. Thomas P. Bradfield and Jacob Kleinhans for appellant.

[Argument of Counsel from page 323 intentionally omitted] Mr. Roger I. Wykes and Mr. Grant Fellows, Attorney General of Michigan, for appellee.

Mr. Justice McKenna delivered the opinion of the court:

Appellant is a telephone company, located in the city of Grand Rapids, in the state of Michigan, where it has 10,000 telephones in use, and by its own and other lines is engaged in the telephone business all over the southern peninsula. It brought this suit to restrain the collection of a tax levied on its property under a certain act of the state of Michigan, on the ground (1) that the act violates the 14th Amendment of the Constitution of the United States and (2) violates the Constitution of the state because the purpose of the act is not expressed in its title.

A demurrer was filed to the bill, which was overruled. An answer was then filed, and, after hearing, a decree was entered dismissing the bill. 185 Fed. 634. This appeal was then taken directly to this court, the case presenting questions under the Constitution of the United States.

Prior to 1909, telephone companies were taxed under act No. 179 of the Public Acts of Michigan for the year 1899 at the rate of 3 per cent on their gross receipts for the year in which the tax was laid. This act also embraced express and telegraph companies. The companies were required to make a report of their gross receipts for the year ending December 1st next preceding such report. The taxes paid were to be in lieu of all other taxes.

Act No. 282 of the Public Acts of 1905 provided for the assessment of the property of railroads and certain other companies, and for the levying of taxes thereon by a state board of assessors. The act did not include either telephone or telegraph companies.

In 1909 the legislature passed act No. 49, which amended the title and certain sections of the act No. 282, and provided for the assessment by the state board of assessors of the property of telephone companies on an ad valorem basis instead of a tax on their gross earnings, as provided by the act of 1899. The act contained this proviso: 'Provided, That the property of telegraph and telephone companies whose gross receipts within this state, for the year ending June 30, did not exceed $500, shall be exempt from taxation.'

The contention of appellant that the act offends the equal protection clause of the Constitution is based on that proviso. It is urged that the proviso makes an unjust discrimination between companies doing the same business by the same means, and imposes a tax on their property because the business of one is large and the other small. 'The business is not taxed,' it is contended, 'under act 49. It is the property used in the business, and it is all of like kind and used for like purposes, and each dollar's worth should be treated alike.' And it is urged that 'it must be remembered that the tax in question is a tax on property according to its value, and not a tax on doing the business.' This being the insistence of appellant, that is, that the tax is on property simply, appellant makes the property, dollar for dollar, the only basis of comparison between the taxed companies and the exempt companies, and asserts illegal discrimination. In other words, treating the tax as one on property, and this being the purpose of the statute, 'each dollar's worth should be treated alike;' and it is contended, if each dollar's worth is not treated alike, there is an arbitrary classification and hence an illegal classification, because it has no proper relation to the legislative purpose.

The district court, however, took a broader view and considered the inducement of the legislation and its administrative possibilities as giving character to its classification. The court also considered the character of the taxed and nontaxed lines, their number and comparative value, and the amount of taxes which would be assessed against them. The court said:

'For the year ending June 30, 1909, 659 corporations, individuals, or associations made the required report. Of these 224 showed receipts of more than $500 each, reported property said to have cost $35,000,000 and reported gross receipts of $7,600,000. The board assessed this property at $21,000,000, and levied thereon a total tax of $433,000, in place of the former specific tax, which would have been $228,000. Four hundred and thirty-five of the reports showed receipts of less than $500 each. Property belonging to the persons and companies so reporting was not assessed. The cost of this nonassessed property, at the average reported cost per telephone of all reporting companies, would be about $145,000; complainants' proof tends to show such cost to be about $250,000; $200,000 may fairly be assumed as such cost; and upon the comparative basis used with the larger corporations, this exempted property would have been assessed at $120,000. If we add an ample allowance for nonreporting, nontaxable property, it still appears that the property which escaped taxation, and which forms the basis of the complaint, is not more than 1 per cent of the total.'

The lines may be divided into two classes: (1) lines owned by appellant and conducted for profit, and (2) lines connected with those of the first class, and called sublicensed companies, rural and roadway. There are 17 to 20 of the sublicensed companies which operate for a profit. Their lines are connected with the main lines and may extend over a whole county or more. It is testified that the sublicensed companies run their own business, no control being in the main line. Their lines, it is further testified, were constructed by themselves, and the instruments either leased from the main company or owned by themselves. The contracts with the subcompanies are not all alike. The main line may or may not have investment in the sublicensed line.

The 'rural' usually belongs to an association of farmers who live along the line. It comprises a switch board leased by the main or profit-making company to a rural manager, the main company owning the telephones on the line, and receiving the entire charge for toll messages, less the manager's commissions for collection. The roadways connected with a 'rural' are constructed and owned by the farmers in the same way as other roadways. The larger portion of 'rurals' are contracts with individuals. The percentage of corporations in the roadway and sublicensed lines is very small.

The 'roadway' is a line owned and constructed by farmers, connected with a receiving service from an existing exchange of a main line or profit-making company, or of rural exchange manager.

The profit that is derived from the rural and roadway lines is in the reduced rate for the telephones. The manager gets the difference between what he pays the main company and what he gets from those to whom he rents.

The difference, therefore, between the taxpaying and nontaxpaying companies or individuals is that the former, as said by the district court, belong to commercial corporations or enterprises, organized and conducted for the purpose of earning and paying profits as or in the nature of dividends; the latter, the untaxed, are cooperative or farmers' mutual associations, usually unincorporated, conducted at estimated costs, and organized primarily to get for the association cheap telephone service.

It is manifest, therefore, that there are marked differences between the taxed and nontaxed companies, and the differences might be pronounced arbitrary if the rule urged by appellant should be applied; that is, that in the taxation of property no circumstance should be considered but its value; or, to use appellant's words, 'each dollar's worth should be treated alike.' But such rigid equality has not been enforced. In Michigan the legislature has the power of prescribing the subjects of taxation and exemption, notwithstanding the Constitution of the state requires the legislature to provide a uniform rule of taxation, except on property paying specific taxes. People ex rel. St. Mary's Falls Ship Canal Co. v. Auditor General, 7 Mich. 84; Chippewa County v. Auditor General, 65 Mich. 408, 32 N. W. 651; National Loan & Invest Co. v. Detroit, 136 Mich. 451, 99 N. W. 380. The power of exemption would seem to imply the power of discrimination, and in taxation, as in other matters of legislation, classification is within the competency of the legislature. We said in American Sugar Ref. Co. v. Louisiana, 179 U. S. 89, 92, 45 L. ed. 102, 103, 21 Sup. Ct. Rep. 43, that from time out of mind it has been the policy of this government to classify for the purpose of taxation, and a discrimination was supported between taxation of producers and manufacturers of products; and yet in Billings v. Illinois, 188 U. S. 97, 102, 47 L. ed. 400, 403, 23 Sup. Ct. Rep. 272, we compared the rule with that in Connolly v. Union Sewer Pipe Co. 184 U. S. 540, 46 L. ed. 679, 22 Sup. Ct. Rep. 431, where a distinction between buyers of products and the producers of them was held an illegal discrimination.

It may therefore be said that in taxation there is a broader power of classification than in some other exercises of legislation. There is certainly as great a power, and the rule appellant urges cannot be adopted. It is inconsistent with the principle of classification and the cases which have explained the principle and the range of its legal exercise.

In Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 237, 33 L. ed. 892, 895, 10 Sup. Ct. Rep. 533, it was decided that under the power of classification there might be exemption of property, dependent upon its species, and the rates of excise might be varied upon different trades and...