Ed. Schuster & Co. v. Henry

• Decision Date: 04 June 1935
• Citation: 261 N.W. 20,218 Wis. 506
• Parties: ED. SCHUSTER & CO., INC., v. HENRY, STATE TREASURER. WADHAMS OIL CO. v. HENRY, STATE TREASURER.
• Court: Wisconsin Supreme Court

218 Wis. 506

261 N.W. 20

ED. SCHUSTER & CO., INC.,

v.HENRY, STATE TREASURER.

WADHAMS OIL CO.

v.HENRY, STATE TREASURER.

Supreme Court of Wisconsin.

June 4, 1935.

Appeals from orders of the Circuit Court for Dane County; A. G. Zimmerman, Circuit Judge.

Reversed.

Separate actions were commenced by the plaintiffs, Ed. Schuster & Co., Inc., and Wadhams Oil Company, against the defendant, Robert K. Henry, State Treasurer, under the legislative declaration contained in subsection (9) of section 76.75, Stats. 1933, for the purpose of recovering moneys paid by each of the plaintiffs, under protest, as a chain store tax, pursuant to section 76.75, Stats. 1933. The plaintiffs alleged facts because of which they contended that section 76.75, Stats. 1933, is unconstitutional and void as violative of sections 1 and 22 of article 1, and section 1 of article 8, Wis. Const., and of the Fourteenth Amendment, U. S. Const., and also contended that the statute was not applicable to the plaintiffs or the manner and methods in which they operated their businesses. The defendant demurred to the complaints, and contended that the statute was valid. The trial court upheld that contention, and orders were entered sustaining the demurrers. Plaintiffs appealed from those orders.

Kaumheimer & Kaumheimer, of Milwaukee (Edward J. Dempsey, of Oshkosh, Bowler, Bowler & Currie, of Sheboygan, and George H. Likert, Jr., of Milwaukee, of counsel), for appellant Ed. Schuster & Co.

Nichols, Morrill, Wood, Marx & Ginter, of Cincinnati, Ohio, amici curiæ.

Fish, Marshutz & Hoffman, of Milwaukee (I. A. Fish, J. H. Marshutz, and W. H. Voss, all of Milwaukee, of counsel), for appellant Wadhams Oil Co.

Olin & Butler, of Madison, amici curiæ.

James E. Finnegan, Atty. Gen., Herbert H. Naujoks, Asst. Atty. Gen., and Cyrus C. Thieme, Sp. Counsel, of South Milwaukee, for respondent.

FRITZ, Justice.

For the consideration of the proposition which is decisive on this appeal, it suffices to note at the outset the following facts: Section 76.75, Stats. 1933 (which is section 1 of chapter 469, Laws 1933, set forth, so far as here material, in the margin,¹ either verbatim or in substance), creates a so-called “occupational tax on chain stores,” which requires the operators of two or more stores, mercantile establishments, or places where goods, wares, or merchandise are sold or offered for sale at retail to pay an annual tax on the gross income derived by such operators from their retail operations in Wisconsin. The rate of the tax varies according to the amount of that gross income, and increases gradually from six-twentieths of 1 per cent. upon gross income of $100,000 or less, to thirteen-twentieths of 1 per cent. upon all gross income in excess of $5,000,000. In accordance with section 76.75, Stats., plaintiffs filed their reports of the gross income received for the period prior to January 1, 1934, and the tax commission certified the amounts of tax due from each of the plaintiffs. They paid that tax under protest, and commenced these actions for the recovery thereof, as provided in section 76.75(9), Stats.

[1][2] Each of the plaintiffs also alleged facts as to its particular method of operating its business, and contended that the statute was not applicable to its method of operating. However, it is unnecessary to state those facts here, because the decision in Stewart Dry Goods Co. v. Lewis, 55 S. Ct. 525, 527, 79 L. Ed. 1054, decided March 11, 1935 (hereinafter referred to as the Stewart Case), fully sustains the fundamental proposition contended for by the plaintiffs, that section 76.75, Stats., in imposing a graduatedtax on gross incomes, is so arbitrary, unreasonable, and discriminatory that it denies to plaintiffs the equal protection of the laws guaranteed by the Fourteenth Amendment, U. S. Const. As the United States Supreme Court has final jurisdiction to determine whether state laws violate the provisions of the Federal Constitution, and its decisions on that subject are binding on all courts, when that court has determined the nature and the effect of a certain state tax and that it violates the Federal Constitution and is therefore forbidden, its decision as to the nature and effect of the tax is controlling (Galveston, Harrisburg, etc., R. Co. v. Texas, 210 U. S. 217, 227, 28 S. Ct. 638, 52 L. Ed. 1031), and its conclusions, in respect thereto, must be followed by the state courts (Nunnemacher v. State, 129 Wis. 190, 222, 108 N. W. 627, 9 L. R. A. [N. S.] 121, 9 Ann. Cas. 711;Great Atl. & Pac. Tea Co. v. Harvey [Vt.] 177 A. 423).

[3] Although, in section 76.75, Stats., the tax is called an “occupational tax on chain stores,” that designation is not conclusive upon the courts, which must examine and consider the burden of a tax and the manner in which it is imposed in order to arrive at the actual character of the tax created. Crew Levick Co. v. Pennsylvania, 245 U. S. 292, 294, 38 S. Ct. 126, 62 L. Ed. 295, 297;Dawson v. Kentucky Distilleries & Warehouse Co., 255 U. S. 288, 41 S. Ct. 272, 65 L. Ed. 638; Stewart Case, supra. Thus, in the case last cited, the court said: “In resolving the issue, we are not concluded by the name or description of the tax as found in the act; our duty is to ascertain its nature and effect. ‘The substance and not the shadow determines the validity of the exercise of the power.’ ”

Consequently, although in the Kentucky statute (Acts 1930, c. 149), under consideration in the Stewart Case, the tax was called “an annual license tax” and also “an excise or license tax,” instead of an “occupational tax,” as in section 76.75 Stats., as none of those designations are conclusive, the difference in that respect between those designations in the two statutes is of no material significance. But in the Stewart Case it was held of controlling significance that the tax imposed by the Kentucky statute was to be computed “on the amount of the gross sales.” In substance and legal effect that provision in the Kentucky statute is virtually the same as the provisions in subsection (3) of section 76.75, Stats., that “Every person engaged in the chain store business shall pay an occupational tax on the aggregate gross income from its retail operations in this state, to be computed at the following rates, * * *” and in subsection (4) of section 76.75, Stats., that “Gross income within the meaning of this section means gross income before deduction of cost of merchandise retailed and before deduction of any expense.”

Manifestly, the amount which is the “aggregate gross income from * * * retail operations, * * *” before deducting therefrom the “cost of merchandise retailed and * * * of any expense,” is necessarily the same as “the amount of the gross sales” upon which the Kentucky statute imposed the tax. Likewise substantially the same in legal effect, although differing somewhat in the amounts specified as the rates, was the manner in which the tax rate was graduated and increased as the gross sales increased in amount progressively from the specified limitations of one bracket to the limitations of the next. Thus, while under section 76.75 (3), Stats., the rate was increased through seven brackets by one-twentieth of 1 per cent. for each successive bracket, from six twentieths of 1 per cent. on the first $100,000 of gross income to thirteen-twentieths of 1 per cent. on the excess over $5,000,000, under the Kentucky statute (Acts 1930, c. 149, § 2) the rate was graduated through eight brackets so as to increase from one-twentieth of 1 per cent. on the first $100,000 of gross sales, up to 1 per cent. on gross sales of over $1,000,000. Whether the graduated tax thus imposed upon gross income or gross sales, under either section 76.75, Stats., or the statute under consideration in the Stewart Case, supra, is an excise tax or a tax upon property, presents a debatable question. But, as in respect to the nature of the tax to be imposed under section 76.75, Stats., there is equally applicable the court's statement in the Stewart Case, that “The act does not impose an income or profits tax or a license tax, is not an inspection measure or a police regulation. The tax is not confined to a particular method of merchandising. All retailers, individual and corporate, selling every description of commodities, in whatever form their enterprises are conducted, make up the taxable class. And the excise is laid in respect of the same activity of each of them--the making of a sale. Although no difference is suggested, so far as concerns the transaction which is the occasion of the tax, between the taxpayer's first sale of the year and his thousandth, different rates may applyto them. The statute operates to take as the tax a percentage of each dollar due or paid upon every sale, but increases the percentage if the sale which is the occasion of the tax succeeds the consummation of other sales of a specified aggregate amount”--there is also applicable here the determination in that case that, in view of the conclusions reached in Brown v. Maryland, 12 Wheat. 419, 6 L. Ed. 678;Cook v. Pennsylvania, 97 U. S. 566, 24 L. Ed. 1015;Crew Levick Co. v. Pennsylvania, 245 U. S. 292, 38 S. Ct. 126, 62 L. Ed. 295;Panhandle Oil Co. v. State of Mississippi ex rel. Knox, 277 U. S. 218, 48 S. Ct. 451, 72 L. Ed. 857, 56 A. L. R. 583;Indian Motocycle Co. v. United States, 283 U. S. 570, 51 S. Ct. 601, 75 L. Ed. 1277, such a tax as was imposed under the Kentucky statute was not an occupational tax, but was either a tax on the property sold or an excise tax on the sales transactions.

As that determination of the United States Supreme Court, in respect to the nature of such a tax as was imposed by section 76.75, Stats., is controlling, there is also applicable that court's statements and conclusion that:

“Thus understood, the operation of the statute is unjustifiably unequal, whimsical, and arbitrary, as much so as would be a tax on tangible personal property, say...