Federal Reserve Bank of Chicago v. Department of Revenue of State

Decision Date07 June 1954
Docket NumberNo. 41,41
Citation64 N.W.2d 639,339 Mich. 587
PartiesFEDERAL RESERVE BANK OF CHICAGO v. DEPARTMENT OF REVENUE OF STATE.
CourtMichigan Supreme Court

Paul C. Hodge, Chicago, Ill., Gordon W. Lamphere, Detroit, for plaintiff and appellant.

Frank G. Millard, Atty. Gen., Edmund E. Shepherd, Sol. Gen., Lansing, T. Carl Holbrook, William D. Dexter, Asst. Attys. Gen., for defendant-appellee.

Before the Entire Bench.

DETHMERS, Justice.

Need persons engaged in the business of making sales at retail who are subject to a tax, Michigan sales tax under P.A.1933, No. 167, C.L.1948, § 205.51 et seq., Stat. § 7.521 et seq., include in the amount of their gross proceeds used for the computation of the tax any proceeds of their business derived from sales to plaintiff?

Plaintiff is a United States Corporation, an instrumentality and agent of the federal Government, organized and existing under the Federal Reserve Act, 38 Stat. 251. Its stock is owned by those commercial banks which are members of the Federal Reserve System and located in the Seventh Federal Reserve District. From its net earnings the stockholders are entitled by law to receive an annual dividend of 6% on the paid-in capital stock, after payment of which approximately 90% of its net earnings are lawfully turned over annually to the United States Treasury. Upon dissolution, after payment of debts, stockholders are entitled to the return of the pay value of their stock, and any remainder goes to the United States government. A major portion of plaintiff's operations consists of furnishing services as fiscal agent, depository, and custodian for the United States government, and for most of such services it is reimbursed by the United States.

Pertinent provisions of the Michigan sales tax act are:

'Sec. 2. There is hereby levied upon and there shall be collected from all persons engaged in the business of making sales at retial * * * an annual tax for the privilege of engaging in such business equal to 3 per cent of the gross proceeds thereof * * * less deductions allowed in sections 4. * * *

'Sec. 4. * * * No person subject to a tax under this act need include in the amount of his gross proceeds used for the computation of the tax any proceeds of his business derived from sales to the United States, its unincorporated agencies and instrumentalities, any incorporated agency or instrumentality of the United States wholly owned by the United States or by a corporation wholly owned by the United States, * * *.

'Sec. 23. No person engaged in the business of selling tangible personal property at retail shall advertise or hold out to the public in any manner, directly or indirectly, that the tax herein imposed is not considered as an element in the price to the consumer. Nothing contained in this act shall be deemed to prohibit any taxpayer from reimbursing himself by adding to his sale price any tax levied hereunder. * * *'

It is evident that retailers are not excused by the provisions of section 4 of the act from including in the amount of their gross proceeds used for the computation of their annual tax for the privilege of engaging in the retail business any proceeds of their business derived from sales to plaintiff because it does not fall within the classification of any of the entities specified in that section, but, on the contrary, is an incorporated instrumentality of the United States which is not wholly owned by the United States. We are not persuaded by plaintiff's contention that the exempting provisions of section 4 render the act unconstitutional as class legislation because they apply to proceeds derived from sales to the United States, its unincorporated instrumentalities and incorporated instrumentalities if wholly owned by the United States but not to its instrumentalities if incorporated but not wholly owned by the United States. We think that the difference between a corporation wholly owned by the United States and a corporation owned by private persons or corporations and operated, in part, for their benefit affords a valid basis for a difference in classification. In Banner Laundering Co. v. State Board, 297 Mich. 419, 298 N.W. 73, we quote with approval from 26 RCL, pp. 253, 255, Taxation, §§ 224, 225, to the effect that provisions of a taxing act exempting governmental units or property devoted to public use do not render it invalid as a denial of due process or equal protection of the laws. For reasons of fact, public policy and constitutional considerations the distinction is warranted. If it be the legislative intent, in imposing the tax, to avoid passing the economic burden thereof to the United States or agencies wholly owned by it but to permit that burden to pass to its agencies owned entirely or in part by private interests, as in the case of all other private purchasers, we discern therein no arbitrary or discriminatory classification. The tax levying power vested in the legislature includes the power to exempt therefrom so long as classifications made for that purpose are based, as here, on substantial distinctions and are in accord with the aims sought to be achieved by the act. For an analysis of the types of exemptions in a taxing act which are held to leave the act valid see Lucking v. People, 320 Mich. 495, 504, 31 N.W.2d 707, and cases there cited.

Plaintiff contends that, regardless of the provisions of the State act, retailers need not include in the amount of their gross proceeds used for the computation of the annual sales tax to be paid by them the proceeds derived from sales to it because of its implied constitutional immunity to State taxation and its express exemption therefrom under section 7 of the Federal Reserve Act, which reads in part as follows:

'Federal reserve banks, including the capital stock and surplus therein and the income derived therefrom, shall be exempt from Federal, State, and local taxation, except taxes upon real estate.' 12 U.S.C.A. § 531.

Defendant answers this contention of plaintiff with the assertion that it is the retailer, not the purchaser, who is legally obligated to pay the tax under the Michigan sales tax act and that the plaintiff's immunity and exemption privileges have no application to the obligation of the retailer to pay such tax on his gross proceeds even though they include proceeds derived from sales to plaintiff. It is important to note here that, as distinguished from the sales tax act provisions of some of the other States, the Michigan statute does not require the retailer to collect the tax from the purchaser or consumer. Plaintiff points, however, to the provisions of section 23 of the Michigan act prohibiting the retailer from representing to the public that the tax is not considered as an element in the price to the consumer and permitting him to add it to his sale price. Testimony for plaintiff is that such addition is the general practice of Michigan retailers and that some of plaintiff's suppliers are unwilling to make sales to it unless plaintiff pays them an amount equal to such tax in addition to the regular sales price. Accordingly, plaintiff says that if retailers were to be required to pay the tax on proceeds from sales to it they would pass its burden on and plaintiff would, in fact, be compelled to be the taxpayer in violation of its implied immunity and express exemption from State taxation.

The question presented is novel in Michigan. Both parties cite National Bank of Detroit v. Department of Revenue, 334 Mich. 132, 54 N.W.2d 278. We did not there decide the main question now before us, but only that it was a justiciable one which the plaintiff therein was entitled to have adjudicated. In arriving at that conclusion, as a necessary premise thereto, we held that the direct legal incidence of the tax, and to some extent its economic burden, falls upon the retailer, imposed upon him for the privilege of engaging in the retail business, but that its economic burden falls chiefly upon the consumer. In Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 62 S.Ct. 1, 3, 86 L.Ed. 65, the Supreme Court of the United States held, 'These determinations of the incidence of the tax by the state court are controlling * * *.' To be determined, accordingly, is whether the implied immunity or statutory exemption enjoyed by plaintiff extends to its shouldering of the economic burden of a tax whose legal incidence rests on the retailer who sells to plaintiff. That being a federal question, we are bound by such decisions of the United States Supreme Court as may be in point and decisive. We turn, therefore, to a consideration of the decisions of that court.

Plaintiff's reliance is placed on Carpenter v. Shaw, 280 U.S. 363, 50 S.Ct. 121, 74 L.Ed. 478; Richfield Oil Corp. v. State Board, 329 U.S. 69, 67 S.Ct. 156, 91 L.Ed. 80; Colorado National Bank of Denver v. Bedford, 310 U.S. 41, 60 S.Ct. 800, 84 L.Ed. 1067; Federal Land Bank of St. Paul v. Bismark Lumber Co., 314 U.S. 95, 62 S.Ct. 1, 86 L.Ed. 65; and Carson v. Roane-Anderson Co., 342 U.S. 232, 72 S.Ct. 257, 96 L.Ed. 257. Carpenter and Richfield support plaintiff's position that while the construction placed by the State court on the State taxing act is binding on the Supreme Court of the United States even to the extent of a State determination, as in Richfield and here, that the tax is an excise for the privilege of conducting a retail business and not a tax laid on the consumer, nonetheless the State construction is not determinative of the question of whether the tax violates a federal right, that issue turning not on the characterization which the State gives the tax but on its operation and effect. This is no sense inconsistent with the noted holding in Bismarck, expressly reaffirmed in Richfield, that the determination of the State court as to the incidence of the tax is controlling so long as it is recognized, as we do, that it remains open for federal determination...

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