Norfolk and Western Railway Company v. Missouri State Tax Commission

• Decision Date: 11 March 1968
• Docket Number: No. 324,324
• Citation: 390 U.S. 317,88 S.Ct. 995,19 L.Ed.2d 1201
• Parties: NORFOLK AND WESTERN RAILWAY COMPANY et al., Appellants, v. MISSOURI STATE TAX COMMISSION et al
• Court: U.S. Supreme Court

390 U.S. 317

88 S.Ct. 995

19 L.Ed.2d 1201

NORFOLK AND WESTERN RAILWAY COMPANY et al., Appellants,

v MISSOURI STATE TAX COMMISSION et al.

No. 324.

Argued Jan. 25, 1968.

Decided March 11, 1968.

Leave to File Petition for Rehearing Denied April 29, 1968.

See 390 U.S. 1046, 88 S.Ct. 1633.

[Syllabus from pages 317-318 intentionally omitted] William H. Allen, Washington, D.C., for appellants.

William A. Peterson, Asst. Atty. Gen. of Missiouri, for appellees.

Mr. Justice FORTAS delivered the opinion of the Court.

This case brings before us, once again, troublesome problems arising from state taxation of an interstate commercial enterprise. At issue is a tax assessment pursuant to a Missouri statute specifying the manner in which railroad rolling stock is to be assessed for the State's ad valorem tax on that property.¹

In 1964 the Norfolk & Western Railway Co. (N & W), a Virginia corporation with interstate rail operations, leased all of the property of appellant Wabash Railroad Company. The Wabash owned substantial fixed property and rolling stock, and did substantial business in Missouri as well as in other States. Prior to the lease, N & W owned no fixed property and only a minimal amount of rolling stock in Missouri. N & W is primarily a coal-carrying railroad. Much of its equipment and all of its specialized coalcarrying equipment are generally located in the coal regions of Virginia, West Virginia, and Kentucky, and along the coalferrying routes from those regions to the eastern seaboard and the Great Lakes. Scarcely any of the specialized equipment ever enters Missouri. According to appellants, the Wabash property in Missouri was leased by N & W in order to diversify its business, not to provide the opportunity for an integrated through movement of traffic.

By the terms of the lease, the N & W became obligated to pay the 1965 taxes on the property of the Wabash in Missouri and elsewhere.² Upon receiving notice of the 1965 assessment from the appellee Missouri Tax Commission, the N & W filed a request for an adjustment and hearing before the Commission. The hearing was held, and the Commission sustained its assessment against the taxpayer's challenge. On judicial review, the Commission's decision was affirmed without opinion by the Circuit Court of Cole County, and then by the Supreme Court of Missouri. Appellants filed an appeal in this Court, contending that the assessment in effect reached property not located in Missouri and thus violated the Due Process Clause and the Commerce Clause of the United States Constitution. We noted probable jurisdiction. 389 U.S. 810, 88 S.Ct. 84, 19 L.Ed.2d 63 (1967).

I.

The Missouri property taxable to the N & W was assessed by the State Tax Commission at $31,298,939. Of this sum, $12,177,597 relates to fixed property within the State, an assessment that is not challenged by appellants. Their attack is aimed only at that portion of the assessment relating to rolling stock, $19,981,757.³

With respect to the assessment of rolling stock, the Commission used the familiar mileage formula authorized by the Missouri statute. In relevant part, this provides (§ 151.060, subd. 3):

'* * * when any railroad shall extend beyond the limits of this state and into another state in which a tax is levied and paid on the rolling stock of such road, then the said commission shall assess, equalize and adjust only such proportion of the total value of all the rolling stock of such railroad company as the number of miles of such road in this state bears to the total length of the road as owned or controlled by such company.'

The Commission arrived at the assessment of rolling stock by first determining the value of all rolling stock, regardless of where located, owned or leased by the N & W as of the tax day, January 1, 1965. Value was ascertained by totaling the original cost, less accrued depreciation at 5% a year up to 75% of cost, of each locomotive, car, and other piece of mobile equipment. To the total value, $513,309,877, was applied an 'equalizing factor' of 47%, employed in assessing all railroad property in an attempt to bring such assessments down to the level of other property assessments in Missouri. The Commission next found that 8.2824% of all the main and branch line road (excluding secondary and side tracks) owned, leased, or controlled by the N & W was situated in Missouri. This percentage was applied to the equalized value of all N & W rolling stock, and the resulting figure was $19,981,757.

There is no suggestion in this case that the Commission failed to follow the literal command of the statute. The problem arises because of appellants' contention that, in mechanically applying the statutory formula, the Commission here arrived at an unconscionable and unconstitutional result. It is their submission that the assessment was so far out of line with the actual facts of record with respect to the value of taxable rolling stock in the State as to amount to an unconstitutional attempt to exercise state taxing power on out-of-state property.

Appellants submitted evidence based upon an inventory of all N & W rolling stock that was actually in Missouri on tax day. The equalized value of this rolling stock, calculated on the same cost-less-depreciation basis employed by the Commission, was approximately $7,600,000, as compared with the assessed value of $19,981,000. Appellants also submitted evidence to show that the tax-day inventory was not unusual. The evidence showed that, both before and in the months immediately after the Wabash lease, the equalized value of the N & W rolling stock actually in Missouri never ranged far above the $7,600,000 figure. In the preceding year, 1964, the rolling stock assessment against the Wabash was only $9,177,683, and appellants demonstrated that neither the amount of rolling stock in Missouri nor the Missouri operations of the N & W and Wabash had materially increased in the intervening period.⁴ The assessment of the fixed properties (for which no mileage formula was applied) hardly increased between 1964 and 1965. In 1964, prior to the lease, the fixed properties in Missouri were assessed at $12,092,594; in 1965, after the lease, the assessment was $12,177,597.

The Supreme Court of Missouri concluded that the result reached by the Commission was justifiable. It pointed out that the statutory method used by the Commission proceeds on the assumption that 'rolling stock is substantially evenly divided throughout the railroad's entire system, and the percentage of all units which are located in Missouri at any given time, or for any given period of time, will be substantially the same as the percentage of all the miles of road of the railroad located in Missouri.' It then held that the valuation found by the Commission could be justified on the theory of 'enhance- ment,' although the Commission had not referred to that principle. The court described the theory as follows:

'The theory underlying such method of assessment is that rolling stock regularly employed in one state has an enhanced or augmented value when it is connected to, and because of its connection with, an integrated operational whole and may, therefore, be taxed according to its value 'as part of the system, although the other parts be outside the State;—in other words, the tax may be made to cover the enhanced value which comes to the property in the State through its organic relation to the system.' Pullman Co. v. Richardson, 261 U.S. 330, 338, 43 S.Ct. 366, 67 L.Ed. 682.'

The court correctly noted, however, that 'even if the validity of such methods be conceded, the results, to be valid must be free of excessiveness and discrimination.' It concluded that in the present case, the result reached by the Commission was justifiable. We disagree. In our opinion, the assessment violates the Due Process and Commerce Clauses of the Constitution.

II.

Established principles are not lacking in this much discussed area of the law. It is of course settled that a State may impose a property tax upon its fair share of an interstate transportation enterprise. Marye v. Baltimore & Ohio R. Co., 127 U.S. 117, 123 124, 8 S.Ct. 1037, 1039—1040, 32 L.Ed. 94 (1888); Pullman's Palace-Car Co. v. Commonwealth of Pennsylvania, 141 U.S. 18, 11 S.Ct. 876, 35 L.Ed. 613 (1891); Ott v. Mississippi Valley Barge Line Co., 336 U.S. 169, 69 S.Ct. 432, 93 L.Ed. 585 (1949); Braniff Airways, Inc. v. Nebraska State Board of Equalization and Assessment, 347 U.S. 590, 74 S.Ct. 757, 98 L.Ed. 967 (1954). That fair share may be regarded as the value, appropriately ascertained, of tangible assets permanently or habitually employed in the taxing State, including a portion of the intangible, or 'going-concern,' value of the enterprise. Railway Express Agency v. Commonwealth of Virginia, 347 U.S. 359, 364, 74 S.Ct. 558, 561, 98 L.Ed. 757 (1954); Cudahy Packing Co. v. State of Minnesota, 246 U.S. 450, 455, 38 S.Ct. 373, 375, 62 L.Ed. 827 (1918); Adams Express Co. v. Ohio State Auditor, 166 U.S. 185, 218—225, 17 S.Ct. 604, 605, 607, 41 L.Ed. 965 (1897). The value may be ascertained by reference to the total system of which the intrastate assets are a part. As the Court has stated the rule, 'the tax may be made to cover the enhanced value which comes to the (tangible) property in the State through its organic relation to the (interstate) system.' Pullman Co. v. Richardson, 261 U.S. 330, 338, 43 S.Ct. 366, 368, 67 L.Ed. 682 (1923). Going-concern value, of course, is an elusive concept not susceptible of exact measurement. Rowley v. Chicago & N.W.R. Co., 293 U.S. 102, 109, 55 S.Ct. 55, 58, 79 L.Ed. 222 (1934); Nashville, C. & St. L.R. Co., v. Browning, 310 U.S. 362, 365—366, 60 S.Ct. 968, 970, 84 L.Ed. 1254 (1940). As a consequence, the States have been permitted considerable latitude in devising formulas to measure the value of tangible property located within their borders. Union Tank Line Co. v. Wright, 249...