Pacific Telephone Telegraph Co v. Tax Commission of State of Washington Great Northern Ry Co v. State of Washington Northern Pac Ry Co v. Same 529

• Decision Date: 02 March 1936
• Docket Number: Nos. 544,573,s. 544
• Citation: 56 S.Ct. 522,105 A.L.R. 1,297 U.S. 403,80 L.Ed. 760
• Parties: PACIFIC TELEPHONE & TELEGRAPH CO. v. TAX COMMISSION OF STATE OF WASHINGTON. GREAT NORTHERN RY. CO. v. STATE OF WASHINGTON. NORTHERN PAC. RY. CO. v. SAME. , and 529
• Court: U.S. Supreme Court

297 U.S. 403

56 S.Ct. 522

80 L.Ed. 760

PACIFIC TELEPHONE & TELEGRAPH CO.

v TAX COMMISSION OF STATE OF WASHINGTON.

GREAT NORTHERN RY. CO.

v. STATE OF WASHINGTON.

NORTHERN PAC. RY. CO.

v. SAME.

Nos. 544, 573, and 529.

Argued Jan. 13, 1936.

Decided March 2, 1936.

Messrs. Otto B. Rupp and Alfred J. Schweppe, both of Seattle, Wash., for appellant Pacific Telephone & Telegraph Co.

[Argument of Counsel from page 404 intentionally omitted] Messrs. L. B. da Ponte, of Seattle, Wash., and Dennis F. Lyons, of St. Paul, Minn., for appellant Northern Pac. Ry. Co.

[Argument of Counsel from pages 405-406 intentionally omitted] Messrs. Thomas Balmer, of Seattle, Wash., and F. G. Dorety, of St. Paul, Minn., for appellant Great Northern Ry. Co.

[Argument of Counsel from pages 407-409 intentionally omitted] Messrs. R. G. Sharpe, of Olympia, Wash., and Walter L. Baumgartner, of Seattle, Wash., for appellees.

Mr. Justice BRANDEIS delivered the opinion of the Court.

The state of Washington laid upon practically all persons engaged in intrastate business an occupation tax effective August 1, 1933, to continue for twenty-four months. The tax is measured by a percentage of the gross income solely of that business; and, as construed, purports not to tax the privilege of doing interstate business. The rate for telephone companies is 3 per cent.; for railroads, 1 1/2 per cent. Laws of Washington 1933, c. 191, p. 869. No. 544 is a suit by Pacific Telephone & Telegraph Company against the tax commission to enjoin proceedings to enforce the tax. No. 573 is an action by the state against Great Northern Railway to collect the tax for the period ending December 31, 1933. No. 529 is a like action against Northern Pacific Railway. Each company is a foreign corporation. The cases are here on appeals from the Supreme Court of the state and were argued together. Each presents the question whether the statute, as applied, is obnoxious to the commerce clause of the Federal Constitution (Const. art. 1, § 8, cl. 3). The railroads claim also that the statute violates the due process clause by taxing income earned outside the state. In each case the trial court held the statute void. The Supreme Court sustained its validity in all the cases. 48 P.(2d) 931; 48 P.(2d) 938.

None of the companies rests its challenge of the statute primarily upon proof that the tax, in fact, burdens interstate commerce. The telephone company relies wholly, and the railroads mainly, upon an alleged rule of law—the proposition that, when a foreign corporation engages within a state in both local and interstate commerce, an occupation tax laid upon the local business is necessarily void, unless the corporation is free in law and in fact to withdraw therefrom without discontinuing its interstate business. They urge that the alleged rule applies to them, claiming that inability to abandon the local business without also discontinuing the interstate is imposed by state and federal law, and arises also from practical considerations. They insist that the rule applies although the tax is not such in character or amount as to induce withdrawal from the local business. The railroads contend further that the tax, in fact, burdens interstate commerce.

The trial court found, and the Supreme Court assumed, that practical considerations would prevent either of the railroads from abandoning its intrastate business without also withdrawing from the interstate. And this was assumed to be true of the telephone company. The operations of the two classes of business are inextricably intertwined. In the main, they are carried on at the same time, by the same employees, with the same plant, equipment, and facilities. The interstate business is found profitable when carried on in connection with the local, because the expenses of the joint operation are, under applicable accounting rules, apportioned between the two branches of the business. Withdrawal from local business would reduce by but a small percentage each company's cost of operation. The remaining unavoidable exp nse would be heavier than the interstate business could bear under the existing rates or under any conceivable increase. Moreover, the trial court ruled, and the Supreme Court assumed, that the governing law would not permit these corporations to withdraw from local business without discontinuing also the interstate.

The state denies the existence of the alleged rule of law that an occupation tax upon intrastate business is necessarily void, if the corporation is not free to withdraw from the local business without discontinuing also the interstate. There is no denial that a tax upon the privilege of engaging in the local business is void if, by reason of its character or amount, it, in fact, imposes a direct burden upon interstate commerce. The state insists that this tax does not do so.

First. Where interstate and intrastate commerce are served by the same instrumentalities of a common carrier, it is possible that a regulation of the state applied directly to the intrastate business only may in fact burden the interstate. Where this occurs, Congress may remove the burden, since state regulation must yield to its paramount power to assure adequate interstate service. That power is comprehensive, and has, under appropriate legislation, been extensively exercised. Through the Interstate Commerce Commission, Congress has commanded the raising of local rates where they were so low that the intrastate traffic did not bear its fair share of the cost of the service. It has prevented state authorities from compelling the erection of a union station so expensive as unduly to deplete the financial resources of the carrier. It has prevented the construction of an intrastate branch line which would have depleted the financial resources of the builder or of another interstate carrier. It has curtailed existing local service and authorized abandonment of a controlled line, despite the carrier's contract with the state to maintain the line. Such control over intrastate commerce exists because it is a necessary incident of freeing interstate commerce from burdens, obstructions, or discrimination. It has been exerted wherever Congress deemed that the state's power to regulate and promote intrastate commerce is exercised in such a way as to prejudice the interstate. Colorado v. United States, 271 U.S. 153, 164-166, 46 S.Ct. 452, 70 L.Ed. 878.

Similarly, where interstate and intrastate commerce are served by the same instrumentalities of the carrier, it is possible that a tax applied directly to the privilege of doing the local business may in fact burden the related interstate business. While a state may tax the privilege of engaging in local business, as it may regulate local rates, it may not tax the privilege of engaging in interstate commerce. Taxation being one of the forms of regulation, Lehigh Valley R. Co. v. Pennsylvania, 145 U.S. 192, 200, 12 S.Ct. 806, 36 L.Ed. 672, any tax laid directly upon the privilege is void, even in the absence of legislation by Congress or a finding of prejudice. As local rates may be so low, and the circumstances such, that these rates must be raised in order to protect interstate commerce, so a tax on the privilege of engaging in local business may conceivably be so high, and the circumstances such, as to require lowering of the tax in order to protect interstate commerce. But the high tax on the local privilege, like the low rate for the local traffic, if it burdens interstate commerce at all, does so by reason of its consequences. This being so, a tax upon the local privilege only must be held valid in the absence of proof that it imposes an undue burden upon interstate commerce. 'The question of constitutional validity is not to be determined by artificial standards.' See Gregg Dyeing Co. v. Query, 286 U.S. 472, 480, 52 S.Ct. 631, 634, 76 L.Ed. 1232, 84 A.L.R. 831. The alleged indirect tax must be judged by its practical operation.

In its effect upon interstate commerce an occupation tax solely upon local busine § does not differ from an ad valorem property tax upon tangible property used exclusively in such business. Each increases the necessary cost of doing the local business. Either might conceivably be so large as to render the local business immediately unprofitable. A common carrier cannot be compelled to carry on business indefinitely at a loss. Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396, 40 S.Ct. 183, 64 L.Ed. 323; Bullock v. Florida, 254 U.S. 513, 520, 521, 41 S.Ct. 193, 65 L.Ed. 380; Railroad Commission v. Eastern Texas R. Co., 264 U.S. 79, 85, 44 S.Ct. 247, 68 L.Ed. 569. If, because of such loss, a corporation, seeing no prospect of betterment, wished to discontinue its local business and were prevented by law from doing so unless it discontinued also its interstate business, the law might be held void as im- posing an unconstitutional condition upon the privilege of engaging in interstate commerce. Compare Pullman Co. v. Adams, 189 U.S. 420, 23 S.Ct. 494, 47 L.Ed. 877. If it was the tax which caused the unprofitableness of the local business and, consequently, the desire to discontinue it, the tax would then appear as a direct burden on interstate commerce. Compare Postal Telegraph-Cable Co. v. Richmond, 249 U.S. 252, 258, 39 S.Ct. 265, 63 L.Ed. 590; Postal Telegraph-Cable Co. v. Fremont, 255 U.S. 124, 127, 41 S.Ct. 279, 65 L.Ed. 545. But no reason has been suggested why a tax upon the local business should be held void, if, despite its burden, the local business is conducted at a profit; or if, although conducted at an apparent loss, the corporation desires to continue it because of benefits present or prospective. Compare Ohio Tax Cases, 232 U.S. 576, 590, 34 S.Ct. 372, 58 L.Ed. 737.

Second. Inherently the tax challenged is unobjectionable. It is not upon an instrumentality of interstate commerce; it is moderate in amount; and is not a disguised attempt to...