People ex rel. D.W. Griffith Inc. v. Loughman

• Decision Date: 20 November 1928
• Citation: 164 N.E. 253,249 N.Y. 369
• Parties: PEOPLE et rel. D. W. GRIFFITH, Inc., v. LOUGHMAN et al., State Tax Commission.
• Court: New York Court of Appeals Court of Appeals

249 N.Y. 369

164 N.E. 253

PEOPLE et rel. D. W. GRIFFITH, Inc.,

v.LOUGHMAN et al., State Tax Commission.

Court of Appeals of New York.

Nov. 20, 1928.

Certiorari by the People, on the relation of D. W. Griffith, Inc., against Michael F. Loughman, and others, constituting the State Tax Commission, to review a tax assessment. From an order of the Appellate Division (224 App. Div. 100, 229 N. Y. S. 657) annulling the determination of the Tax Commission and remitting the matter to the Commission, for further action per opinion, the State Tax Commission appeals.

Affirmed.Appeal from Supreme Court, Appellate Division, Third Department.

Albert Ottinger, Atty. Gen. (Wendell P. Brown, Deputy Atty. Gen., and Henry S. Manley, of Falconer, of counsel), for appellants.

E. Crosby Kindleberger, M. E. Harby, Edward G. Zimmer and Albert H. T. Banzhaf, all of New York City, for respondent.

LEHMAN, J.

The relator, D. W. Griffith, Inc., is a corporation organized under the laws of the state of Maryland. In July, 1920, it applied to the secretary of state of New York for permission to do business in this state. Its authorized capital stock consisted of 500,000 shares of no par value.

At the time the relator began to do business in this state, the Tax Law (Consol. Laws, c. 60, § 181) provided: ‘Every foreign corporation * * * doing business in this state, shall pay to the state treasurer, for the use of the state, a license fee of one-eighth of one per centum for the privilege of exercising its corporate franchises or carrying on its business * * * in this state, to be computed upon the basis of the capital stock employed by it within this state, during the first year of carrying on its business in this state; which first payment shall not be less than ten dollars; and if in any year thereafter any such corporation shall employ more than eight thousand dollars of its capital stock within this state on which a license fee has not been paid then a license fee at the rate of one-eighth of one per centum shall be due and payable upon any such increase. The measure of the amount of capital stock employed in this state shall be such a portion of the issued capital stock as the gross assets employed in any business within this state bear to the gross assets wherever employed in business. * * * No action shall be maintained or recovery had in any of the courts in this state by such foreign corporation after thirteen months from the time of beginning such business within the state, without obtaining a receipt for the payment of the license fee upon the capital stock. * * *’

In People ex rel. Elliott-Fisher Co. v. Sohmer, 148 App. Div. 514, 132 N. Y. S. 789, affirmed 206 N. Y. 634, 99 N. E. 1115, it was held that ‘the clear intention of the Legislature was that this tax should be based upon the par value of the capital stock which is employed in business in the State.’ At the time the relator began to do business within the state, the statute did not expressly provide any measure for capital stock which had no par value. In People ex rel. Terminal & Town Taxi Corp. v. Walsh, 202 App. Div. 651, 195 N. Y. S. 184, the Appellate Division held that in such circumstances the tax must be based upon the actual capital of relator within this state.

The omission in the statute was supplied by an amendment to section 181 of the Tax Law, which took effect on May 12, 1921 (Laws 1921, c. 705, § 3) or about ten months after the relator began to do business in this state. ‘The issued capital stock of any corporation issuing shares without designated monetary value shall pay for the use of the state a license fee of six cents on each such share employed in this state, as hereinbefore provided.’ At the close of the first year of carrying on business within this state, the tax or license fee payable by the corporation has been fixed at 6 cents on each share of its capital stock employed in this state. The tax so fixed is much greater than it would have been if based upon the actual capital of the relator within this state in accordance with the practice which prevailed before the amendment of the statute; and the relator attacks the assessment on the ground that the amendment is unconstitutional, and that in any event it should not be construed as applying to corporations which had begun to do business in this state under certificate of permission issued by the secretary of state before the amendment took effect.

There can be no doubt that the method of taxation embodied in the amended statute must result in some inequalities. Corporations with stock having no par value are taxed on a basis entirely different from the tax assessed against corporations which have issued stock with a par value. The number of shares of capital stock having no par value bears no relation of any kind to the actual capital or business of the corporation. It can form, it is said, no legitimate basis for the imposition of a license tax upon a foreign corporation. Such considerationsare clearly not without weight, and have led, not only the court below, but the Circuit Court of Appeals (Third Circuit) to hold the amendment unconstitutional, relying on the authority of Air-Way Electric Appliance Corporation v. Day, 266 U. S. 71, 45 S. Ct. 12, 69 L. Ed. 169;Matter of Thermiodyne Radio Corp. (D. C.) 26 F.(2d) 713, affirmed New York v. Latrove, 28 F.(2d) 1017, October 31, 1928, ‘on opinion of Judge Morris below.’ See, also, People ex rel. Terminal & Town Taxi Corporation v. Walsh, supra. We have reached the opposite conclusion in spite of the inequalities that may be produced by the tax.

The relator is a foreign corporation. The Legislature might have excluded it from the state. It chose to admit it upon condition that it pay a license fee or tax, just as a domestic corporation must pay a similar organization tax before it receives corporate powers from the state. The power of the state to impose upon a foreign corporation a license fee or tax as a condition precedent to its entry into the state is, from its nature, less subject to constitutional limitations than the power to impose a franchise tax as payment or compensation for the privilege of continuing to do business here. Different tests must be applied to determine the validity of attempted exercise of such powers. Hanover Fire Insurance Co. v. Harding, 272 U. S. 494, 47 S. Ct. 179, 71 L. Ed. 372, 49 A. L. R. 713. At least, in the former case, there need not be equality between domestic and foreign corporations.

Here, though the tax is called a ‘license’ tax in the statute, it cannot be measured until one year after the corporation has received a certificate of authority to do business in the state, and payment is necessarily postponed until after that time. In strict sense, such payment is not a condition precedent to the entry of the corporation into the state. For that reason in Matter of Thermiodyne Co., supra, the court held that the validity of the tax must be tested as if it were a ‘franchise’ rather than a license tax. The test of the validity of the tax must be determined ‘by its substance-its essential and practical operation-rather than its form or local characterization.’ International Paper Co. v. Massachusetts, 246 U. S. 135, 38 S. Ct. 292, 62 L Ed. 624, Ann. Cas. 1918C, 617. The state has admitted the relator subject to the condition that the corporation pay a license fee, just as a domestic corporation must pay an organization tax before it has any power to act. The measure of the tax adopted by the Legislature required postponement of the tax bill a year after the corporation began to do business. Only in that sense is such payment a condition subsequent. The obligation to pay arose when the corporation began to do business in the state, and the effect of failure to meet that obligation results not merely in the revocation of authority previously granted by the state to do business here, but acts as a bar to enforcement, within the state, of contracts made in the course of such business. Essentially the tax constitutes the payment exacted for the privilege of entering into the state, even though in some particulars it is analogous to a franchise tax.

We have analyzed the essentials of the tax and its practical operation to indicate the question presented in this case. Authority is not lacking that the Legislature might have adopted the same measure as a basis even for a franchise tax. We are not called upon to define the extent of the legislative power beyond the limits of its exercise in this case. We do not attempt to determine whether the Legislature might have gone further.

In Air-Way Electric Appliance Corp. v. Day, supra, the Supreme Court of the United States held that ‘the mere number of authorized non-par value shares is not a reasonable basis for the classification of foreign corporations for the purpose of determining the amount of such annual fees' to be paid to a state for the privilege of doing business therein. The court pointed out several objections to the tax. ‘The inevitable effect of the act is to tax...