People v. American Bell Tel. Co.

• Decision Date: 26 November 1889
• Citation: 117 N.Y. 241,22 N.E. 1057
• Parties: PEOPLE v. AMERICAN BELL TEL. CO.
• Court: New York Court of Appeals Court of Appeals

117 N.Y. 241

22 N.E. 1057

PEOPLE

v.AMERICAN BELL TEL. CO.¹

Court of Appeals of New York.

Nov. 26, 1889.

Appeal from supreme court, general term, first department.

James C. Carter, for appellant.

Wm. A. Poste, Dep. Atty. Gen., for the People.

RUGER, C. J.

The controversy in this case is presented by an agreed statement of facts submitted by the parties to the supreme court, under section 1279 of the Code, for its decision. The plaintiff claims the right to recover taxes from the defendant for five years between 1881 and 1887, upon some portion of its capital stock and upon its gross earnings in this state, by virtue of the provisions of chapter 542 of the Laws of 1880, as amended by chapter 361 of the Laws of 1881 and chapter 501 of the Laws of 1885. The taxes contemplated by the statutes referred to are a certain percentage upon the amount of the capital stock of ‘every corporation, joint stock company, or association whatever, now or hereafter incorporated or organized under any law of this state, or now or hereafter incorporated or organized by or under the law of any other state or country, and doing business in this state.’ Section 3, c. 542, Laws 1880; section 3, c. 361, Laws 1881. By chapter 501 of the Laws of 1885 the tax upon the capital stock of corporations, when such stock was only partially employed in this state, was limited to so much only of such capital stock as was thus employed. Section 6, c. 542, of the Laws of 1880, and section 6, c. 361, of the Laws of 1881, authorize, in addition to other taxes, and among other corporations, as a tax upon its corporate franchise or business in this state, a certain percentage upon the gross earnings of ‘every telegraph company or telephone company incorporated under the laws of this or any other state and doing business in this state.’ The taxes authorized by these statutes are in addition to the usual and ordinary taxes levied upon property, and were intended to reach and tax only the business and franchise of the corporations designated.

The main question presented is whether the defendant is a corporation ‘doing business in this state,’ within the meaning of those words as used in the statutes. No difference exists between the authority to impose a tax upon capital stock under the act and that conferred to tax gross earnings, and the right to levy both taxes, therefore, rests upon the same ground, and stands or falls upon the simple question whether the defendant is doing business in this state. Whether the defendant during this period was in fact doing business in this state must be determined from the actual character of the business carried on, as disclosed by the facts contained in the submission, and not from the existence of any unexercised powers reserved to it by its contracts; for the material question is whether it has in fact done business within the state, and, if so, what was its nature, character, and extent, and not whether it possesses the natural or contractual right to carry on business therein Some of the leading features of the business under consideration may be concisely referred to, as having an important, if not controlling, bearing upon the subject. The defendant is a foreign corporation, chartered under the laws of Massachusetts, and located and doing business in that state. It is authorized by its charter ‘to carry on the business of manufacturing, owning, selling, using, and licensing others to use, electric speaking telephones, and other apparatus and appliances pertaining to the transmission of intelligence by electricity.’ Practically, its whole business consists in manufacturing under its patents, and leasing to and licensing the use of telephones by others in the various states of the Union. In the state of New York, these licensees are corporate bodies, formed therein, to carry on, in certain defined localities, the business of furnishing telephonic facilities to the citizens of such communities, and they are entitled to the exclusive privilege of doing so under the Bell system. The conduct of the business is carried on under authority obtained from the Bell Telephone Company, upon the conditions and regulations contained in contracts with that company. The entire receipts for the use of telephonic facilities from the citizens of New York are paid by the customers of the respective local companies to the company of which they are respectively patrons or lessees; and such receipts constitute the entire income and earnings accruing to the Bell Telephone Company from the use and employment of its telephonic instruments in the state of New York. The contracts under which this business is done by the licensees are made at the defendant's office in Boston, and the rentals or royalties due to it are payable monthly, in advance, at that place. The telephones are delivered to each licensee at the general office or factory of the defendant company, in Boston, as often as requested, and not elsewhere. The licensee transports them, at his own risk and expense, wherever he wishes, and lawfully may use them, or furnish them to others for use. The licensee, when he sees fit, may return them to the defendant company at Boston, but, so long as he retains them, is bound to pay the royalties thereon, whether they be used or not. The business, as conducted by the local companies, requires, in addition to the telephones furnished by the Bell Telephone Company, the use and employment of an expensive plant; the construction and maintenance of extensive lines of poles, wires, switches, and switch-boards; the services of numerous agents and employes; and the management and control of an extensive business, calling for the employment of a large capital, and the incurrence of serious risks in its prosecution.

The Bell Telephone Company has no office or officer, agent or employe, in the state of New York, unless the local corporations can be so denominated. It has no direct business relations with the public, from whose patronage the income for telephonic facilities is derived; and such income is always collected by and paid to, and becomes the property of, the local companies. The profits derived from the business thus carried on belong wholly to the stockholders of the respective local companies. In fact, the Bell Telephone Company is largely instrumental in procuring the organization of local companies in New York to transact the business carried on under their contracts, and has usually subscribed largely to the capital stock of such companies. As has been observed, this business is conducted under contracts between the Bell Telephone Company and the several local companies, and is usually provided for in three separate contracts, adapted to the particular use which was intended to be made of the telephones leased. These contracts are quite voluminous, and are replete with detailed qualifications and restrictions imposed upon the local companies by the Bell Telephone Company in regard to the use to be made of their instruments, and intended to protect the rights secured to the licensor by its patents. It is unnecessary to refer to these restrictions in detail, as they do not affect the problem under consideration. So far as the provisions of the contracts bear upon this controversy, they will be referred to. The patented instruments used consisted of a transmitter and a receiver, costing about $3.50 to manufacture. The use to which the telephones may be put by the licensees is defined in these contracts as- First, contracts for exchange systems; second, contracts for extraterritorial connecting lines; third, contracts for private lines. The first class embraces the business of constructing lines and apparatus within a certain described area, and affording facilities for telephonic communication between the customers or subscribers of the company having control of the business in the district in which such customers reside. This embraces the usual and ordinary mode of using telephones, and covers by far the most lucrative and extensive method of employing telephones by the public. Other occasional uses are those designated as ‘extraterritorial contracts' and ‘private lines contracts.’ These uses are of a limited nature, and the receipts therefrom are comparatively insignificant, amounting in the aggregate to about one-fiftieth part of the gross amount received in the business. They are significant only for the use which is attempted to be made of them through some slight differences in the provisions of the contracts relating to the conduct of the respective kinds of business. The sums required to be paid by the local companies to the defendant company for royalties upon the instruments leased by them vary slightly between the various local companies, and also according to the character of the use which is made of them, but are controlled, in certain instances, by a percentage upon the amounts received by the local companies from their respective customers and subscribers, and which sum is specified and fixed in each contract. The sums, however arrived at, are intended as the measure of the compensation of the licensor for the use and employment of its telephones by the local companies. The receipts for the use of telephones are in all cases collected by the local companies, and the defendant company has no right, in any case, to make such collections, except upon a default in the payment of royalties or dues by the local company, when, in some instances, the licensor is authorized, in order to protect itself from loss, to collect, in the name of the local company, so much of the dues owing to it by its customers as will satisfy the sums due and unpaid to the defendant company. It is also, in some cases, upon the default of the local companies in supplying telephonic facilities to their customers, authorized to take possession of their plant, and to carry on the business until other satisfactory arrangements can be made...