State ex rel. Froedtert Grain & Malting Co. v. Tax Comm'n of Wis.

• Decision Date: 03 March 1936
• Citation: 265 N.W. 672,221 Wis. 225
• Parties: STATE EX REL. FROEDTERT GRAIN & MALTING CO., INC., v. TAX COMMISSION OF WISCONSIN.
• Court: Wisconsin Supreme Court

221 Wis. 225

265 N.W. 672

STATE EX REL. FROEDTERT GRAIN & MALTING CO., INC.,

v.TAX COMMISSION OF WISCONSIN.^a1

Supreme Court of Wisconsin.

March 3, 1936.

Original action for declaratory judgment by the State, on the relation of the Froedtert Grain & Malting Company, Incorporated, against the Tax Commission of Wisconsin.--[By Editorial Staff.]

Judgment in accordance with opinion.

Original action for a declaratory judgment determining as to the constitutionality of section 3, chapter 505, Laws 1935, as amended, imposing a 2 1/2 per cent. tax on the transaction by which corporate dividends are declared and received out of income derived from property located or business transacted within this state.Lamfrom Tighe, Engelhard & Peck, of Milwaukee (Leon B. Lamfrom and Egon W. Peck, both of Milwaukee, of counsel), for plaintiff.

James E. Finnegan, Atty. Gen., Herbert H. Naujoks, Asst. Atty. Gen., and Cyrus C. Thieme, Sp. Counsel, of South Milwaukee, for defendant.

Olin & Butler, Harry L. Butler, and Ward Rector, all of Madison, Lawrence A. Olwell, Bernard V. Brady, Shaw, Muskat & Paulsen, Miller, Mack & Fairchild, and Upham, Black, Russell & Richardson, all of Milwaukee (Perry J. Stearns, of Milwaukee, of counsel), Nicholson, Snyder, Chadwell & Fagerburg, of Chicago, Ill., Stephens, Sletteland, Sutherland & Cannon, of Madison (Erwin P. Snyder and Dewey F. Fagerburg, both of Chicago, Ill., and Glenn W. Stephens, of Madison, of counsel), amici curiæ.

FOWLER, Justice.

The suit is brought directly in this court to procure a declaratory judgment as to the constitutionality of section 3, chapter 505, Laws 1935, as amended by chapter 552, Laws 1935, which imposes a 2 1/2 per cent. tax on the transaction by which corporate dividends are declared and received out of income derived from property located and business transacted within this state. The relator is a Wisconsin corporation doing business in this state and Minnesota. The majority of its stockholders are nonresidents. The tax is deductible by the corporation from the dividends declared and payable by the corporation to the tax commission. It is declared by the statute to be a tax “for the privilege of declaring and receiving dividends.” The full text of the section as amended is printed in the margin.¹

The relator contends that the statute is void because (1) it purports to impose a tax on something that is “non-existent”; because (2) it impairs the obligation of contracts contrary to section 10, article 1 of the United States Constitution; because (3) it violates the due process clause of the Fourteenth Amendment to the United States Constitution; because (4) it violates the equal privilege clause of the Fourteenth Amendment; and because (5) it is so indefinite and uncertain as to be incapable of enforcement.

[1][2][3] 1. It is claimed in several of the briefs filed in opposition to the tax imposed by the statute that the statute is void for attempting to impose a privilege tax on something that is not a privilege, but a right. Under some dictionary definitions this might be true, but the word “privilege,” as used in the statutes taxing privileges, is used as synonymous with right. Many cases are cited in Words & Phrases to this effect: vol. 6, Words and Phrases, First Series, 5583; vol. 3, Words and Phrases, Second Series, 1206; vol. 6, Words and Phrases, Third Series, 131; vol. 3, Words and Phrases, Fourth Series, 178. This court has so construed the word in the inheritance tax cases. Nunnemacher v. State, 129 Wis. 190, 108 N.W. 627, 9 L.R.A.(N.S.) 121, 9 Ann.Cas. 711;Beals v. State, 139 Wis. 544, 121 N.W. 347;State v. Bullen, 143 Wis. 512, 128 N.W. 109;State ex rel. Kempsmith v. Widule, 161 Wis. 389, 154 N.W. 695;In re Estate of Stephenson, 171 Wis. 452, 177 N.W. 579. It is true that some courts and text-writers have made the broad statement that a privilege tax cannot be imposed on the right to own property. Freiberg Co. v. Dawson (D.C.) 274 F. 420, 434; Prof. Beals, in 37 Harvard Law Review, 1. This may be so in the abstract, but it is not, and never has been, so in the concrete. Taxes were early imposed on the right to own carriages. They are now universally imposed on the right to own automobiles. They are imposed on the right to own dogs. The briefs in opposition to the tax are largely beside the case, because they do not recognize the true nature of the tax. The tax is a privilegetax, or an excise tax, one form of which is a tax imposed on the transfer of property. The federal government in its stamp taxes imposes a tax on the right to transfer property by deed; it formerly imposed a tax on the right to transfer funds in banks by check; it imposes taxes on the transfer of property by inheritance or will. These taxes are best characterized as a tax on the transaction involved. The power of the state to impose excise taxes is under our system of dual sovereignty as broad as the power of the federal government. True, taxation must not conflict with the Fourteenth Amendment, but that we will consider later. “The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. It reaches to every trade or occupation; to every object of industry, use or enjoyment; to every species of possession.” Cooley, Const. Lim. (7th Ed.) p. 678. A sales tax in one view is but a tax on the right to buy--to receive--the thing sold, but is better viewed as a tax on the right to consummate the transaction of sale. There are, according to Cooley on Taxation (4th Ed.) § 38, three kinds of taxes: Property taxes, capitation or poll taxes, and excises. “Excise taxes” are defined in Cooley, Const. Lim. (7th Ed.) p. 680, as taxes “paid upon the manufacture, sale or consumption of commodities within the country, upon licenses to pursue certain occupations, and upon corporate privileges.” This definition is quoted with approval in Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389, Ann.Cas.1912B, 1312. An “excise tax” is a privilege tax, as distinguished from a property or capitation tax. 2 Cooley, Taxation (4th Ed.) § 837; Black v. State, 113 Wis. 205, 218, 89 N.W. 522, 90 Am.St.Rep. 853. All taxes, not property taxes or capitation taxes, are excise or privilege taxes. The word “privilege” is broad enough to cover any species of tax except these two and is used with such effect in our constitutional provision covering taxation: “The rule of taxation shall be uniform, and taxes shall be levied upon such property with such classifications as to forests and minerals, including or separate or severed from the land, as the legislature shall prescribe. Taxes may also be imposed on incomes, privileges and occupations, which taxes may be graduated and progressive, and reasonable exemptions may be provided.” Article 8, § 1, Wisconsin Constitution.

[4] Much stress is laid in the briefs filed upon the declaration of the statute that the tax is imposed “for the privilege of declaring and receiving dividends.” It is contended that the language imposes a tax upon the recipient of the dividend. The language is perhaps susceptible to the construction that the Legislature so considered it. But it is immaterial how the Legislature considered it. The Legislature cannot by its mere designation change the nature of the tax. Whatever the designation in the act may be, it is for the court to determine the nature and effect of the tax and uphold it or void it according as its nature and effect as determined may require. McCallen Co. v. Com. of Massachusetts, 279 U.S. 620, 49 S.Ct. 432, 73 L.Ed. 874, 65 A.L.R. 866;Ed. Schuster & Co. v. Henry (Wis.) 261 N.W. 20.

[5] However the Legislature may have regarded the tax, we have no difficulty in construing the statute as imposing an excise or privilege tax upon the transaction involved of transferring the dividends from the corporation to its stockholders.

[6][7] 2. It is contended in several of the briefs in opposition to the tax that the statute is unconstitutional because it impairs the obligation of the contract of the corporation with its stockholders, especially as to its preferred stockholders. The point urged is that a state has granted a charter to a corporation covering the right to pay dividends to its stockholders; that the right is a contract right, as a charter is a contract; and that this state cannot impair that right by imposing a special tax on the exercise of it. The defendant argues that this contention is effectively met by the holding of the United States Supreme Court in Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 40 S.Ct. 228, 64 L.Ed. 460, that the statute therein involved did not impair the contract obligations of the employer. That statute imposed a tax on salaries earned within the state of New York and required, as to nonresident employees, that the employer deduct the tax from the salaries paid and made the employer liable for its amount. The opinion in that case states, 252 U.S. 60, at page 77, 40 S.Ct. 228, 231, 64 L.Ed. 460, that there was no averment that any such contract existing before the passage of the New York act required salaries to be paid in the state of the nonresident's residence, or contained any other provision conflicting with the provision for withholding salaries. This implies that the obligation to pay salaries was not impaired by the withholding provision of the statute, although it rested on contracts that existed prior to the enactment of the statute. The obligation to pay dividends is the pre-existing contract obligation it is claimed the instant statute impairs. We do not see that this obligation differs from the contract obligation to pay salaries involved in the case cited. If the latter obligation was not impaired by the New York statute, the former is not by our statute. As in the Travis...