Stewart Dry Goods Co v. Lewis Levy v. Same Penney Co v. Same Kroger Grocery Baking Co v. Same 8212 457

• Decision Date: 08 February 1935
• Docket Number: Nos. 454,s. 454
• Parties: STEWART DRY GOODS CO. v. LEWIS et al. * LEVY et al. v. SAME. J. C. PENNEY CO. v. SAME. KROGER GROCERY & BAKING CO. v. SAME. —457
• Court: U.S. Supreme Court

294 U.S. 550

55 S.Ct. 525

79 L.Ed. 1054

STEWART DRY GOODS CO.

v LEWIS et al.^* LEVY et al. v. SAME. J. C. PENNEY CO. v. SAME. KROGER GROCERY & BAKING CO. v. SAME.

Nos. 454—457.

Argued Feb. 8, 1935.

Decide March 11, 1935.

On Appeals from the District Court of the United States for the Western District of Kentucky.

On Appeal from the District Court of the United States for the Eastern District of Kentucky.

[Syllabus from pages 550-552 intentionally omitted] Messrs. Robert S. Marx, Frank E. Wood, and Harry Kasfir, all of Cincinnati, Ohio, John C. Doolan, of Louisville, Ky., and James W. Stites, of Frankfort, Ky., for appellants.

Messrs. Bailey P. Wootton, Atty. Gen., and Leslie W. Morris, S. H. Brown, and Francis M. Burke, all of Frankfort, Ky., for appellees.

Mr. Justice ROBERTS delivered the opinion of the Court.

These are four suits heard by a specially constituted District Court in Kentucky, to enjoin state officers from enforcing an act of that commonwealth imposing a gross sales tax. The plaintiffs are, respectively, a domestic corporation conducting a department store in Louisville, a partnership operating a similar store in the same city, a Delaware corporation having 21 department stores in Kentucky, and an Ohio corporation maintaining 289 grocery stores within the commonwealth. Nineteen individuals, partnerships, and corporations, proprietors of one or more stores selling various lines of merchandise, intervened as plaintiffs. Interlocutory injunctions issued, but the District Court of three judges dismissed the bills for want of equity, being of opinion there was an adequate remedy at law. Upon appeal, this Court reversed the decrees and remanded the causes.¹ At final hearing, the District Court found the remedy at law inadequate, but sustained the act and dismissed the bills.² The present appeals are upon the merits.

The statute became a law March 17, 1930. The title and certain sections are copied in the margin; other sections are there summarized.³ The tax imposed upon the first $400,000 of annual gross sales is one-twentieth of 1 per cent. The rate increases on each additional $100,000 of sales between $400,000 and $1,000,000, inclusive, being seventeen-twentieths of 1 per cent. in the last bracket. On sales over $1,000,000, the rate is 1 per cent. The increased rates are applicable, however, only in respect of sales in each successive bracket, and therefore the tax burden attributable to $1,100,000 of sales is not 1 per cent., but a composite ascertained by adding the total tax for the sales falling within the various brackets, and dividing by the dollar value of all sales. Thus the act requires the merchant to pay in the total .05 per cent. on $400,000 of sales, .305 per cent. on $1,000,000 of sales and .96 per cent. on $15,000,000 of sales.

The appellants charge that the statute violates several sections of the Constitution of Kentucky and several provisions of the Federal Constitution. We shall not stop to enumerate these, since we must sustain the claim that the classification made by section 2 denies the appellants the equal protection of the laws assured by the Fourteenth Amendment.

The trial court's relevant findings are: The act is essentially a revenue measure. The tax is on gross sales, not on gross collections from vendees. Sales made by merchants taxed under any of the brackets of the act are made in competition with like sales of the same character of merchandise by those who are taxed under other brackets. As a general proposition, increased volume of sales results in increased profits and increased ability to pay the tax. The rate of profit from retail sales generally varies with the character of the goods sold. The management of a store or stores is one of the fundamental factors in determining whether or not a profit is realized and the amount of profit. As a general proposition, those merchants doing the largest amount of trade are enabled to secure the highest type of management.

In the light of these findings, does the act tax sales in an unequal and arbitrary way, classifying them for the imposition of different rates without reference to any real or substantial distinction, as appellants insists; or does it impose an excise upon the conduct of retail business, reasonably adjusted in amount with regard to substantial differences in the nature of the privilege exercised, as appellees contend?

In resolving the issue, we are not concluded by the name or description of the tax as found in the act; our duty is to ascertain its nature and effect.⁴ 'The substance and not the shadow determines the validity of the exercise of the power.'⁵ The act does not impose an income or profits tax or a license tax, is not an inspection measure or a police regulation. The tax is not confined to a par- ticular method of merchandising. All retailers, individual and corporate, selling every description of commodities, in whatever form their enterprises are conducted, make up the taxable class. And the excise is laid in respect of the same activity of each of them—the making of a sale. Although no difference is suggested, so far as concerns the transaction which is the occasion of the tax, between the taxpayer's first sale of the year and his thousandth, different rates may apply to them. The statute operates to take as the tax a percentage of each dollar due or paid upon every sale, but increases the percentage if the sale which is the occasion of the tax succeeds the consummation of other sales of a specified aggregate amount. As found by the court below, the act of making a sale, which with all others made in the taxable year represents a total sales price of $400,000 or less, results in the imposition of a tax of one-twentieth of 1 per cent. upon the price, whereas the making of the same sale by one who has theretofore sold $400,000 but less than $500,000 worth of goods entails a tax of two-twentieths of 1 per cent., or by one whose prior sales aggregate $900,000, a tax of seventeen-twentieths of 1 per cent.

In connection with other provisions of the fundamental law, this court has had occasion to analyze similar acts. In Brown v. Maryland, 12 Wheat. 419, 6 L.Ed. 678, a tax on the occupation of an importer was held a tax on imports obnoxious to the commerce clause. Said the court (page 444 of 12 Wheat.): 'It is impossible to conceal from ourselves, that this is varying the form, without varying the substance. * * * All must perceive, that a tax on the sale of an article, imported only for sale, is a tax on the article itself.' In Cook v. Pennsylvania, 97 U.S. 566, 24 L.Ed. 1015, a tax on the amount of an auctioneer's sales was declared a tax on the goods sold. In Crew Levick Co. v. Pennsylvania, 245 U.S. 292, 38 S.Ct. 126, 62 L.Ed. 295, a state tax on the business of selling goods in foreign commerce, measured by gross receipts from goods so sold and shipped, was pronounced an impost upon exports. The court said (page 297 of 245 U.S., 38 S.Ct. 126, 128): '* * * Nor is it an occupation tax, except as it is imposed upon the very carrying on of the business of exporting merchandise. It operates to lay a direct burden upon every transaction in commerce by withholding, for the use of the state, a part of every dollar received in such transactions.' Panhandle Oil Co. v. Knox, 277 U.S. 218, 48 S.Ct. 451, 72 L.Ed. 857, 56 A.L.R. 583, decides a privilege tax imposed on sellers of gasoline, fixed at so many cents per gallon sold, is a tax on sales. At page 222 of 277 U.S., 48 S.Ct. 451, 452, the court said: 'Sale and purchase constitute a transaction by which the tax is measured and on which the burden rests. * * * To use the number of gallons sold * * * as a measure of the privilege tax is in substance and legal effect to tax the sale.' And in Indian Motocycle Co. v. United States, 283 U.S. 570, 51 S.Ct. 601, 602, 75 L.Ed. 1277, a federal tax upon motorcycles 'sold * * * by the manufacturer' was held to be an excise on the sale, and the doctrine of the Panhandle Case was reaffirmed.

Thus understood, the operation of the statute is unjustifiably unequal, whimsical, and arbitrary, as much so as would be a tax on tangible personal property, say cattle, stepped up in rate on each additional animal owned by the taxpayer, or a tax on land similarly graduated according to the number of parcels owned.

The appellees seek to avoid the arbitrary character of the classification of sales for the purpose of imposing the levy by the claim that the act, properly construed, lays an excise upon the privilege of merchandising at retail and the exaction is made only for this privilege. They insist the amount of tax is merely measured by the volume of sales,⁶ and in this view the classification is not arbitrary if any reasonable relation can be found between the amount demanded and the privilege enjoyed. They en- deavor to deduce such a relation from the alleged fact that a merchant's net income and his consequent ability to pay increase as the volume of his sales grows. The argument does not advance the case for the validity of the statute. Even in this aspect the classification is arbitrary, for the claimed relation of gross sales—the measure of the tax—to net profits fails to justify the discrimination between taxpayers.

The District Court found that 'generally speaking' he who sells more is in receipt of a greater profit and hence has larger ability to pay, and upon this basis justified the classification. But it is to be remembered that the act in question taxes gross sales and not net income. As stated in United States Glue Co. v. Town of Oak Creek, 247 U.S. 321, 328, 38 S.Ct. 499, 501, 62 L.Ed. 1135, Ann. Cas. 1918E, 748:

'The difference in effect between a tax measured by gross receipts and one measured by net income, recognized by our decisions, is manifest and substantial, and it affords a convenient and workable basis of distinction between a direct and immediate burden upon the business...