Storen v. J. D. Adams Mfg. Co.
| Decision Date | 30 April 1937 |
| Docket Number | 26401. |
| Citation | 7 N.E.2d 941,212 Ind. 343 |
| Parties | STOREN et al. v. J. D. ADAMS MFG. CO. |
| Court | Indiana Supreme Court |
Appeal from Superior Court, Marion County; Russell J. Ryan judge.
Philip Lutz, Jr., Atty. Gen., Fred A. Wiecking Asst. Atty. Gen., and Joseph P. McNamara, Deputy Atty. Gen for appellants.
Matson, Ross, McCord & Clifford, Harry T. Ice, Baker & Daniels, Bamberger & Feibleman, Schortemeier, Ely & Wood, and White, Wright & Boleman, all of Indianapolis, for appellee.
Appellee brought this action seeking a declaratory judgment construing certain portions of the Gross Income Tax Act of 1933 . The facts were stipulated and are not in dispute. There was a judgment for appellee.
The ruling on appellants' motion for a new trial is assigned as error.
Appellee is an Indiana corporation, engaged in manufacturing machinery, tools, appliances, and equipment for the construction, improvement, and repair of roads and highways. Its home office, and principal place of business, and its only manufacturing plaint, is located in the State of Indiana. It sells a substantial portion of its products to purchasers within the state, some to the ultimate user or consumer, and the remainder to dealers who resell. It sells a substantial portion of its products, through selling agents or otherwise, to dealers in other states and in foreign countries. All sales made outside of the state are upon orders taken subject to the approval of the home office, shipment is made from the factory, and payment is made to the home office. Its receipts from business in other states and foreign countries, during each of the four years immediately preceding the trial, were in excess of $1,000,000, and amounted to approximately 80 per cent. of its entire gross income from the sale of its products. At certain seasons of each year it invests, for temporary periods, a substantial portion of its working capital in bonds or other obligations of municipal corporations within the state, which obligations are interest-bearing, and, by the statutes in force at the time of issuance, are exempt from taxation; and, since the 1st day of May, 1933, it has collected, as part of its gross income, interest on such obligations in excess of $2,500.
Upon these facts, the trial court held: 'That said Gross Income Tax Act of 1933 does not by any of its terms or provisions authorize or require the assessment or collection of any tax upon the gross income derived by the plaintiff, or others similarly situated, from business so conducted in commerce between the State of Indiana and other states of the United States or between the State of Indiana and foreign countries, but such gross income is by said act expressly excepted from such tax.' It further held that, in so far as the act purports or attempts to impose a tax upon gross income, consisting of interest upon tax-exempt securities, it impairs the obligation of contracts, and is void under the State and Federal Constitutions.
It further found that the plaintiff was not engaged in any business except 'manufacturing,' as defined in section 3(a) of the act (Burns' Ann.St.1933,§ 64-2603(a), and that the law does not by any of its terms authorize or require the assessment of any tax upon the gross income of appellee, or others similarly situated, derived from sales to ultimate users or consumers, at any other or different rate than one-fourth of one per cent., the rate which applies to manufacturers.
Three questions are presented: (1) Is that part of appellee's gross income, which is derived from sales of appellee's products to ultimate users, taxable at one per cent., the rate which applies to those engaged in the business of retailing, or at one-fourth of one per cent., the rate which applies to those engaged in the business of manufacturing? (2) Is that part of appellee's gross income, derived from interest payments on tax-exempt bonds of municipal corporations of the State of Indiana, taxable? (3) Is that part of appellee's gross income, which is derived from the sale of its products in interstate and foreign commerce, taxable?
Section 3 of the act provides for a tax 'upon the entire gross income of every person engaged in the business of manufacturing' at the rate of one-fourth of one per cent., and 'upon the entire gross income of every person engaged in the business of retailing' at the rate of one per cent.
It is appellee's contention that sale is an indispensable incident to the business of manufacturing, and that whether a person is engaged in manufacturing is not determined by the manner in which he sells his goods, and that those engaged in manufacturing are, under the statute, taxable at the rate of one-fourth of one per cent. only, regardless of whether their sales are to jobbers, wholesalers, or at retail directly to the consumer. If this position can be sustained, it means that manufacturers, who operate exclusively through retail stores or stations and compete with retailers in the ordinary sense, have a discriminatory advantage by reason of the fact of manufacturing their own product. The goods sold by the ordinary retailer come down to him through a manufacturer, a jobber, and a wholesaler, and are burdened with one-fourth of one per cent. tax upon the manufacturer, the jobber, and the wholesaler, and one per cent. upon the retailer, a total of one and three-fourths per cent., while his competing retailer, who manufactures his own product, would pay but one-fourth of one per cent. There is nothing in the act which indicates a legislative design and intention to create such a discriminatory situation. The basic tax upon taxpayers generally is one per cent. Section 4 (Burns' Ann.St.1933, § 64-2604) recognizes that the same person or corporation may be taxable upon different parts of his income at different rates, and provides that each person shall be subject to taxation at the highest rate applicable to any part of his gross income unless he shall segregate the parts subject to different rates. Some reason can be seen for taxing manufacturers, jobbers, and wholesalers at a lower rate, since their merchandise moves in larger quantities and in greater price competition, and since the articles manufactured and sold by them must be ultimately burdened with successive taxes. A 'manufacturer,' as the term is commonly understood, is one who processes raw material 'and stands between the original producer and the dealer.' Indiana Creosoting Co. v. McNutt, Governor, et al. (Ind.Sup.1936) 5 N.E.(2d) 310, 314.
The question of whether there would be a sufficient constitutional basis for classification and discrimination between those who manufacture their own merchandise, and other retailers, need not be considered, since no legislative intention to so discriminate is apparent, and a reasonable interpretation of the act precludes such a conclusion.
The rate does not depend upon the business in which the taxpayer is primarily engaged, but upon the activity from which each item of his gross income is received. Sales to ultimate consumers must be regarded as retail sales, whether made by the producer of the article sold or another.
The court erred in concluding that that part of the income of a manufacturer, which was received from sales at retail to the ultimate users, is not taxable at one per cent.
The bonds from which the income was received are specifically exempted from taxation, but there is no statutory provision which exempts the interest from excise taxes which may be imposed by the state. In Orr v. Gilman (1902) 183 U.S. 278, 289, 22 S.Ct. 213, 218, 46 L.Ed. 196, it was held by the Supreme Court of the United States: 'That a transfer or succession tax, not being a direct tax upon property, out a charge upon a privilege exercised or enjoyed under the law of the state, does not, when imposed in cases where the property passing consists of securities exempt by statute, impair the obligation of a contract within the meaning of the Constitution of the United States.' Upon the same reasoning, it does not offend against article 1, section 24, of the Constitution of Indiana. The gross income tax is not a tax upon property, but an excise upon a privilege. Miles et al. v. Department of Treasury et al. (1935) 209 Ind. 172, 199 N.E. 372, 101 A.L.R. 1359.
The court erred in holding that that part of appellee's gross income, which consists of interest on tax-exempt bonds, is exempt from gross income tax.
It was held that section 6(a) of the law (Burns' Ann.St.1933, § 64-2606(a) excepts gross income derived from commerce between the several states and with foreign countries. Section 6, so far as it is pertinent, reads as follows: 'There shall be excepted from the gross income taxable under this act: (a) So much of such gross income as is derived from business conducted in commerce between this state and other states of the United States, or between this state and foreign countries, to the extent to which the state of Indiana is prohibited from taxing under the Constitution of the United States of America.' This clause excepts such gross income only to the extent that taxation is forbidden by the Constitution, and the act must be construed as contemplating a tax on all income that the state is permitted to tax. Courts will not prevent the carrying out of a legislative intention unless a Constitution clearly forbids. The act must be construed as levying the tax unless such a levy is violative of article 1, section 8, of the Federal Constitution. Final jurisdiction of questions involving the Federal Constitution is in the Supreme Court of the United States, and the principles...
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