United Air Lines, Inc. v. Porterfield

• Decision Date: 26 November 1971
• Docket Number: No. 71-120,71-120
• Citation: 276 N.E.2d 629,57 O.O.2d 288,28 Ohio St.2d 97
• Parties: , 57 O.O.2d 288 UNITED AIR LINES, INC., Appellant, v. PORTERFIELD, Tax Commr. of Ohio, Appellee.
• Court: Ohio Supreme Court

Page 97

28 Ohio St.2d 97

276 N.E.2d 629, 57 O.O.2d 288

UNITED AIR LINES, INC., Appellant, v. PORTERFIELD, Tax Commr. of Ohio, Appellee.

No. 71-120.

Supreme Court of Ohio.

Nov. 26, 1971.

Syllabus by the Court

1. The provisions of R.C. 5745.02, that 'an excise tax is hereby imposed upon the privilege of engaging in the business of transporting persons or property by air within this state,' and providing for a tax of '(A) Four per cent of the receipts derived from transportation which begins and ends within this state,' and '(B) Where the transportation does not begin and end within this state, four per cent of the receipts derived therefrom attributable to business carried on within this state based on the proportion of the mileage within the state to the entire mileage over which the persons or property are transported, into or out of the state,' do not affront the Ohio Constitution or the United States Constitution.

2. The airlines excise tax imposed by R.C. Chapter 5745 is applicable to a federally regulated air carrier engaging in interstate commerce and, in the absence of evidence showing a lack of nexus between the local incidents of operation whereby the carrier received benefits from the state of Ohio and the amount of the tax required to be paid, or in the absence of facts showing that the financial impact of the tax unreasonably burdens the privilege to engage in interstate commerce, such tax does not offend the Ohio Constitution or the United States Constitution.

3. Where the Tax Commissioner has added a penalty to a taxpayer's assessment, as provided for by R.C. 5745.07, which statute also provides that the Tax Commissioner 'may adopt and promulgate rules and regulations for the remission of penalties' and where the Tax Commissioner has not made such rules, the Board of Tax Appeals has not acted unreasonably or unlawfully by failing to find that the Tax Commissioner abused his discretion in refusing to remit the penalty.

The instant case is a challenge by appellant, United Airlines, Inc. (United), against an assessment of the Ohio Airline Excise Tax levied against it under R.C. Chapter 5745. The contested assessment was made by the Tax Commissioner in the sum of $75,083.72 in taxes, to which he added a penalty of $11,262.56 for a total of $86,346.28. This is an appeal as of right from the decision of the Board of Tax Appeals dated February 5, 1971, affirming the determination of the Tax Commissioner.

We are called upon to determine whether the airlines excise tax (R.C. Chapter 5745), as applied to appellant, is violative of the Commerce Clause of the Constitution of the United States or the due process provisions of the Constitutions of Ohio and the United States. ¹ Appellant also seeks determination of whether the Tax Commissioner has abused his discretion in refusing to remit the penalty assessment.

United Airlines, Inc., a Delaware corporation, is a common carrier by air which has been doing business in Ohio since 1935. On August 18, 1969, Amended House Bill No. 689 (R.C. Chapter 5745) became law. During the third quarter of s969, the taxable period in question, United serviced six airports in the state of Ohio under authority of three certificates of public convenience and necessity issued to United by the Civil Aeronautics Board, an agency of the federal government.

Appellant holds no certificate of public convenience and necessity from the state of Ohio, nor requires one to render the above service. Ohio neither licenses nor regulates United in any manner.

Pursuant to its federal certificates of public convenience and necessity, United engages in four kinds of flights over the state of Ohio. There are flights crossing some portion of the state but not landing in Ohio; flights originating in Ohio and terminating out of state; flights originating out of state and terminating in Ohio; and flights stopping over at one or more points within the state, but incident to an out-of-state origin or destination. Clearly, the first type flight is not a subject of the airlines excise tax.

United is not authorized to have flights originating and ending within the state. Any flight that serves two points in Ohio must originate or terminate out of state. However, United does carry passengers and goods whose origin and destination are points in Ohio.

Dargusch & Day, Carlton S. Dargusch, Jr., Roger F. Day and L. Orin Slagle, Jr., Columbus, for appellant.

William J. Brown, Atty. Gen., and David S. Bloomfield, Columbus, for appellee.

DUNCAN, Justice.

We affirm the decision of the Board of Tax Appeals.

The Privilege Concept

R.C. 5745.02, in pertinent part, provides: '* * * an excise tax is hereby imposed upon the privilege of engaging in the business of transporting persons or property by air within this state.' Appellant, for one of its contentions, seeks to persuade us to view this language as evidencing an attempt to lay a tax on the bare privilege of engaging in interstate commerce, citing Spector Motor Service v. O'Connor (1951), 340 U.S. 602, 609, 71 S.Ct. 508, 95 L.Ed. 573. If the scope of the inquiry were so mundane, our rationale would be complete, and we could proceed to consider our next case. However, as often is the case, the simple solution is not available, for it is questionable whether Spector is now authoritative support for the proposition that the commerce clause forbids all state taxation on the privilege to engage in interstate commerce. See Cooper-Jarrett, Inc. v. Porterfield (1968), 15 Ohio St.2d 54, 60, 238 N.E.2d 554; Roadway Express, Inc. v. Director, Div. of Taxation (1967), 50 N.J. 471, 236 A.2d 577, appeal dismissed, 390 U.S. 745, 88 S.Ct. 1443, 20 L.Ed.2d 276.

The Supreme Court of the United States has apprised us that the substance of the statute must be examined rather than its form. Chief Justice Warren stated in American Oil Co. v. Neill (1965), 380 U.S. 451, at page 455, 85 S.Ct. 1130 at page 1133, 14 L.Ed.2d 1:

'When passing on the constitutionality of a state taxing scheme it is firmly established that this Court concerns itself with the practical operation of the tax, that is substance rather than form. Wisconsin v. J. C. Penney Co., 311 U.S. 435, 443-444 (61 S.Ct. 246, 254, 85 L.Ed. 267); Lawrence v. State Tax Comm'n, 286 U.S. 276, 280, (52 S.Ct. 556, 560, 76 L.Ed. 1102) and cases cited therein. * * *'

Furthermore, on review of statutory acts, a court is bound to give a constitutional rather than unconstitutional construction if one is reasonably available. See State ex rel. Dickman v. Defenbacher (1955), 164 Ohio St. 142, 128 N.E.2d 59; State ex rel. Jackman v. Court of Common Pleas (1967), 9 Ohio St.2d 159, 224 N.E.2d 906; American Cancer Society v. Dayton (1953), 160 Ohio St. 114, 114 N.E.2d 219.

Therefore, we examine the substance of R.C. 5745.02, which provides, in part:

'The tax is as follows:

'(A) Four percent of the receipts derived from transportation which begins and ends within this state;

'(B) Where the transportation does not begin and end within this state, four percent of the receipts derived therefrom attributable to business carried on within this state based on the proportion of the mileage within the state to the entire mileage over which the persons or property are transported, into or out of the state.'

R.C. 5745.07 provides that, after an assessment the tax becomes conclusive:

'The clerk of courts * * * shall enter a judgment for the state against the person assessed in the amount shown on the entry.

'* * * Execution shall issue upon said judgment upon the request of the commissioner * * *.'

Although a statute uses the terminology that it is taxing a privilege to do business, such a tax is not ipso facto unconstitutional in its application to an instrumentality of interstate commerce when the substance of the law lays a tax on the fairly apportioned gross receipts of that activity based on business done within the state. See General Motors Corp. v. Washington (1964), 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430, where the Supreme Court upheld a tax statute, which read, in part, as follows:

'Section 4. From and after the first day of May, 1935, there is hereby levied and there shall be collected from every person a tax for the act or privilege of engaging in business activities. Such tax shall be measured by the application of rates against value of products, gross proceeds of sales, or gross income of the business, as the case may be, as follows: * * *.' (Emphasis ours.)

We cannot condemn Chapter 5745 solely on the basis of the labeling terminology employed by the General Assembly.

Payment of the Tax Not a Condition Precedent to Doing Business in Ohio

Section 8, Article I of the U. S. Constitution, confers upon Congress the power to regulate commerce among the states. Once the Supreme Court of the United States had decided that taxation is a form of regulation, ² it might have concluded either that the grant of regulatory power to Congress was exclusive, and hence the states could not tax interstate commerce at all, or it might have held the power to tax concurrent in order that the states could regulate and tax in a manner not forbidden by Congress. The Supreme Court of the United States did neither. Instead, it chose a middle course-which has been extremely difficult to follow. ³

Over the years, the United States Supreme Court's approaches in this field have varied considerably. Professor Hellerstein, in State and Local Taxation (2 Ed. 1961), 158, 164, has stated:

'The present posture of the court is characteristic of its entire history in dealing with Commerce Clause tax issues-the great issues involved reflect sharp differences is approach among the Justices, the leading cases are decided by slim majorities over strong dissent, and both the rationale and holdings are fluid and dynamic, with one decade's minority becoming the next decade's majority, only to be displaced in another decade by a new majority.'

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