Appeal from the District Court of the United States for the District of Connecticut.
Before L. HAND, CLARK, and FRANK, Circuit Judges.
This appeal by the Connecticut State Tax Commissioner brings up for consideration the validity of the Connecticut Corporation Business Tax of 1935, Conn. Gen. Stat., Sum. Supp. 1935, § 418c, assessed against the plaintiff, a Missouri corporation having its principal place of business in Chicago, Illinois, and engaged in the interstate trucking of freight. The district court held that the statute, construed to avoid an unconstitutional burdening of interstate commerce, did not justify the tax assessed by the commissioner against the plaintiff for the period from June 1, 1937, to December 31, 1940, upon what he had found to be business done within the state. It, therefore, granted the plaintiff's prayer for an injunction against the assessment and collection of the tax and for an adjudication of its nonliability for the tax. D.C. Conn., 47 F.Supp. 671, 676. Jurisdiction was rested upon the constitutional issues and the diverse citizenship of the parties, the court holding inapplicable the prohibition of 28 U.S.C.A. § 41(1), as amended in 1937, against federal injunction of state tax proceedings, because it found no plain, speedy, and efficient remedy in the state courts. Notwithstanding the fact that the parties were in agreement with the court on this point, we have found it not free of doubt. Since, however, we have concluded that jurisdiction does exist, we shall postpone our discussion as to it until later,*fn1 and turn at once to the very interesting question of the extent to which an interstate trucking business can be subjected to a state corporate franchise tax based fundamentally on net income allocated and attributed to the business done within the state.
Plaintiff pioneered in the development of the "two-way haul" of goods between St. Louis, Missouri, and New York City, that is, the system whereby trucks which have come East with freight are supplied with another load for the return trip after a minimum holdover at the terminals. As developed, this involved the collection of freight in less than truckload amounts at certain eastern terminals, where it was sorted and the loads consolidated and placed in the returning trucks. Hence in 1934 and in 1935, plaintiff leased terminals for its exclusive use in Chicago, illinois, and New Britain, Connecticut, in addition to those already in existence in St. Louis, Missouri, and New York City; and later it lesed another in Bridgeport, Connecticut. It has also acquired agency terminals, where it has the use of terminal facilities of some other carrier, in certain cities in Massachusetts, Rhode Island, and New Jersey. Plaintiff utilizes about 150 trucks for its interstate hauling, almost all of these being leased from its corporate affiliate, the Wallace Transport Company of Illinois. For shipments less than truck-loads these trucks are loaded and unloaded at the terminals, to or from which the goods are brought or delivered by separate pickup or cartage trucks, some leased from local truckers and some owned by plaintiff. Thus, at the New Britain terminal plaintiff has five such pickup trucks, all owned by it on conditional bills of sale.
At the New Britain terminal plaintiff has 17 employees, and at the Bridgeport terminal 10, including loading, accounting, and sales personnel. Bills, as well as wages of employees, are usually paid by draft on plaintiff at Chicago, although some cash is kept in New Britain for incidental expenses. Plaintiff has a bank account in Bridgeport for collections made by its drivers, but no Connecticut employee is authorized to disburse this money. That is left entirely in the control of plaintiff's main administrative offices in Chicago, which handle all matters relating to rating and billing. Plaintiff has no real estate in Connecticut; its total physical assets there - outside of the pick-up trucks - amount to only some $1,500 or $2,000 of office equipment in the two terminals. Between one-third to one-half of the dollar volume of plaintiffs business, however, originates in Connecticut.
When plaintiff negotiated for the lease of the New Britain terminal, the lessor, as a precaution in case of future litigation regarding the lease, required the company to qualify as a foreign corporation doing business in the state and to designate the Secretary of State as its agent for service of process. Plaintiff then paid the annual statutory fee of $50 and has since maintained its qualification, paying this yearly fee. It has not applied for or received the certificate of public convenience and necessity from the Connecticut Public Utilities Commission which is a prerequisite for the doing of local business as a motor common carrier. Conn. Gen. Stat., Cum. Supp. 1935, § 577c, amended by Supp. 1939, § 499e. Moreover, its permit from the Interstate Commerce Commission - granted udner the so-called "grandfather clause" of § 206(a) of the Interstate Commerce Act, 49 U.S.C.A. § 306(a) - limits its traffic, except for lines from St. Louis to Chicago and to Quincy, Illinois, to interzone hauling between the West and the East. See In re Spector Motor Service, Inc., Common Carrier Application, 32 M.C.C. 443. Hence, although a very substantial part of its business originates within the state, that business must go into interstate commerce and plaintiff has not engaged in purely intrastate business.
The Connecticut Corporation Business Tax Act of 1935, Gen. Stat., Cum. Supp. 1935, §§ 416c et seq., passed as a result of the recommendations of the Connecticut Temporary Tax Commission, Rep. 1934, 455 et seq., improses upon every corporation "carrying on business in this state" which has to file a report for federal income tax purposes, with certain exceptions not here material, "annually, a tax or excise upon its franchise for the privilege of carrying on or doing business within the state, such tax to be measured by the entire net income as herein defined received by such corporation or association from business transacted within the state during the income year and to be assessed at the rate of two per cent," Cum. Supp. 1935, § 418c,*fn2 with a further pvovision for a minimum tax, more specifically defined in §§ 421c and 422c. By § 419c, net income is gross income less the deductions under the federal corporation net income tax, with certain exceptions which include "interest and rent paid during the income year."*fn3
There follow special and ingenious provisions as to allocation of net income in the case of business carried on partly without the state. Sec. 420c (amended by Supp. 1939, § 356e, Supp. 1941, § 177f, and Supp. 1943, § 292g) states: "If the trade or business of the taxpayer shall be carried on partly without the state, the business tax shall be imposed on a base which reasonably represents the proportion of the trade or business carried on within the state." Provision is then made for the allocation of certain specific receipts - interest, dividends, royalties, and gains on sales of assets - to the state of the principal place of business unless they can be "clearly established" as coming from local business or are sales or rentals of tangible property within the state - and the remainder of net income is to be allocated under rules and regulations of the commissioner, except in the case of income "derived from the manufacture, sale or use of tangible personal or real property." In the latter case the local income is found by use of an allocation fraction which is the mean or average of three ratios: (1) the ratio of tangible property in the state to all tangible property, (2) the ratio of wages and salaries paid within the state to all wages and salaries, and (3) the ratio of gross receipts assignable to the state to all gross receipts.*fn4 The commissioner computed the tax by use of this allocation fraction. Not great amounts are involved; the total tax for the 5 1/2 years involved was $6,122.77, upon which the commissioner also claimed a 25 per cent penalty and interest.
Sec. 421c (amended by Supp. 1939, § 357e, and Supp. 1941, § 178f) provides for the minimum tax which is set up as an alternative to § 418c, and requires the corporation to pay, whichever is the larger, either the tax already defined in § 418c or the tax here defined of one mill per dollar based substantially on outstanding securities and corporate stock and reserve. Sec. 422c contains provisions for the allocation of this minimum tax in the case of business carried on partly without the state, which corresponds to the plan of § 420c for the main tax. Since the minimum tax is not involved here, we need refer to these provisions no further than to point out the extensive and ingenious steps taken by the legislators in attempting to devise a fair system of allocation between business within and without the state and yet prevent a corporation from escaping what was thought to be its fair share of the tax. See Lenox Realty Co. v. Hackett, 122 Conn. 143, 187 A. 895, 107 A.L.R. 1306.
This objective is still further emphasized by § 423c, which provides that a company's officers, when believing that the allocation method applied to it by the commissioner has operated to subject it to a tax "on a greater portion of its business than is reasonably attributable to thsi state, "may file with its return a statement of their objections to the tax and their own alternative method, which the commissioner then passes upon; and if the method "is in fact inapplicable and inequitable," he is to redetermine the tax base by such other method of allocation "as shall seem best calculated to assign to the state for taxation the portion of the business reasonably attributable to the state." All this is, of course, subject to the general appeal to the state superior court accorded by § 435c to "any taxpayer aggrieved," with the court empowered to grant "such relief as amy be equitable," including an order for the refund of any tax paid with interest.
The district court, relying on certain precedents hereinafter discussed, held that if this tax applied to a wholly interstate business it would be an undue burden thereon, contrary to Art. 1, § 8, of the United States Constitution, and hence indulged in the presumption of validity to interpret the statute as applicable only to those corporations which carried on an intrastate business. This we think is to warp the meaning beyond permissible limits. The broad sweep of the language imposing the tax and the subordinate provisions for careful allocation of the tax between business within and without the state seem to us to disclose unmistakably an intent to make the tax applicable in a case such as this. Indeed, the commission which recommended the tax envisaged its application to interstate business and carefully discussed its validity in the light of that premise. Rep., Connecticut Temporary Commission to Study the Tax Laws, 1934, 455, 456, 483; and cf. Stanley Works v. Hackett, 122 Conn. 547, 190 A. 743. It seems to us fairer to hold, as we do, that the statute was intended to apply to the allocated local business of corporations situated as was the plaintiff and then to face directly the main issue whether the tax is in fact an unconstitutional burden on interstate commerce.
The traditional dogma is that a state cannot tax interstate commerce, the business which constitutes such commerce, or the privilege of engaging in it. Cooney v. Mountain States Telephone & Telegraph Co., 294 U.S. 384,55 S. Ct. 477, 79 L. Ed. 934; Matson Nav. Co. v. State Board, 297 U.S. 441, 56 S. Ct. 553, 80 L. Ed. 791; New Jersey Bell Telephone Co. v. State Board of Taxes, 280 U.S. 338, 50 S. Ct. 111, 74 L. Ed. 463. And the fact that some of the business is intrastate justifies a tax only on that part and not upon either the interstate business or the whole business without discrimination. Cooney v. Mountain States Telephone & Telegraph Co., supra. In the past years, however, many exceptions have served increasingly to limit this strict rule. As was said in Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S. Ct. 546, 548, 82 L. Ed. 823, 115 A.L.R. 944: "It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of state tax burden even though it increases the cost of doing the business. 'Even interstate business must pay its way,' Postal Telegraph-Cable Co. v. Richmond, 249 U.S. 252, 259, 39 S. Ct. 265, 266, 63 L. Ed. 590."
Hence we now find that the person who conducts an interstate business is subject to a property tax on the instruments employed in the commerce, Western Union Tel. Co. v. Massachusetts, 125 U.S. 530, 8 S. Ct. 961, 31 L. Ed. 790; Adams Express Co. v. Kentucky, 166 U.S. 171, 17 S. Ct. 527, 41 L. Ed. 960; Old Dominion S.S. Co. v. Virginia, 198 U.S. 299, 25 S. Ct. 686, 49 L. Ed. 1059, 3 Ann.Cas. 1100, and if the instruments are used both within and without the state, a fairly apportioned tax is permitted. Pullman's Palace-Car Co. v. Pennsylvania, 141 U.S. 18, 11 S. Ct. 876, 35 L. Ed. 613; Cudahy Packing Co. v. Minnesota, 246 U.S. 450, 38 S. Ct. 373, 62 L. Ed. 827. And a domestic corporation is taxable on its earnings from interstate as well as intrastate commerce. United States Glue Co. v. Town of Oak Creek, 247 U.S. 321, 38 S. Ct. 499, 62 L. Ed. 1135, Ann. Cas. 1918E, 748;Atlantic Coast Line R. Co. v. Doughton, 262 U.S. 413, 420, 422, 43 S. Ct. 620, 67 L. Ed. 1051; Matson Nav. Co. v. State Board, supra. Again, the assets of a foreign corporation engaged in interstate commerce have been held taxable not only by the state in which they have acquired a business situs, First Bank Stock Corp. v. Minnesota, 301 U.S. 234, 57 S. Ct. 677, 81 L. Ed. 1061, 113 A.L.R. 228, but also by the state in which the corporation has a commercial domicile. Wheeling Steel Corp. v. Fox, 298 U.S. 193, 56 S. Ct. 773, 80 L. Ed. 1143. Finally, a franchise tax may be imposed, measured by the net income from business done within the state, including such portion of the income derived from interstate commerce as may be justly attributable to business done within the state by a fair method of apportionment. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 41 S. Ct. 45, 65 L. Ed. 165; Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 266 U.S. 271, 45 S. Ct. 82, 69 L. Ed. 282; cf. Hans Rees' Sons v. North Carolina, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879; Bulter Bros v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991. Even a tax measured by gross ...