NORTHWESTERN STATES CEMENT CO. v. MINNESOTA

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Argument of Joseph A. Maun

Chief Justice Earl Warren: Number 12 Northwestern States Portland Cement Company versus State of Minnesota.

Mr. Maun.

Mr. Joseph A. Maun: Mr. Chief Justice, and members of this Court.

This case involves that the validity of a portion of the Minnesota state income tax law under the provisions of the Commerce Clause and the Fourteenth Amendment to the Constitution of the United States.

Probable jurisdiction was noted by this Court on January 6th of this year.

The appellant here is a cement manufacturer with his plant and place of business at Mason City, Iowa.

It maintained one sales office in the State of Minnesota which was occupied under a lease and paid for out of Mason City.

It owned no real estate in the State of Minnesota and its only personal property was such as was necessary to run the sales office, consisting of desk, two typewriters and some filing cabinets.

Its salesmen had automobiles in the State of Minnesota.

The office consisted of two small rooms, some material, advertising material and that is all.

During the years which are involved in this proceeding the appellant had at the most six employees and I say at the most because it extends over a period of years.

Two of these employees and the secretary worked out of the Minneapolis office, the rest of the salesmen worked out of their homes throughout the State of Minnesota.

All employees were hired by supervisory personnel in Mason City, Iowa and no employee in the State of Minnesota had any authority to hire or fire any other employee or had anything whatever to do with the fixing of wages.

The Minnesota office was used for the forwarding of orders that customers sent in and a place out of which the two salesmen in Minneapolis could work.

These orders when they came into the Minneapolis office were transmitted directly to the Mason City office in Iowa.

Credit extensions and collections were handled exclusively by the home office.

No salesmen had any authority to handle such matters.

All claims for adjustment were handled directly by the Mason City office.

No employee in Minnesota had any authority to do that.

All cement was invoiced and by shipped by rail from the home office at Mason City directly to the purchasers who were located in the states of Iowa, Minnesota, North and South Dakota and Wisconsin.

Price quotations were sent directly to the customers from the home office and all changes in price were authorized only by the Mason City office.

Prices were quoted at the mill site, FOB Mason City, although the freight was added for the convenience of a customer.

Now Minnesota has taken a position that part of the income earned by this taxpayer is taxable by Minnesota.

Upon Northwestern's refusal to file returns, the Commissioner of Taxation for the State of Minnesota prepared the returns himself.

He prepared them for the years 1933 through 1948.

1933 was a year in which Minnesota adopted its income tax law.

When the taxpayer refused pay to these taxes disclosed by these returns, the state of Minnesota in 1953 commenced this action to collect these taxes.

In preparing these returns, the Commissioner of Taxation used what is known as a three factor formula equally weighted, that is the ratio of the taxpayer's shipments into Minnesota, to its shipment replace or sales, the ratio of the taxpayer's property in Minnesota to its property everywhere, and the ratio of its wages paid in Minnesota to its wages everywhere.

Now the income taxes, interest and penalties which were demanded as a taxpayer and which the trial court adjudged were payable for the years in question amount to somewhat over $100,000.

The Supreme Court of Minnesota in a five to two divided opinion upheld the action of the trial court.

Now the Minnesota income tax is what is sometime known as a second structured tax, there is two sections to it.

The first section provides that an excise tax shall be laid up on the privilege of the domestic corporations for the privilege of existing as a corporation for any part of a year and upon look -- foreign corporation doing a local business.

The second section or structure and that's the one we are involved here provides that there shall be an annual tax laid up on foreign corporations doing an interstate or foreign business within the state of Minnesota or both.

Now, the regulations promulgated by the Commissioner of Taxation for the State of Minnesota, under this particular act, provides flatly that the section requires the imposition of a tax upon the net income from interstate commerce.

There is no pretense that there is any local activity.

Had there had been any intrastate activities, this levy would have been made under the first structure of this tax, not the second.

Both taxes are measured in exactly the same manner.

The Minnesota Supreme Court held that the tax was not an excise tax, it was not a franchise tax, it was a not a privilege tax.

It said that it was a general income tax.

It did not indirectly define what it meant by a general income tax.

Now I'll address myself first perhaps to the due process aspect of this matter.

Justice Felix Frankfurter: Before you go on may I ask this, (Inaudible) you said that Section 2 is invalid in its entirety and not because of its application to the particular fact of this case?

Mr. Joseph A. Maun: I say that this did not involve either personal question at all.

It's invalid in its entirety, as a direct tax upon interstate commerce.

Justice Felix Frankfurter: You said because insofar as I understood you to say, insofar as Minnesota has power to levy a tax on the doings of a corporation engaged in interstate commerce, it would fall under the -- it would be -- it's an incident imposed by Section 1, and the circumstances of the Section 2 never can be satisfied.

Mr. Joseph A. Maun: I don't see how it can ever satisfied.

Justice Felix Frankfurter: I wanted to know if is that's your position.

Mr. Joseph A. Maun: That is right.

Justice Felix Frankfurter: All right.

Chief Justice Earl Warren: May I ask if the state of Iowa taxes all of the interstate commerce of this company?

Mr. Joseph A. Maun: No it does not.

Chief Justice Earl Warren: It does not.

Mr. Joseph A. Maun: That is right.

Chief Justice Earl Warren: Just that that is in the State of Iowa.

Mr. Joseph A. Maun: It's in six states, I would say that again you get into Your Honor of whether or not you have the same deduction and that sort of thing, based on what the Minnesota law is, it wouldn't be true, and now Wisconsin we get into there and they don't permit a federal deduction, so we get into different concepts of what constitutes income, but based on the Minnesota formula Iowa does not.

Now first of all, as we probably know that due process may have a threefold impact on taxes of this nature.

First we get into the question of what we might call procedural due process of whether there can be in personam jurisdiction over this taxpayer.

Now -- and then we get into the question of legislative jurisdiction over the subject matter of the tax and thirdly assuming those two aspects ever are satisfied, the question of whether there is due process in the apportionment factor.

Now we believe that in this case that Minnesota does have jurisdiction in personam over this taxpayer and that's not the issue before this Court, I think based on the International Shoe Company case against Washington where it provided that they needed only such notice as will satisfy the requirements of substantial justice, bearing fair play that there is jurisdiction as far as procedural jurisdiction over this taxpayer.

We contend, however, if Minnesota does not have jurisdiction over the subject matter, so as to able it to impose a tax upon the income of this company, it would seem that if Minnesota does have jurisdiction over the subject matter, then probably we would never reach the question of whether this tax violates the Commerce Clause.

Although this Court has observed in some of it's prior decisions that the conceptions of due process in Commerce Clause is they related to validity of tax statutes, sometimes overlap, they are still not identical and we should sharply distinguish them.

It would certainly appear that Minnesota has any jurisdiction at all to tax here then it must be, because it can subject interstate commerce itself to income tax because that is the only subject matter within the boundaries of the State of Minnesota.

Here the trial court itself followed that the only activities of this company carried on within the State of Minnesota were an integral part of interstate commerce and all of its revenues were produced from interstate commerce.

Now time and time again, this Court has said that the solicitation of orders, together with such acts as maybe in furtherance thereof does not provide the local incidence of operation, which ables a state to tax a foreign corporation, but should in all other respects stays at home.

The reason for this of course is that solicitation, is an essential ingredient of interstate commerce itself, and this fundamental concept of course was first pronounced by this Court in early case of Robbins against Shelby County Taxing District.

In more recent cases this question of due process of a state with relation to other kinds of taxes has risen many times.

In Miller Bros., the Court will remember against the State of Maryland, this Court stuck down the Maryland excise tax on the use, storage of consumptions of articles of commerce insofar as Maryland attempted to impose the responsibility of perfection.

It was in – and there the solicitation part took (Inaudible) of radio and newspaper advertising and this Court there pointed out that although its decisions were not always clear, and to the reason for the invalidity of these taxes, the principle remained that due process always required some definite link, some minimum connection between the state, the person, the property and the business, which it sought to impose a tax upon.

So we may ask ourselves here, what local incidents are taxable events in Minnesota?

This company ships 48% of its product into Minnesota and certainly if that fact is to become a basis or a subject matter of a tax, then a totally new concept would have been annunciated.

The theory of the Minnesota Supreme Court was that the volume of shipments was so substantial that such commerce in fact became localized, and thus separated from the free flow of commerce.

No attempt was made by that court to define the precise buy-in necessary to affect this localization.

In other words, under the theory, the Minnesota Supreme Court, the quantity of the shipment is critical.

However, this Court will notice as a matter of contrast, that in a case immediately to follow this one, the Georgia case, the State of Georgia argues that it's the quality of the connection between the state and the foreign corporation that is important.

And of course the reason the State of Georgia argues that is because in their case, less than 1% of that company's business was shipped in the state of Georgia.

Now it would seem that neither quality nor quantity, nor regularity, could really turn interstate commerce into something that it actually is not.

Now under the decisions of this Court, had this taxpayer been engaged in some intrastate activity, then such activity in and of itself might have been used as a springboard upon which to base the tax.

For instance, if this taxpayer had a plant in Minnesota there would be no problem of jurisdictional due process.

That was the situation in which this Court upheld levy in the Wisconsin income tax, in the case of the United States Glue Company.

There the taxpayer was a domiciliary of Wisconsin and it had a manufacturing plant there, and it did a large intrastate business.

The only question there was whether the statute violated the Commerce Clause, not the Due Process Clause because the substantive due process was well satisfied, and that is found in many of the cases of this Court, such as International Harvester against Evatt, Ford Motor Company against Beauchamp, West Publishing Company against McColgan, and Butler Brothers against the same Commissioner, but none of those cases was jurisdictional due process involved were there were local events.

Such cases are no different.

In those situations where this Court has time and time again upheld ad valorem property taxes, even though the property was used exclusively in interstate commerce.

In every such instance, however, intrastate activities did exist.

Similar are those cases where gross earnings taxes upheld in lieu of an ad valorem property tax.

Now in Shaffer against Carter, the right of the State of Oklahoma to tax the income of a non-resident from business carried on in Oklahoma was upheld.

In doing so this Court reaffirmed the doctrine, first pronounced by Justice Brewster in the Michigan Central Railroad Company case, that the only possible subjects of any tense, are persons, property and business.

In the Miller Bros. case this Court again reaffirmed that principal and necessarily then the power of taxation, from a substantive jurisdictional standpoint is limited to those three subject matters, persons, property and business.

The Oklahoma tax upon a non-resident was upheld because the business was in Oklahoma.

Under on the same theory this Court has upheld tax levied on rental income received from real estate by a New York resident, even though the real estate was located with -- out of the state of New York.

There again the subject matter was the privilege or domiciled residents of the person.

It was not upon the real estate located outside of the State of New York.

So too in (Inaudible) against the State of Mississippi, this Court held, and I think properly so, that Mississippi could impose an income tax, upon all of the earnings of a resident, wherever those earning were earned.

The reason for it is that the subject matter of the tax was within the State of Mississippi, and in answer to Chief Justice's question, Iowa under that case could impose a tax because it's a domiciliary state upon 100% of income of this company.

But the tax in those cases is not upon income as the subject matter, it is upon the subject matter and it is measured by the income.

In all of those instances, you will find that the state has put some benefits, it has given some protection, it's afforded some privileges, not arising out of the federal constitution itself.

Now if we try to analyze what tax is we find that it has three matters -- sorry three elements.

First it has a subject matter, secondly it has a measure and third it has a rate.

Now in the Shaffer case the subject matter was said to persons, property and business.

Legislative requirement of jurisdiction of due process applies only to the subject matter of a tax.

Once they have satisfied that, the measure and the rate become unimportant.

Where the subject matter is clearly defined, we have no -- we do not have much trouble with the application of due process from a substantive point of view.

But we must recognize that modern day taxes have become so refined that it is often difficult to differentiate between the subject matter of the tax and measure which the tax employs.

Justice William O. Douglas: What is the incidence of taxes in --

Mr. Joseph A. Maun: I say the only possible instance could be interstate commerce, which is invalid incident.

Justice William O. Douglas: Has the Supreme Court of Minnesota spoken specifically on that, what the incidence is?

Mr. Joseph A. Maun: They merely define it Your Honor as being a general income tax, and they said the systematic and regularity of solicitation localized the business because of the volume of shipments into the state.

Justice William O. Douglas: If they didn't pay it would they lose their license?

Are they authorized to do business in --

Mr. Joseph A. Maun: They are not authorized to do business in the State of Minnesota.

Justice William O. Douglas: Could they be required to --

Mr. Joseph A. Maun: Minnesota Supreme Court specifically held that carrying on this business within the state was not a condition precedent -- I mean the payment of the tax was not a condition precedent to carrying on this interstate commerce.

Justice William O. Douglas: If they didn't pay, could they be out of the state --

Mr. Joseph A. Maun: Well they are not in the state in the sense that they are not part --

Justice William O. Douglas: Could their sales (Inaudible)

Mr. Joseph A. Maun: I would doubt that they could.

Justice Felix Frankfurter: Anything to levy the tax on in?

Mr. Joseph A. Maun: There is nothing in Minnesota that could levy to tax upon, unless it be some accounts receivable and (Inaudible)

Justice Felix Frankfurter: We're troubled about this petition merely out of respect for the decision of Supreme Court of Minnesota.

There is no sanction behind it.

Mr. Joseph A. Maun: No sanction except under the full faith and credit clause it could be quite good in the State of Iowa.

Justice Felix Frankfurter: Well, it all depends whether there was -- in Iowa with respect to judgment, it ought to be respected.

Mr. Joseph A. Maun: Well we --

Justice Felix Frankfurter: I'm not suggesting you shouldn't.

I just want to -- the question put my brother Douglas --

Mr. Joseph A. Maun: Yes, that's my preface.

We think under the International Shoe Company case that Minnesota has Jurisdiction --

Justice Felix Frankfurter: Jurisdiction?

Mr. Joseph A. Maun: -- in personam.

Justice Felix Frankfurter: (Inaudible)

Mr. Joseph A. Maun: Served that is right.

Justice Felix Frankfurter: That's a different question.

Mr. Joseph A. Maun: That's right, very different question.

Justice William O. Douglas: So there is no sanction inside the -- that Minnesota could apply to?

Mr. Joseph A. Maun: No sanction except the sanction of money.

Justice William O. Douglas: That's conceded (Inaudible)

Mr. Joseph A. Maun: Oh yes, that is conceded here.

Justice William O. Douglas: The only force that this judgment has (Inaudible)

Mr. Joseph A. Maun: In question, yes.

Chief Justice Earl Warren: There is no question about this tax if it was a Minnesota corporation you say.

Mr. Joseph A. Maun: Oh, no then we would have satisfied the question of due process and commerce.

Chief Justice Earl Warren: Yes, is there any, is there any question of discrimination here between intrastate and interstate.

Mr. Joseph A. Maun: Well I think when we get to the Commerce Clause, there is no question in my mind at least that any time you tax interstate, pure interstate commerce that you have subject it to the possibility of multiple taxation, undue burden on intrastate commerce can never possibly be subjected to.

Justice Felix Frankfurter: I wonder why you get at the Commerce Clause by the indirection of Due Process Clause.

You said two minutes ago the only thing that would just effect is interstate commerce and you also indicated they couldn't pass on interstate commerce, so why isn't that the way to get out of it?

Mr. Joseph A. Maun: Well there is always a question of which ones of these comes first.

I always -- it seems to me -- at least I deem that if you don't have jurisdiction in the first place then there is no use discussing the next matter and to my notion Minnesota doesn't have jurisdiction in all of these --

Justice Felix Frankfurter: Minnesota jurisdiction because it attaches to commerce.

It has jurisdiction for certain purposes as you agree.

Mr. Joseph A. Maun: That is right.

Justice Felix Frankfurter: It has jurisdiction under the International Shoe case for certain purposes.

Mr. Joseph A. Maun: That is right Your Honor.

Justice Felix Frankfurter: It does have jurisdiction in any sense, it could have any meaning because it tackles up and it doesn't belong to it i.e. interstate commerce.

Mr. Joseph A. Maun: That is right.

Justice Felix Frankfurter: That is your argument.

Mr. Joseph A. Maun: That is right.

Now as I am pointing out, there are sometimes often -- differentiate between these modern concepts of taxation.

Justice William O. Douglas: Well before you go there, then this -- what do you say this case would be quite different than from the Spector case?

Mr. Joseph A. Maun: Well just unless you -- this Court desires to emphasize greatly the question of labels, the incident of the tax and all that is exactly the same and the impact --

Justice William O. Douglas: The influence of the tax in Spector case was only a franchise of the corporations?

Mr. Joseph A. Maun: The Connecticut courts held that incident of the tax was the privilege of carrying on the business in that state, and there is no question about that and --

Justice William O. Douglas: That was relied upon by this Court.

Mr. Joseph A. Maun: And this Court followed it explicitly.

What this Court would have done is not the Spector had not (Inaudible) known?

Justice William O. Douglas: In the Spector case if the tax hadn't been paid they could have been barred from crossing the state, their interstate.

Mr. Joseph A. Maun: Of course there we had no question of the, of substantive due process or legislative jurisdiction because --

Justice William O. Douglas: They thought the interstate commerce.

Mr. Joseph A. Maun: Yeah they were called by to do business within the state of Connecticut, we are not.

Justice William O. Douglas: Well it can't be that they have greater power by a state to tax a corporation exclusively on interstate commerce when it doesn't even enjoy the privilege of doing business in the state then -- it doesn't even have that much for the state.

I don't see why you – I frankly don't follow the metaphysical argument, you first have to create -- satisfy a due process before you go over to commerce?

Mr. Joseph A. Maun: Well I feel there maybe an error that if there is no due process over this company at all, then clearly this thing has to be sent back and reversed because the question was raised and of course with --

Justice William O. Douglas: And that's the holding often to the interstate commerce?

Mr. Joseph A. Maun: That is right, yes.

I claim it violates both, question in my mind.

Justice William O. Douglas: But I still don't see how this reaches the interstate, how this cripples these, interferes with the performance of an interstate function if there is no --

Mr. Joseph A. Maun: Well --

Justice William O. Douglas: -- action that the state of Minnesota can take against --

Mr. Joseph A. Maun: If Iowa and under the decisions of this Court, unanimous decisions in the (Inaudible) case can tax a 100% income of this company, and if this Court in this series of cases have laid down a rule that Minnesota can also tax and only Wisconsin can tax and North and South Dakota can tax, there remains a question that interstate commerce is going to be subjected to moldable version that you can't possibly subject a corporation to the state all within the confines and boundaries of one state.

This can't be done as a practical physical matter.

Justice Felix Frankfurter: How much does this tax amount in dollars and cents?

Mr. Joseph A. Maun: For the years in question?

Justice Felix Frankfurter: Yes.

Mr. Joseph A. Maun: It's about 102,000.

Justice Felix Frankfurter: A year, a year?

Mr. Joseph A. Maun: 13 years it runs all the way from a few thousand dollars to five, six, seven --

Justice Felix Frankfurter: And you are -- are you arguing that Minnesota can't pass a statute which says the corporation that does no local business in Minnesota would then (Inaudible) to get interstate sales shall pay each year $5000, could Minnesota pass such a statute?

Mr. Joseph A. Maun: I say they cannot I think --

Justice Felix Frankfurter: Well this, is this the thing, I shall argue that's what they've done here.

Mr. Joseph A. Maun: Yes, indeed.

Justice Felix Frankfurter: You'll have to argue that.

Mr. Joseph A. Maun: Well I am trying to aim in that direction Your Honor.

Now --

Justice William O. Douglas: Are you able to distinguish the West Publishing case in California.

Mr. Joseph A. Maun: The West Publishing Company case, the elements in that case are considerable different than they were here, of course there was a per curiam affirmance by the court, and the merits were not, I don't know whether they were considered or not, but at least they was no oral argument.

The West Publishing company case, you know, were --

Justice William O. Douglas: The per curiam decision it seemed would be fairly simple case --

Mr. Joseph A. Maun: Well in the case the, in that case they were considerable amount of intrastate activities that took place, that did not take place here.

They were collections by the salesmen and there were adjustments made by their salesmen, they kept an inventory of books within the state.

Justice William O. Douglas: But that would go to you due process, would it not?

Mr. Joseph A. Maun: That is right.

Justice William O. Douglas: Not through your interstate commerce?

Mr. Joseph A. Maun: That is right.

Justice William O. Douglas: I mean on the commerce point there is no (Inaudible).

Mr. Joseph A. Maun: On a commerce point case I think that the West Publishing Company case is only a commerce point case and -- but it's distinguishable or not from this case, I am not so sure, I haven't the record yet, but I do say that it was not decided on the due process states -- question.

Now sometimes when it comes to analyzing an income tax, we will sometimes lose sight of the distinction between the question of the basis of the tax and the measure of the tax.

And sometimes some courts have had the tendency to discuss what I think is the equitable nature of the tax and thus neglect the real question which is whether or not the subject matter of the tax itself is within the states' grasp.

Exemplifying I think this type of tax is a comparison between the ad valorem real property tax which is levied on real estate as a subject, but still measured by the real estates' value and on other hand a gross earnings tax on a utilities' gross earnings as a measure, but the tax is actually on the property we'll get within the state.

Now what's seen in this type of case that it would be impossible with regard to income in and of itself as a subject rather than a measure of a tax?

Now the reason for this is that income is merely an abstraction which is arrived at by pre-described mathematical means.

It is an artificial norm which provides a measure, but which by reason of its abstract character cannot logically provide a foundation or the subject matter of tax itself.

Now most state taxes are well grounded from this stand point because normally they are up on the residences or up on the domestic aided corporation.

And the result of that at sometimes have led some courts to assume that so long as the income tax is fairly apportioned, it can be applied with respect to any income which the state directs the tax at even though there's not a proper subject matter within the state to ascertain that tax.

And it's for this reason that judicial reference to local activities or intrastate activities has reached a paramount significance of income tax cases.

A search for a local activity represents a proper (Inaudible) such as a search for the primer essential to tax, namely a subject matter within the territorial jurisdiction of the state.

Now a law, if even -- if we could look at this case from a stand point of an equitable basis and ignore for a moment the tremendous upsetting impact, if these taxes could be leveraged by every state in the (Inaudible) we might ask what benefits have been sort afforded this tax, they're equitable entitled to this tax.

It argues of course this has provided a civilized and local community in which the shipments can be made, that's a right guaranteed by the federal constitution, it is argued that it provides highways.

But for that it can, under decisions of this Court, levy a highway users' tax.

As it says it has given the peace protection to its property but if it has it can impose an ad valorem property tax upon that property.

And it is argued it didn't go in Minnesota courts, well this corporation is doing a local business and it's not qualified within Minnesota and Minnesota need not let it go into its courts.

I think this case, the facts of this case bring it squarely within the decision of the Alpha Portland Cement Company case and as a matter of fact, as you read this record, it will be clear that Northwestern patterns it's business practices, so come exactly within the Alpha case and there this Court held as a matter of due process, a state may not tax property beyond its borders under the guise of taxing intrastate business, of activities carried on by Alpha in Massachusetts were greater than those here.

Alpha had a bank account in Massachusetts, there was none in Minnesota.

Alpha solicitors made collections, Northwestern's do not.

Alpha solicitors ordinarily took orders and forwarded them.

Northwestern's normally do not, they go around and they are goodwill missionaries and the orders normally go directly into the office of the company at Mason City for acceptance or rejection, the same as one aspect or element of the Northern case in Illinois.

Now it has been suggested by some that each activity in interstate commerce is a taxable event, and taxes multiply only in the sense that each state taxes that which occurs within its own borders.

The argument is then advanced that a tax by more than one state is not upon the same activity and therefore it's valid.

If that theory is to be followed, Minnesota is free exact the tax because of solicitation, then other states to which any such commerce extends may with people rightly, of any tax on any activity.

If solicitation of sales such as separate activity, it would seem to follow that sending out of agents to make purchases of raw materials would be just as much as separate activity to many commercial concerns and then take this purchase of raw materials is much more important than the sales of product.

In our own state of Minnesota where our rich beams of iron ore are -- host of cheap water transportation are fast disappearing.

That raw material is much more important than the question of finding a market for it.

Certainly it must be conceded that each activity in interstate commerce is a perquisite to the final result.

Solicitation is only one of those.

There is no more justification for singling out that activity as a taxable event, than it is for separating out the natural gas that is absolutely necessary the fuel with which to produce the tremendous heat that is necessary to make this cement.

Acquisition of that gas from Texas as well these had to be a separate activity of solicitation.

It is more essential and by far more regular and more continuous for it is used 24 hours a day, seven day a week, everyday of the year.

Now the argument has been made that the taxing of a business twice is no difference than doubling the tax.

In other words, if this company is taxed in Iowa, and taxed in Minnesota, it is no different than if Iowa doubled the rate.

This does not necessarily follow for the rate is doubled for intrastate business just as well.

The intrastate merchant has other safeguards.

First he is a part of the electorate and he can protect himself at the ballet box.

Then too if a state doubles its rate its intrastate business is going be at a competitive disadvantage and therefore it's not going to economically practicable.

So doubling the rate is much different than letting more than one state tax or letting five states tax and let each member double the rate.

Justice John M. Harlan: Is there any showing in this record that they have in fact multiple taxation in this instance?

Mr. Joseph A. Maun: There has been no specific showing in this record Your Honor.

Justice John M. Harlan: Well your argument is (Inaudible) is to what might happen.

Mr. Joseph A. Maun: Well if this Court lays down the rule that interstate commerce can be the subject matter of a tax is what will happen.

Chief Justice Earl Warren: I understood you to say it was a fact that there was no double taxation.

Mr. Joseph A. Maun: In this particular case.

Chief Justice Earl Warren: In this particular case.

Mr. Joseph A. Maun: Yes sir.

Now we all recognize of course that in adopting the constitution these states gave up certain aspects of their sovereignty in certain specified areas and that was to regulate commerce and the power was given to this Court (Inaudible) national legislation to see whether there was a burden or interference with interstate commerce.

And in addition when the Fourteenth Amendment was adopted, the states further relinquished another portion of their sovereignty by the virtue of the Fourteenth Amendment, and that was the right for them to determine themselves whether a tax such as this and in many other fields overlaps so as to interfere with our national welfare and harmony.

Now the proper limitation under the Fourteenth Amendment of the exercising of the tax sovereignty of the states to subjects within their jurisdiction is as vital to the political and economic harmony of this union, as are the restrictions on state sovereignty imposed by the other sections of the constitution, including the Commerce Clause.

Well this Court will be continued to be guided by the principle that interstate commerce in and of itself does not constitute a jurisdictionally sound subject matter upon which to base an income tax from a due process standard will not deprive the state of their revenue.

This Court has in prior decisions chartered a course under which states can impose a tax even upon corporations carrying on interstate commerce activities.

Where there are intrastate activities itself they can use that as a springboard.

The states should not either through their clamor for more revenues or any theory of alleged state rights be permitted to destroy the area of free trade that Commerce Clause sort to create.

We recognize that interstate commerce must pay its way, but it does pay its way and it has long been a -- certainly a well established rule by this Court that a state may not impose a charge for the enjoyment of a right granted by the federal constitution.

This Court unanimously held so in Murdock against the Commonwealth of Pennsylvania where they refused to allow the license tax for the privilege of exercise of a religion on a theory that was a right granted by the federal constitution.

Now the argument has been advanced that if Minnesota is not permitted to impose this tax, intrastate commerce will act as a disadvantage.

Well that's not true, because under the Lawrence case Iowa can tax 100% of this income, the same as Minnesota can tax 100% of income of companies domiciled there.

And this taxpayer pays all the local taxes to Iowa that Minnesota corporations pay to Minnesota.

And under the series of cases which this Court handed down in the used tax cases and the sales tax cases, Minnesota could have imposed a used tax on the sale of cement in the state of Iowa.

And had it done so it would have received over this period of years over half a million dollars rather than the amount of which it's seeking in this action.

Now merely because Minnesota does not want to follow that constitutional avenue of taxation there is no reason why this Court should extend it a helping hand.

And Minnesota like California in its brief filed amicus here cannot claim that this is a substantial source of its revenue, because it is not.

Minnesota would not expect a decision either if someone had you believe that brought about the resistance to this type of taxation.

Minnesota has never sought to enforce this tax.

It was until 20 years after this law was adopted that Minnesota commenced this proceeding.

It's obvious Minnesota has not then relied upon this as a source of its revenue.

Justice John M. Harlan: What was the (Inaudible)

Mr. Joseph A. Maun: Administratively Your Honor I do not know, I do know that they -- after – I think long after Spector decision they decided to mention (Inaudible).

So the states haven't been relying on this and the Court will notice in supplemental record filed by the Stockham case today, the Commissioner of the State of California said that this type of income being taxed by the State of California would produce about $600,000 a year out of $210 million or one-fourth or 1% of its total tax revenues.

So it is not the type of tax these states have relied upon for any of the revenues whatsoever.

They haven't enforced it, and at this late stage to enforce this type of tax will create chaos among companies doing business in interstate commerce.

And it's not the type of the company like a General Motors or the Ford Motor Company or General Electric that is going to be bothered if this Court upholds this kind of tax.

It's a small company, doing business in one or two or three states.

The large companies already have qualified to do business throughout the 48 states of this union.

They are paying those taxes because they can pay an excise tax on the privilege to do business within those states.

So this type of tax will only or mainly upon the small company, it's a tax the states have not relied upon for their revenue, it's a tax which of course they sought to enforce as an afterthought.

Justice Hugo L. Black: Do you think it has materiality in connection with the question of constitutional question you raise there?

Mr. Joseph A. Maun: Justice Black I think it goes to the question whether administratively they thought this law was constitutional or not.

I think the administrative interpretation of a law is, it was not unconstitutional and perhaps because of a change in administration in a local level they say, they try and see what happens.

It surely would not have waited 20 years from any other theory.

Justice Hugo L. Black: Well that's a question of state interpretation of the law?

Mr. Joseph A. Maun: Just as an administrative matter which I understand is not of course binding upon this Court.

Chief Justice Earl Warren: Mr. Voldness.

Argument of Perry Voldness

Mr. Perry Voldness: Mr. Chief Justice, members of the Court.

The issues have been stated by counsel for a appellant, but I would like to point out a few items of fact that I think bear some stressing.

The corporation concern here is in the State of Minnesota concededly for one purpose, to make money.

Its activity is selling cement manufactured in Iowa to persons who buy the cement in Minnesota.

Although these activities are all an integral part of interstate commerce, some of these activities are something more than that are outside of the usual idea of the flow of commerce.

The corporation has salesmen who in addition to soliciting orders from perspective purchasers from the corporation contact the ultimate users of the product, architects those people who will be buying the product that cannot buy from the corporation and they quote to these people, pricing in the same manner that they quote to the dealers.

They're driving for one thing of course, to enlarge the volume of their business that is by encouraging sales by their dealers who handle the products.

This is specifically the sort of activity which in Northwestern Milling Consolidated Corporation, Northwestern Consolidated Milling Corporation versus Massachusetts reported in Cheney Brothers Company versus Massachusetts was held sufficient to sustain a tax and the privilege of doing a local business.

Justice Charles E. Whittaker: Mr. Voldness, is it true that this (Inaudible) by state upon Section 290-102?

Mr. Perry Voldness: The tax is sort to be rested under the provisions of 290.03.

Justice Charles E. Whittaker: Now if (Inaudible) doesn't what the statute says?

Mr. Perry Voldness: The state court if I might point out, construed the tax as a purely general net income tax, which was not by operative effect, legislative intent or dictionary definition, a tax upon the privilege of engaging in interstate commerce.

Some of this confusion --

Justice Charles E. Whittaker: But if you (Inaudible) there is no income?

Mr. Perry Voldness: The section applies also to residents, non-residents, the estates of decedents and to trusts.

The court --

Justice Charles E. Whittaker: Does this statute apply to one (Inaudible) doing some local business?

Mr. Perry Voldness: No.

Justice Charles E. Whittaker: Then according to the terms of supply (Inaudible) would be barred exclusively in interstate.

Mr. Perry Voldness: I think the distinction that I would make there is that under the provisions of 290.02 a tax is imposed upon corporations doing a local business for the privilege of doing that business.

290.03 imposes a tax on residents, on non-residents, on trusts, states of decedents and on those corporations engaged exclusively in interstate or foreign commerce who are not taxable under 290.02.

If this nomenclature second structure is to be applied, I think the second structure tax is the tax imposed upon the local business.

Then in that sense we impose a -- if you want to call a subject to the tax is the privilege in lieu of the income tax imposed under 290.03.

Now with respect to --

Justice Felix Frankfurter: Did you cite the Cheney Brothers' case as sustaining this?

Mr. Perry Voldness: I would -- I cite the Cheney Brothers case for this proposition if --

Justice Felix Frankfurter: Not – if you would be good enough to tell me what facts in the Cheney Brothers case are like the facts in this case --

Mr. Perry Voldness: The Cheney Brothers --

Justice Felix Frankfurter: I could understand the general proposition better.

Mr. Perry Voldness: In the Cheney Brothers case, the tax on seven corporations, there was -- tax on seven different corporations was under consideration.

With respect to Northwestern Consolidated Milling Corporation, the Minnesota corporation was operating in Massachusetts under substantially the same set of facts here, except --

Justice Felix Frankfurter: I don't think they were the same circumstances.

Mr. Perry Voldness: -- they had salesmen in the state who solicited orders.

Justice Felix Frankfurter: From local people.

Mr. Perry Voldness: From wholesalers and in addition they solicited orders from local people and delivered it to the wholesalers through which they sold their products.

Justice Felix Frankfurter: So they solicited from local buyers and turned the purchases or the orders over to a local wholesaler.

Mr. Perry Voldness: In this case.

Justice Felix Frankfurter: To whom they had served, no doubt.

Now what is there analogous to that in this case?

Mr. Perry Voldness: In this case the salesmen of the appellant, contact as a regular course of business those persons who are the ultimate users of the cement, but whom the corporation would not sell, the corporation considers eligible dealers or eligible purchasers only lumber yards, building supply dealers, contractors and ready mix cement companies.

Justice Felix Frankfurter: What I want to know is that anything in this record with which I am not familiar with --

Mr. Perry Voldness: I can --

Justice Felix Frankfurter: -- analogous to the Northwestern case whereby in Minnesota a retail customer was solicited for his business and then this corporation, called the Northwestern States Portland Company, turned the order over to a local Minnesota resident wholesaler to fill it, what is there in this record?

I don't think there is anything I just want to know.

Mr. Perry Voldness: There is and I will give you an exact reference.

In fact if you would examine the record at Page 86 the testimony of Mr. Pray, witness of --

Justice Felix Frankfurter: Page 86.

Mr. Perry Voldness: 86.

We have a reference there, the contract between the seller as the dealer who handles the product, who purchases from Northwestern and the person to whom he sells the product, a reference to Exhibit 20 which is recorded at Page -- record 336, we also have testimony --

Justice Felix Frankfurter: 336.

Mr. Perry Voldness: 336.

Justice Felix Frankfurter: If you say (Inaudible) the future by telling you what that transcend says?

Mr. Perry Voldness: Of the fine print in the contract is of course is merely an agreement with regard to the quantity used, price and shipment of the cement, but as the testimony on Page 86 shows, this was drawn up for use by the dealer in dealing with the person, the ultimate consumer of the cement.

It is to be signed by according to the exhibit would appear by two persons, by the testimony of Mr. Pray signed by all three partners.

Justice William O. Douglas: You are saying the contractors made a mistake.

Mr. Perry Voldness: I don't know where that contract was made.

Justice William O. Douglas: I don't know.

Justice Charles E. Whittaker: (Inaudible) locals.

Mr. Perry Voldness: I am just pointing up an analogy, is what I have been attempting to do here.

Also there is a testimony in the record that in order to increase the business of the corporation, these contacts with, shall we say non, the non-direct purchasers, that is with the ultimate consumers, was such as to require a special form for holding prices to it.

And that is again on page -- record 79, the question was, “Now Mr. Pray showing you the defendant's exhibit 17, I will ask you to identify it, if you can do so and tell the court what it is?”

“This is a quotation on specific work, a work that can be identified like a bar nor a bank building or a library or a bridge.

It is initially used in quoting for the account of the dealer.”

“What do you mean by that?”

Answer, “I mean by that that the cement is going to go through the dealer and the dealer informs us as to what price he wants to sell that cement for and that is the price we quote to the contractor who is figuring this work.”

“Who is this sent to?”

At record page 80, “That form would be sent to a contractor.”

Now I point out the Cheney case and the decision therein with regard to the Northwestern Consolidated Milling Company to point out that a situation analogous to this was sufficient to sustain a tax from the doing of a local business.

But we do not contend that the tax here, we reject any contention that the tax here is imposed on the privilege of doing business.

Our court held this was general net income tax and that it was a not a franchise tax, it was not a privilege tax.

It is imposed clearly and simply on net income and the decisions of this Court I think will bear me out when I say the tax on net income is not a tax on the source of net income as was pointed out in Peck & Company versus Lowe, and the US Glue versus of Town of Oak Creek.

Here the subject of the tax is -- the subject of the tax is the net income, if you will.

True this may arise out of activities conducted within the state.

Leaving the nature of the tax aside --

Justice Charles E. Whittaker: (Inaudible) I find that clear in my mind (Inaudible) pursuant here under (Inaudible) which is imposed only upon those who have (Inaudible) exclusively in interstate business.

Now it seems to me your contention was (Inaudible) that they were in fact doing out of intrastate business.

Am I right or wrong about that?

If they were, it's pretty simple, I would then --

Mr. Perry Voldness: The tax is imposed on all.

Justice Charles E. Whittaker: I beg pardon.

Mr. Perry Voldness: The tax is imposed on all that is a net income tax.

In the case of 290.02 however the imposition is a privilege tax or (Inaudible).

That -- that applies only to corporations that are doing a local business or you might say I'll let me read this statute that would be best.

“290.02, imposition of privilege tax on corporations measurement, an annual exercise tax is hereby imposed upon every domestic corporation except those included within section 290.03 for the privilege of existing as a corporation during any part of the taxable year and upon every foreign corporation except those included within 290.03 for the draft to it of the privilege of transacting or for the actual transaction by it of any local business within the state doing any part of its taxable year in corporate or organized form.

Under 290.03 an annual tax for each taxable year, computed in the manner and at the rates hereinafter provided is hereby imposed upon the taxable net income for such year of the following classes of taxpayers” and it names four classes of tax payers.

“Domestic corporations not taxable under 290.02 --”

Justice Charles E. Whittaker: They are not involved here.

Mr. Perry Voldness: That's right, resident and non-resident individuals --

Justice Charles E. Whittaker: Not involved.

Mr. Perry Voldness: -- estates of decedents --

Justice Charles E. Whittaker: Not involved.

Mr. Perry Voldness: -- and trusts.

Now when we look to the statute to determine the subject of the tax, it is clear the subject of the tax is net income.

The fact that a related tax of equal weight, of equal measure, of equal burden is imposed upon the domestic corporation should be sufficient to destroy any argument that the tax imposes an unfair burden or discriminates against the foreign corporation.

Justice Felix Frankfurter: Do I understand your answer to Justice Whittaker to be that the qualification of Section 3 (B (A) -- 3B, parenthetically shall apply in cases so on so to any taxable year to just exclusively of interstate commerce, that that qualification consists of exclusively of interstate commerce, does not qualify the taxability of subject matter under B but all you have to look at is under A, is it net income.

Mr. Perry Voldness: That's right.

Justice Felix Frankfurter: Is that your argument?

Mr. Perry Voldness: My argument is that you have to construe the statute from the four corners to determine what is the subject of the tax?

The subheadings with regard to corporations with regard to residents and non-residents are only denoting who is subject to the tax.

Justice Felix Frankfurter: But taxes imposed on human beings, they are not imposed on things, some individuality is tax that putting aside admiralty conception.

So the Section 3 (B) defined the category of the classes of taxable persons, and as I understand you in reply to Justice Whittaker when he finds out that the qualification under A the others not in country, not an issue out of a state trust and so on that that qualification is immaterial so long as you go up and see under A that is net income.

That's you answer --

Mr. Perry Voldness: It's immaterial from the Commerce Clause, from the Commerce Clause portion of the argument which is hard to separate, because as long as the local corporation that is the domestic or the intrastate corporation is being subjected to the same burden there is no discrimination.

Justice Felix Frankfurter: It isn't a question of discrimination.

It's a question of legislature having said you can tax, having an effectible 3 (A) define the scope of the taxing measure, you then have a separate clause.

I can write it, the legislature of Minnesota did.

It has a separate one fairly relating to people both domestic and foreign and business within the year et cetera, exclusively intrastate commerce and you say that that qualification is not a limitation, is that right?

Mr. Perry Voldness: They have made classifications I think for this purpose for classifying or to pointing out in this case we are taxing the income from interstate commerce.

If he is a non-resident or the resident we are taxing income from an entirely different source.

Source is of material insofar as the subject is concerned.

Justice Felix Frankfurter: But if the source is exclusively interstate commerce then a question arises that it's beyond the power of the state to determine, namely, whether they're levying upon the product of interstate commerce beyond the power of state to levy it.

Mr. Perry Voldness: Well this would be the case in all of our railroad cases where we impose a personal property tax on railroad cars, apportioned to the allocated sales, the amount of time spent within interstate.

The amount paid for that tax comes from interstate.

Justice Felix Frankfurter: (Inaudible) correct, those railroad apportionment cases are cases in which the statute explicitly taxed it, the apportioned value of the corpus of the organic railroad within a particular state for the reason that is indicated that after all that has such a permanent situs within the state, that it would be unfair not to allow the state to levy or rather the other way around it's not such an intrusion or such an burden on interstate commerce as to exclude the state, that's the theory, isn't it?

Mr. Perry Voldness: By analogy, the income tax also taxes the apportioned net income, attributable to activities within the state which benefit from the governmental services, which have been rendered.

Justice Felix Frankfurter: Are you saying that the State Supreme Court may rewrite a tax statute to accomplish the result that a good statute could have accomplished (Inaudible) business to take the rewriting and not the words of the statute, is that what you saying?

Mr. Perry Voldness: The State of Minnesota -- the State Supreme Court has construed this statute, and I do not think that they have done any injustice to the legislative intent.

I think the language is clear on its face.

It is hereby to propose a tax on net income.

Justice Charles E. Whittaker: Assume (Inaudible), the statue picks up and therein it says it does not reach it unless it is -- it consists exclusively from interstate commerce.

Now that's what is relevant, because the argument you are making about transactions between a salesmen and a dealer and a contractor (Inaudible) which happens to be close (Inaudible) had to do with it, unless you are indicating that tax meant local business?

Mr. Perry Voldness: Well I'm talking about -- in that case I'm talking about activities in the due process sense.

Justice Charles E. Whittaker: You do not contend that there was any local business being done by this petitioner.

Mr. Perry Voldness: Well I would contend that the activity of contacting those to whom he would not sell, that is in largely the business of the lumberyard dealers --

Justice Charles E. Whittaker: As local business --

Mr. Perry Voldness: -- is the local activity.

Justice Charles E. Whittaker: All right.

Mr. Perry Voldness: But I would also admit that, that is an integral part of interstate commerce, because he wouldn't have been engaging in it unless it paid off.

Justice John M. Harlan: It's not a local business, it would be sufficient to bring the corporation under the franchise tax (Inaudible)?

Mr. Perry Voldness: Perhaps.

Justice John M. Harlan: Really?

Mr. Perry Voldness: I don't know, I don't know what the answer is to that.

Justice William O. Douglas: But you haven't made that contention.

Mr. Perry Voldness: We haven't made that contention, we haven't advanced it.

Justice William O. Douglas: Minnesota has never stopped (Inaudible)

Mr. Perry Voldness: Not to my knowledge.

Justice Charles E. Whittaker: Then it has to be exclusive (Inaudible) in your view it has to be income arising more (Inaudible) and exclusively from interstate business before this statute of which you derive reaches it?

Mr. Perry Voldness: No, I wouldn't say that it does.

I would say that it's merely an attempt to group them.

A resident maybe (Inaudible) no interstate business and he is taxed, a non resident is taxed --

Justice Charles E. Whittaker: How would you deal with it without (Inaudible) that if this company were doing any local business (Inaudible) then it has subjected itself to (Inaudible).

Now I am trying to know what is it you contend there was any local business done by petitioner in Minnesota, if so then what is that?

If not then your law (Inaudible) income exclusively from interstate business and the fact (Inaudible) you have power to do what you did?

Mr. Perry Voldness: I would take the position that the -- the Court has held that the income was exclusively from interstate business, but its activities were all an integral part of interstate business.

Now, some of these activities maybe outside the direct flow of commerce in the general sense, but they were still an integral part of the interstate business.

The income was derived solely from the interstate commerce.

The question in that remains is whether net income is a subject of tax which will sustain this, which will sustain the tax against an argument that it violates the interstate commerce.

Justice Felix Frankfurter: You talk as though net income is an abstraction, net income of what?

Mr. Perry Voldness: The net income --

Justice Felix Frankfurter: There must be a relation between the apportioned net income in interstate commerce and what may fairly be localized as local activity in relation to.

Mr. Perry Voldness: That is right.

When we speak of net income we intend to only tax that net income which is fairly attributable to the activities that arise out of the Minnesota activity --

Justice Felix Frankfurter: But then how can you --

Mr. Perry Voldness: -- or conducted within the State of Minnesota.

Justice Felix Frankfurter: And I don't understand --

Mr. Perry Voldness: Now this is a due process.

Justice Felix Frankfurter: Then I don't care about either of those labels, they mean nothing to me except to confuse thoughts, but when you agree to Justice Whitaker's remark and repeated it that you agree this arises exclusively out of interstate commerce.

Mr. Perry Voldness: The income.

The income --

Justice Felix Frankfurter: If it's exclusive then it can have a segregateable local incidence.

Mr. Perry Voldness: I would say that it arise exclusively from the interstate commerce, the activities of interstate commerce that are attributed to Minnesota.

Certain activities are carried out in the State of Minnesota.

You cannot say that they weren't carried on there.

They were carried on in the state.

The question is whether the tax in operation is operated to regulate interstate commerce.

Justice Felix Frankfurter: Let me ask you this, could you -- could Minnesota, without any question of construction of a statute, that's for your cause and not for us, could Minnesota have taxed, imposed a license tax on these drummers soliciting business in Minnesota to be filled by the Iowa corporation from Iowa.

Mr. Perry Voldness: A license tax on drummers?

Justice Felix Frankfurter: On these drummers (Inaudible)

Mr. Perry Voldness: Under the Spector, the answer –

Justice Felix Frankfurter: What?

Mr. Perry Voldness: Under the theory of the Spector case the answer no because there is no right in the state to impose an privilege, any tax on -- directly on the --

Justice Felix Frankfurter: Then you do the same thing by calling the product of their drumming local business?

Mr. Perry Voldness: I think that, that has been answered by this Court in Pekin Company versus Law.

Justice Felix Frankfurter: What, in what case?

Mr. Perry Voldness: I think that, that is by this Court in Pekin Company versus Law, where it was held that a tax on income was not a tax on the source of the income.

The tax of the appellant --

Justice Felix Frankfurter: It can impose, according to our decisions it can impose on the drummer who solicits this business in Minnesota, a $10 license or a $50 license, that fee (Inaudible)

Mr. Perry Voldness: Under the decisions of this Court, yes.

Justice Felix Frankfurter: But you say that it can impose income tax on the value of the order which he gets, is that right?

Mr. Perry Voldness: That's my position.

Justice Felix Frankfurter: All right.

Mr. Perry Voldness: Now the attempt to bring the interstate commerce question over into due process has I think been rejected by this Court before, in International Harvester Company versus Kentucky, the Court indicated and rejected an argument that the interstate -- the fact that the activities were entirely interstate commerce is embodied those activities such that it should eliminate the corporation from service of process.

And I know the argument is made that what is sufficient for service of process is not perhaps sufficient for the purpose of imposing a tax, but in International Shoe Company versus Washington, the rule is clearly laid out that if the activities which are substantially the same as in this case, were sufficient to sustain both the lawsuit and the tax under the due process.

Now West Publishing Company versus McColgan follows this same line of reasoning and it is my position that West Publishing Company versus McColgan actually controls this case.

Justice Charles E. Whittaker: But there is local difference in each of these cases.

That is my point (Inaudible) incidence of taxation of local carriers.

Here it seems to me you are limited to a whole (Inaudible) tax which imposes a tax only upon that which derives exclusively from interstate commerce?

Mr. Perry Voldness: The California income tax like Minnesota is purely a general net income tax.

Justice Hugo L. Black: May I ask to see if I can get this clear, I'm not sure, you have an income tax in Minnesota.

Mr. Perry Voldness: That's correct.

Justice Hugo L. Black: And it's written up in a such way that one part it says it shall apply to this one, and another part of it says it shall apply to this one, and another part of it says it should apply to this one, that third part is the interstate commerce.

You are going on the theory the constitution does not forbid taxation of companies that are engaged in interstate commerce.

And as I gather, what you are saying is, whether right or wrong, what you're arguing I want to see if it is right that this interstate -- these companies that are engaged in interstate commerce are engaged -- part of their activities are in your state, people buy it there, whether it's (Inaudible), it's shipped in there, some of it goes through local merchants as a convenience, and you are attempting to tax the net income on their receipts.

Now what receipts, I want to get that, what receipts?

Mr. Perry Voldness: On net income from those that this fairly attributable under a three factor apportionment formula to the activities conducted within the State of Minnesota, there has been no question with regard to the fairness of the formula.

Justice Hugo L. Black: I gather from what you say you are -- whether it is right or wrong, you are saying that while this phase of this tax law, this part of this paragraph refers to income from interstate commerce, that's just one designation of a part of the various types of income that you consider taxable --

Mr. Perry Voldness: That is correct.

Justice Hugo L. Black: And we finally have to get back to the question, is whether that's a forbidden tax either under the Commerce Clause or the due process.

Mr. Perry Voldness: That is the question.

Justice Felix Frankfurter: Would you with Chief Justice's permission be good enough to put on a piece of paper, or paint your pages but not the exact parallel on this record, or the close enough parallel, on this record, of the fact between this case and Northwestern Consolidated Milling Company case, because if this is Consolidated Northwestern Milling Company case, then I for one have those problems.

Mr. Perry Voldness: After the hearing is adjourned?

Justice Felix Frankfurter: Pardon me?

Chief Justice Earl Warren: Yes after adjournment.

Of course counsel may file another memorandum if he disagrees with it.

Justice Felix Frankfurter: Mr. Attorney General don't bother arguing it just if you could, the circumstances -- you know what the question Justice Black has put to you --

Mr. Perry Voldness: (Inaudible)

Justice Felix Frankfurter: The local conduct, so that's in way the essence of Northwestern Milling Company.

Mr. Perry Voldness: Then assuming at least for the purpose that the tax satisfies due process, we know that there are several constitutional tests that must be met with regard to the Constitution.

Is there discrimination?

There has been none in fact here, none has been shown, none has been alleged.

Domestic corporations insofar as the ultimate tax burden is concerned are no better off than this corporation.

Those corporations which engage in intrastate commerce alone are no better off than this corporation, but to sustain the appellant's contention and hold them tax free, would mean that the discrimination would be placed under domestic corporation or the corporation engaging in intrastate business, because a lot of our corporations may not go outside the state, but they would have to pay a tax, they would have to pay the cost for the services of government that this appellant receives.

Now there has been a lot of talk about an income tax, but I think that everyone agrees the basically it's the most equitable, the fairest form of taxation there is.

It's the only tax that I know of that is clearly based on ability to pay.

Perhaps it could be even phrased in a better manner.

It could be drawn so that it would more clearly reflect the ability of payer.

When we look at the taxes we are familiar with, this one is designed to do one thing, to tax people on the ability to pay and I say there is one other thing that it does, it relates the benefits, protections, the opportunities and further afforded by government to something that we already recognize, dollar value.

Now what better criteria for the value of the services received by this corporation than police protection, fire protection, the production or the presentation of a civilized market tender, even the net income of the corporation.

Counsel for appellant has argued that after all the state of Minnesota must furnish this civilized community and this market.Minnesota does not have to furnish a market.

Minnesota just cannot keep the corporation from coming in there, but that does not mean that the corporation should be free to come in and to be in plain words a freeloader.

Justice Hugo L. Black: What do you say to his argument that Minnesota could have equalized the burden on residents and non-residents by putting this as a use tax instead of an income tax?

I understood him to make that argument, if you could have done it on a used tax?

Mr. Perry Voldness: Well on a used tax of course -- I don't think that the used tax will conceivably reach the same fairness of result in the first place.

A used tax isn't related to ability to pay.

It isn't related to the value of the services received.

It's a flat levy on each transaction.

Justice Charles E. Whittaker: (Inaudible)

Mr. Perry Voldness: Our tax, the tax that we have here falls on our own residents in practical operation and effect.

Justice Charles E. Whittaker: (Inaudible)

Mr. Perry Voldness: Well the -- we have an income tax in Minnesota yes.

Justice Charles E. Whittaker: Well, I mean this tax (Inaudible)

Mr. Perry Voldness: This specific section, no but under 290.02 we also impose an income tax.

Justice Charles E. Whittaker: Well that's not (Inaudible)

Mr. Perry Voldness: I might point out that the incidents --

Justice Charles E. Whittaker: (Inaudible)

Mr. Perry Voldness: The legal subject of the tax in 290.02 has never been precisely pointed out by our Court.

In 191 -- in Reid versus Bjornson, this is not cited in my brief, in Reid versus Bjornson, 191 Minnesota, I think at page 254, the Court points out that this maybe a property tax, it may not, they never went on to answer the question of whether it was an exercise tax or a property tax.

There have been no decisions with regards to our tax except this case construing 290.03 to be not a privilege tax.

Now with respect to multiplicity of burden, any idea that perhaps the taxpayer is going to be taxed on more than 100% of his income.

In the first place due process requires in order to avoid reaching extraterritorial value that there be an apportionment with respect to property, that the apportionment be according to situs, with respect to net income that the same thing should apply, that there should be an apportionment according to the source of the income and this is a question of fact whether the formula in fairness does attribute to the state be proper law.

Now the taxpayer can come in and show that it does not Tax in that manner.

He is entitled to separate accounting and separate accounting will correctly equate, reflect and this formula will not.

Now with respect to the state of domicile, the court has imposed a rule on these states that personal property must be apportioned if situs is shown elsewhere.

This same principle can be used to prevent multiple burdens or a duplicity of taxation with regard to the same parts of the income, that is, of income then would not be taxed in both Iowa and Minnesota or Michigan or Minnesota.

Now I think everyone agrees that interstate commerce must pay it's own way, as I've stated this tax is an income tax, is fair, is equitable, the kind of thing.

Justice Charles E. Whittaker: That would (Inaudible)

Mr. Perry Voldness: It must pay I think for the benefits, the opportunities that it receives.

Now if I had no --

Justice Felix Frankfurter: What has it received here from Minnesota?

The right of its drummers to go about and have orders placed.

Mr. Perry Voldness: It may receive police protection --

Justice Felix Frankfurter: (Inaudible)

Mr. Perry Voldness: It received police protection.

Justice Felix Frankfurter: For who, for the drummers?

Mr. Perry Voldness: For their drummers.

Justice Felix Frankfurter: So why gather drummers, be likely (Inaudible)

Mr. Perry Voldness: Well I would distinguish the drummer cases, most of the drummer cases, but there a flat license fee has been imposed and that might not their relationship.

Justice Felix Frankfurter: Well I can --

Mr. Perry Voldness: For the time that they are in the state.

Justice Felix Frankfurter: I can understand that if the license fee was enormous, but these are small license fees, these aren't vast license fees and we strictly haven't done except in the Union Brokerage case where we worked hard to work out some special relations in the particular case.

Justice Charles E. Whittaker: None of this comes out actually (Inaudible)

Mr. Perry Voldness: Well I really couldn't make --

Justice Charles E. Whittaker: (Inaudible)

Mr. Perry Voldness: I wouldn't be able to answer the question.

Justice Charles E. Whittaker: (Inaudible)

Mr. Perry Voldness: With respect to West Publishing Company a thorough opinion of course as I stated, before -- but the activities in this case, although not precisely the same, are as great in scope as the activities in West Publishing.

The only distinction that I can see between the two is that instead of renting an office and paying for it in cash, they let someone use their books.

Justice Hugo L. Black: What do you mean by that?

Mr. Perry Voldness: In West Publishing Company as I understand the salesmen let lawyers use the books that were being sold in order -- in return for some space in the office.

Well, in our case we have an office that has been maintain under lease, cash is paid for it also maintained --

Justice Hugo L. Black: Where?

Mr. Perry Voldness: In Minneapolis.

Justice Hugo L. Black: The company has a --

Mr. Perry Voldness: Pardon?

Justice Hugo L. Black: The Company has an office.

Mr. Perry Voldness: The company has an office that's listed in the classified directory of the St. Paul telephone book and in the classified directory of the Minneapolis book in the alphabetical section of both books, it pays an extra cost for the listing in the same book, although the Minneapolis listing comes with the --

Justice Hugo L. Black: With reference to the brief you are going to give us, I would like to maybe bear particular in mind the statement of what the Northwestern was doing when you prepared it and I want to ask you now if it was doing -- the company here was doing these same things in Minnesota, where corporation that promote local trade and product, manufactured in another state, and sold in interstate commerce to wholesalers, maintained their local office with agents who solicited orders from local retailers and turned them over to local wholesalers who billed them and were paid by the retailer, the Court held that was taxable.

Mr. Perry Voldness: I think that's --

Justice Hugo L. Black: (Inaudible) think is identical case.

Mr. Perry Voldness: Our Court has pointed this out, in fact the Minnesota court points to the change.

Justice Hugo L. Black: That's the -- what you are going to prepare the brief on, that statement on.

Mr. Perry Voldness: The statement of facts.

Justice Felix Frankfurter: Give me reference to the record that's just what I want.

Rebuttal of Joseph A. Maun

Mr. Joseph A. Maun: I had no more --

Chief Justice Earl Warren: Mr. Maun.

Mr. Joseph A. Maun: -- Mr. Chief Justice except to comment on the Northwestern Consolidated Milling Company case, but if were going to file a memo on that, I assume that will take care of the facts of the situation there.

Justice William J. Brennan: (Inaudible)

Mr. Joseph A. Maun: The differences are that Northwestern Consolidated Milling Company case, the salesmen for the company went into Massachusetts.

They would go from -- to be a user of cement and say why you don't buy ours -- not cement but the milling and the flour, why don't you buy our flour say a grocery store.

The groceries say all right, so he had taken an order from the grocery for so many barrels or bags of flour or whatever they were in those days, and he takes that order back to a wholesaler within the state and the wholesaler would fill that order.

In this case the solicitors at no time ever took an order, every order they ever took and the trial court so found was subject to a rejection or acceptance back at the home office.

Surely if they encouraged a dealer to try to sell a contractor cement when a building was going to be built and the dealer would ask, well what price can I give this contractor and so they would send from Mason City, Iowa a quotation that they could use in billing them flour and giving the content -- to give the contractor, so that the contractor could bid on the particular building job or road job or whatever it was, but at no time, did they ever take an order from a dealer or from a user of cement, from one to the other and give it within the state itself, every order went back to Mason City, quotations were for the convenience of the customer, so that the customer in turn could quote to a user on perhaps a bid job, for instance a state highway job, because contractors must know the price at which they can purchase their raw materials before they put in a bid and those raw materials prices must be firm until that --

Justice William J. Brennan: (Inaudible)

Mr. Joseph A. Maun: That is right.

Justice William J. Brennan: There was never any (Inaudible)

Mr. Joseph A. Maun: That is right, in every instance, without exception.

Justice William J. Brennan: That's fundamentally the difference.

Mr. Joseph A. Maun: That is right, yeah.

Justice William O. Douglas: (Inaudible)

Mr. Joseph A. Maun: That is the quotation form, yes, and that had to go back to Mason City, Iowa for acceptance or rejection, no salesmen were ever authorized to sign these forms.

That is there.

Justice Hugo L. Black: You think that would be a crucial difference (Inaudible) that paper was signed.

Mr. Joseph A. Maun: I think it's the same difference we find in the McColgan cases, where the delivery took place, in New York, here the -- order take place in Iowa, both under Minnesota and Iowa statues.

Print this transcript Transcript: 

Argument of Ben F. Johnson

Chief Justice Earl Warren: Number 33, T.V Williams, State Revenue Commissioner, Petitioner versus Stockham Valves and Fittings Incorporated.

Mr. Johnson you may proceed?

Mr. Ben F. Johnson: May it please the Court.

I think it might help to start here with the nature of the Georgia tax.

The Georgia tax is a -- the Georgia Income Tax Act of 1931 as amended and the Georgia statute says that the taxes, the tax on net income, I'd like to read you the precise language of the statute if I may.

The first section is the tax on individuals.

A tax is hereby, now this is in the appendix of our brief page 57, a tax on individuals, a tax is hereby imposed upon every resident in this state.

The tax can levied and collected and paid annually with respect to the entire net income of the taxpayer's (Inaudible) at the time and upon having been non-resident with respect to his entire income, not here exempted, received by such taxpayer, from a proxy owned or from business cared on in this state can use its foreign rates.

Now then the next section of that statute, which is set forth over on page three, because it's more relevant to the question here than that, Section 92 3102 says every domestic corporation and every foreign corporation, shall pay annually an income tax, (Inaudible) to five and one-half percent --

Justice Felix Frankfurter: I'm sorry Mr. Attorney General, what page did you read?

Mr. Ben F. Johnson: I'm reading now, I've just read about individuals.

Justice Felix Frankfurter: Yes I read that --

Mr. Ben F. Johnson: Page 57 back, and now I'm back on page three --

Justice Felix Frankfurter: I beg your pardon, thank you.

Mr. Ben F. Johnson: -- dealing with the constitutional provision in the statute immediately involved, so that every domestic corporation and every foreign corporation shall pay annually an income tax equivalent to five and one-half percent of the net income from property owned or from business done in Georgia as defined in Section 92-3113.

Now I simply observe at this point, that we tax income of residents and non-residents, if it's received, derived from property owned or business done in Georgia, and we tax domestic corporations and we tax foreign corporations, on the income which is derived from property owned or business done in Georgia.

Justice Felix Frankfurter: Now whatever one may think about the Minnesota case that turns on the other statute as different in that Section 2 is just discussed.

Mr. Ben F. Johnson: Clear and right to point, yes.

Justice William O. Douglas: Well what is -- do you have a formula for apportioning?

Mr. Ben F. Johnson: Yes, and that's contained, I'm getting to that Your Honor.

Now then --

Justice Charles E. Whittaker: Well, may I ask you General, is the word is used always (Inaudible) and its stock, resident then in Georgia, how the same tax with respect to local business as to (Inaudible)

Mr. Ben F. Johnson: I think we've got to see this, and that is that, we may have a corporation that is in engaged in exclusively interstate commerce and yet nevertheless, some of its activities have taken place locally within Georgia, that is territorial within Georgia.

Justice Charles E. Whittaker: That's not --

Mr. Ben F. Johnson: Now that is -- that's not local business in the sense of your franchise tax, but that is local activity, which maybe receiving benefits and protections and opportunities from the laws of Georgia and from the Government of Georgia and the economy of Georgia, which developed.

Justice Charles E. Whittaker: But your own Supreme Court dealt it was not business (Inaudible), did it not?

Mr. Ben F. Johnson: No sir, I don't think so.

Justice Felix Frankfurter: Before you get to that question, if I may, Mr. Attorney General, since the phrase is from business done in Georgia, what the scope of that is with due regard to the Commerce Clause is a question of each particular case, is that right?

In other words, there is no such trade exclusivity in interstate commerce or so on or domestic.

There is a generalized trade, business done in Georgia and whether for taxing purposes or other Georgia legislative purposes, it is "Business done in Georgia", involved with instruction not only of your local law, but of the limitations of your local law through the Commerce Clause, am I right about that?

Mr. Ben F. Johnson: That's the way I see it.

In other words, to answer in part to your question, that is when our Court said that -- they said this is an excise tax, they say just that, they say it's in the nature of an excise tax.

But now I say that they were not there giving a ruling or judgment of law as a matter of statutory construction, but they were there making a rule constitutional law, and as such were merely acting as an inferior court to this Court because this is the court that gives us those judgments with regard to constitutional law.

Therefore, when they said, as in effect they said, that an income tax is a franchise tax, they were ruling not as a matter of statutory construction with regard to our legislature's intent, they were saying irrespective of legislative intent, per se, constitutionally per se, that this is a franchise tax, and that, when they said that they were operating just as an inferior federal court and we are now here to get the last authority ruling with regards to whether or not an income tax is per se a franchise tax.

Now that's with regard to the interstate commerce question.

Justice Felix Frankfurter: Now let's say that your Supreme Court, (Inaudible), your Supreme Court had said as the matter of construct, we do not think this is business done in Georgia, you couldn't be here?

Mr. Ben F. Johnson: I wouldn't be here.

Justice Felix Frankfurter: And if we by any -- if it should turn out that we sustain your court, on it's view of the cons -- of the federal -- of the Commerce Clause, you could go back to your courts and then they could say what they say under the local statute (Inaudible) less of any limitation of the US Constitution, is that right?

Mr. Ben F. Johnson: That's right.

Justice Felix Frankfurter: All right.

Mr. Ben F. Johnson: Now then --

Justice William O. Douglas: I still don't see how (Inaudible) on the facts.

Mr. Ben F. Johnson: Well I though maybe if we started with the nature and see that my statute is clear, they do have that little problem in that.

Now to return to the facts and these facts, we never admitted that they were engaged exclusively in interstate commerce, we just said that the plaintiff characterized his activities to engage and include, and the Georgia Supreme Court said so, and therefore we will argue it that way.

Justice Felix Frankfurter: But your court – did your court in first instance make a finding of facts that they were exclusive engaged in interstate commerce, in your case, in the trial court, was there a trial court here?

Mr. Ben F. Johnson: Yes sir, that --

Justice Felix Frankfurter: Did they make a finding that this (Inaudible) that the --- that the activities and questions were exclusively in interstate commerce?

Mr. Ben F. Johnson: Let me if I may, see just exactly what the trial judge did say there.

Justice William O. Douglas: The statute clearly makes that irrelevant?

Mr. Ben F. Johnson: That's right, in this regard and I think I would like to finish that about that statute and I'll get to those facts.

And I would like to say this -- this other there because it'll help us to sort of bring this thing along.

First the point I wanted to make is the Georgia statute taxes the income of domestic foreign corporations alike.

There is no question of discrimination about it in this case.

They make no claim of discrimination.

The next thing I'd like to say, and this is according to our Supreme Court, the Georgia statute purports to tax only the income derived from sources within the state, but it has no purpose to tax income from sources outside the state.

And in order to do this it sets up a three fact formula, which is based on inventories, payroll and gross receipts.

Now that's not all that might be used, that's the statutory formula and the Commissioner has authority to develop any other formula that more closely fits the particular facts of a particular case in order to bring about a fairer allocation, a fairer, a factor which more measure best than these passed upon the facts to fit the case.

Now Stockham makes no claim in this case that – that their formula which was used in this case, taxed as income which was derived from sources outside of Georgia, except with regard to what was done at the home office there.

Now, let me put that a little bit different.

We will see in a minute that this -- that these sale representatives in Georgia, traveling Georgia and in North Carolina and South Carolina and Florida, and so on.

Now they are not saying at all that we are tying to tax income, derived from income producing efforts in North Carolina or South Carolina or Florida.

They do of course say that we are trying to tax income which is derived in Alabama, because that's where the home office is, and that's where these contracts are accepted and the credit and so on, we will get back to that.

In 1950, our income tax statute was amended to add this.

Every such corporation, that's in with respect of foreign domestic corporations, that's right in behind that section, shall be deemed to be doing business within the state that engages within that state in any activities or transactions for the purpose of financial profit or gain, whether or not, such corporation qualifies to do business in this state, whether or not it maintains an office or place of doing business within a state, and whether or not such activity or transaction is connected with interstate or foreign commerce.

Now that amendment, part of that amendment, the Georgia court had held, that our statute did not intend, as a matter of statutory construction, did not intend to tax income derived from exclusively interstate commerce, but from sources or activities in Georgia.

So the purpose of this amendment is to exhaust the state's constitutional power to tax income from Georgia sources, including income from exclusively interstate and foreign commerce, which is carried on within the state.

Justice Charles E. Whittaker: (Inaudible)

Mr. Ben F. Johnson: Yes I think it was, I'm not too conversant with it.

Now then, let me go back to the facts in our case.

This was a Delaware corporation.

Its main office was in Birmingham.

Its factory, it's only manufacturing plant was in Birmingham.

It had an established scheme of distribution and that's scheme was this, in four cities, other than Birmingham, it had warehouses and another seven -- these of course were strategically located all over the United States, in another seven cities strategically located over the United States, they had what are called sales, service offices.

Chief Justice Earl Warren: Offices?

Mr. Ben F. Johnson: Offices, yes offices.

Now then, I want to put this in, all orders which were received or accepted at the home office in Birmingham, and all shipments were remade FOB warehouse.

Now then, I want to point out the differences in the Northwestern case, in so far as the facts are concerned, and then I'll -- because that's fresh in mind and I -- There are three main differences here, between our case, start from the statute, on the facts there are three main differences.

First is that Northwestern had two salesmen and a secretary which was operating out of its Minneapolis -- which was operating in, I should say and in and out I guess out of its Minneapolis office.

And there were one to three owners that were operating in the state of Minnesota but not operating out of this office, they were operating of their home that's in Northwestern.

Our case we had -- they had only one full time sales service representative that was stationed so to speak in this Atlanta office and then they had a full time secretary there and that's -- a difference in personnel.

They had more personnel there than we did.

Second is that their -- these operators, salesmen whatever you call them, were confined to Minnesota whereas the sales service representative in Georgia also traveled in some in the surrounding states and the record shows that that in this he spent about two-third of his time traveling to these other states and about one-third of his time in the Atlanta office.

The third difference is the volume of business, the volume of business which Northwestern got out of Minnesota went up to 48% of its total sales, but in our case it was only 1% to 2%, but in dollar terms that was a $150,000 to $300,000 worth of business.

Now then as regards to due process, because I have got to show in order to win this case, I have got to show that these activities, I won't call them local activities, these activities that took place in Georgia, even though they were wholly pursuant to interstate commerce, I have go to show that they were substantially enough to have received some of the opportunities and the benefits and the protections of the State of Georgia.

Now then let me -- I'll say that that these differences that I have given you are really not material differences, because we think it is the quality of what Stockham was doing, the quality of Stockham's establishment in Georgia and not the measurable aspects of it.

I can illustrate that pretty simple, from the Northwestern's case if you notice that one year they only have $10 tax and for the 10 -- this is Northwestern, $10 tax and for the preceding 10 years that tax had run up to $8000 and for five years after that it again went up to $7000 or $8000.

I don't know why that happened, but it could have happened because they didn't have much sales, but the record shows that its establishment was the same all during that time.

Now you could take another illustration as I pointed out, Stockham we have three years involved here.

The first year they had about a $150,000 of sales, the third year they had $300,000 which was about double.

If it's a quantitative thing at what point, and we are talking about jurisdiction to tax, at what point does jurisdiction of tax if it's a quantitative thing.

So I say it's a qualitative thing.

Now I like to say a bit about what we are not talking about.

$300,000 of sales can be gotten out of Georgia on a number of different ways.

They could have gotten $300,000 of sales out of Georgia by mail order business and we are not talking about mail order business.

They could have had an occasional traveling salesman, go through there, and he may have been a good salesman and gotten $300,000 worth of business and we are not talking about that.

As a matter of fact they may have had a proof of these traveling salesmen operating out of Birmingham and getting in there fairly regularly, but we are not talking about that.

They may have even had an office in Atlanta, and this crew of traveling salesman may have used that office as a sort of mail drop, but we are not talking about that.

So the question is what is the quality of Stockham's establishment in Atlanta?

Now when we speak to this, I think we are looking at the nature of what went on there.

It's substance that causal relationship between the activities that went on there and in these seven other places and the relationship of all of that is total activities.

And I might say here that we are not talking about how Stockham might have acted, I mean how close it might have acted.

I mean, instead of being expansive, it could have acted -- stayed at home.

Well we talk about how they did that?

Now it is a fact in the record the Stockham had an office in Atlanta and this office was publicized as the office, as the Atlanta office of Stockham.

They were listed in the telephone book.

They were listed in the classified section under the (Inaudible) in city.

They were -- they sent out their letterheads and said that they had seven of these offices throughout the country and Atlanta was one of them and it was in all their literature.

Now it was there as a part of a designed system of distribution, it was there permanently.

It was there day to date.

It was there year in year out since 1950.

It was there, it was not there temporarily, it was not there transiently.

It was there to compete with its competitors as the record says many of whom had inventory stocked of these very same goods in Atlanta.

Justice Charles E. Whittaker: (Inaudible) Section 9 (2) (c) 113?

Mr. Ben F. Johnson: I think the sum total, the sum quality of it, I wouldn't say that one factor -- I would say this, that if they did have inventory there then that is an establishment of considerable quality because you get over when you peddle it, cases there almost -- you see you are better.

Justice Felix Frankfurter: Did they have an inventory?

Mr. Ben F. Johnson: No sir.

Justice Felix Frankfurter: They did not.

Mr. Ben F. Johnson: But their competitors did.

Justice Felix Frankfurter: Yeah did they have a storeroom of samples.

Mr. Ben F. Johnson: Not but they had a -- they had all the catalogues, the literature.

They had a secretary there who was in teletype communication with Birmingham.

Justice Charles E. Whittaker: (Inaudible), would it not?

Mr. Ben F. Johnson: But it's enlarged, -- that concept of doing business if Your Honor please, and I think if your trade it all the way the back, it always has been in connection in due process and not in connection with interstate commerce.

What I am saying is that, it was there to compete with competitors who were on the spot with their goods.

It was there purposefully to get business.

It was there with sufficient personnel to get the business and they wanted to get all the business they could get and they want to get in anyway they could get it.

Now let's see it another way; Stockham had no hold on its market through patterns on its products.

It had no hold on its market through national advertising.

It had no hold on these local wholesalers and jobbers by reason of exclusive dealership arrangement.

Its product was a standard and common design, manufactured and sold by a number of competitors.

Some of them as I said, had warehouse stocked right there in Atlanta.

Its customers were independent wholesalers, independent wholesalers and jobbers who were free to buy or not to buy, to stock these goods or not to stock them, to push or not to push them.

They were free to deal in competitive products and the record shows that their customers did carry one or more competing lines of the identical partners.

The record also shows that Stockham did not seek to compete by price cut.

Now that's what I call a competitive and fluid, if you get what I mean, it was a fluid condition, a fluid market condition.

They could get what business because they owned the spot at the right time to get it or it going somewhere else, that's what I mean by fluid, sort of quick (Inaudible).

You couldn't fetch a thing on it unless you were right there, at the right time with the right kind of search because if you weren't, it was going next door.

Unknown Speaker: (Inaudible)

Mr. Ben F. Johnson: No, I wouldn't say that, no.

I am not trying to draw in an analogy here.

As a matter of fact as I said that on the facts other than those three things and our name they were pretty much like.

Now then what was Stockham's response to this competitive condition?

The stipulation tells, it said while not disregarding price as a factor Stockham sought in this competition to emphasize on the quality of its goods.

Now this local establishment didn't have a thing in the world to do with the quality of its goods, but it did have a function with regard to emphasizing first hand, face-to-face to these customers of theirs just what do you mean by quality pipe fittings.

Second, and the stipulation goes on, Stockham saw in this competition to emphasize its good service to local wholesalers and jobbers.

Now this good service is spelled further on in the stipulation.

These -- and in some detail, I hesitate to repeat, but it is fell out in considerable detail what they were there to do with regard to their customers and with regard to prospective customers.

They were not at all instruments of emphasizing their good service and selling their good service but they were instruments of furnishing the service.

They owned the stock.

They were in direct communication, teletype communication with Birmingham.

They could get those goods into Atlanta overnight by teletype and as almost as quickly as you could get them delivered from the competitor down the street with a stock of goods in Atlanta, they could get these goods out of Birmingham overnight, promise to deliver in the morning, because they had a man on the job right down the spot, they would expedite this thing, get it through and give these customers that good service that customers appreciate in tight place.

Justice William O. Douglas: Well, I still don't get (Inaudible)

Mr. Ben F. Johnson: Yes sir I'm -- it's all interstate commerce, it's all interstate commerce, I am trying to show you that they had a -- in quantity they had a substantial establishment there, quantity to note, but in the production of its income it was all in force.

Justice Charles E. Whittaker: (Inaudible)

Mr. Ben F. Johnson: Sir?

Justice Charles E. Whittaker: It is – the statute does –-

Mr. Ben F. Johnson: That's what I am saying qualitative.

Justice Charles E. Whittaker: (Inaudible)

Mr. Ben F. Johnson: That's right.

Now then the stipulation goes on.

It says Stockham sought in this competition to emphasize a third kind, the development of a local demand for Stockham products through sales work among local architects, engineers, contractors, and others consulted and in a position to advise concerning the specifying the use of 5000 biddings including representatives of governmental and industrial use.

Now this business of development a local demand, these local representatives were the chief actors.

They could talk the technical language of architect and engineers and this is in the record and they could advise with them and pass on technical ideas.

After all it's the architect who writes up the specification and can specify Stockham products and therefore can control the products, which is going in to these businesses.

Now it was also important that these wholesalers and jobbers know that this man was doing this local development, because every local wholesaler likes to know that his manufacturer is out selling his goods for him and preparing the market in preparing demand.

So that was the third function which these local representatives were doing.

They were going out there and building up a local demand than going to the local wholesaler and say look what we do employ, not taking orders that's what was involved in the Northwest solidly, they weren't taking any orders.

If they got any orders, they would simply relay them into Birmingham.

If they got a local architect who wanted the product, he would reaffirm to a local wholesaler or jobber.

Justice Felix Frankfurter: Suppose and IBM – suppose (Inaudible) IBM go around your state or any other state and demonstrate great value of these new electrical typewriters, make no (Inaudible) but just create a proper atmosphere and (Inaudible) have that wonderful machine.

Mr. Ben F. Johnson: I wouldn't say that any one of these factors all by itself established a quality --

Justice Felix Frankfurter: That's what I said -- you would --

Mr. Ben F. Johnson: No sir.

Justice Felix Frankfurter: No it's the totality of it.

Now just I can get one thing more (Inaudible), the stipulation goes on to say this, that Stockham relied on, that Stockham relied on the personnel efforts of its sales service representatives who were stationed in these established sales -- they relied on them.

Now that if Your Honor pleases is a good summation of the facts and I suppose that we would conclude at 4:30 and I just leave it, it'd be better than starting with something else.

Chief Justice Earl Warren: Yes, it's 4:30, now we'll adjourn.

Mr. Ben F. Johnson: Thank you.

Print this transcript Transcript: 

Argument of Ben F. Johnson

Chief Justice Earl Warren: Number 33, T.V Williams, State Revenue Commissioner, Petitioner versus Stockham Valves and Fittings Incorporated.

Mr. Johnson you may proceed?

Mr. Ben F. Johnson: Mr. Chief Justice and members of the Court.

With the permission of the Court, in the 15 minutes that I have left, I would like to address myself to the question on the relationship between a general net income tax and exclusively interstate commerce.

And first I'd like to say this, by way of further description of our Georgia income tax and I think it can be best said very succinctly by saying that it's an income tax just like the federal income tax.

The second thing that I think needs to be said at this point is that with respect to attack on interstate commerce, that this Court has many times said, that the fact that an interstate operator has to pay the tax, does not determine the legal incidence of the tax.

Our concern then is to see if somehow or another, a general income tax, or general net income tax like the Georgia tax, is a tax on interstate operations as distinguished from an interstate operator.

Now I suggest that there are two propositions of law that we've got to take into consideration.

The first is a formalistic judgment of this Court that a tax which is a matter of statutory construction is determined to be a tax on the privilege of engaging in business as a part to the exclusively interstate commerce is invalid, no matter how its nature.

Justice Felix Frankfurter: When you say formalistic, what does that mean, that it has no -- no rational justification, just that a kind of an empty formula?

Mr. Ben F. Johnson: No sir, I don't mean that.

I mean that's it's -- I don't mean that.

I mean that we look to see as a matter of statutory construction and if the legislature says it's a privilege tax then this court goes no further, when it's a part to interstate -- to exclusively interstate and commerce, it doesn't make any difference how fairly that tax is measured.

Justice Felix Frankfurter: Well it can't be fairly, if it's a tax which the legislature itself says we want to tax the right to do business in interstate commerce.

That isn't a formula, except in the sense that it's a formula in response to a division of authority, between the nation and the state.

Is that right, would you agree to that?

Mr. Ben F. Johnson: Yes sir, I am -- all I want to say is --

Justice Felix Frankfurter: All I intend to suggest is formalistic has innuendo of emptiness.

Mr. Ben F. Johnson: No sir.

I don't want to use that word nominally, because that to me is emptiness in another direction if you get what I mean.

What I'm trying to say is, what was held in the Spector case.

Now then, I say that in this case, we are not concerned with such a tax as that, because our statute called it an income tax.

You can read the provisions of it and it's an income tax, just like the federal income tax.

Our Supreme Court did not say that it was not an income tax and I don't really believe that the respondents contend that it is not an income tax.

Justice Felix Frankfurter: I don't mean to take your time, but these are very difficult questions for anywhere.

Would you agree that one because it's denominated, a tax on interstate commerce may not be found so necessarily, as well as the converse because it's labeled an income tax, it may not be offensive to the commerce law that's construed today.

Mr. Ben F. Johnson: I have no objection to those conclusions.

Justice Felix Frankfurter: All right.

Mr. Ben F. Johnson: The second proposition that I'm trying to bring in here is this, to get to the substance of the matter, and this is really, you are ahead of me, it is that -- a tax upon business activity, when that business activity is exclusively interstate commerce, is a tax upon interstate commerce or activity, no matter what the name of the tax is.

I said that first proposition we are not convinced this is the proposition that we are concerned with.

Now the clearest manifestation of this proposition is found in the tax on gross receipts.

A tax own gross receipts, no matter what the name of the tax is, is a tax on the business activity which produced those gross receipts, and when that activity is exclusively interstate commerce, it's a tax on interstate activity.

Why, because gross receipt is business activity reduced to its money equivalent.

Activity is one side of the coin and gross receipts is the other side of the corner.

In other words gross receipt is a direct reflection of activity.

Now the next manifestation of this proposition is found in the tax on gross income.

The Indiana gross income tax that was involved in the Adams Manufacturing Company case (Inaudible) and in these cases the Court concluded the gross income was like gross receipts, and that it was pretty much a direct reflection of the activity which produced the gross income.

So the question in the present case it seems to me is whether or not the law with respect to gross receipts taxes and gross income taxes is going to develop and cover the net income tax.

Justice Hugo L. Black: It is a fair appraisal of what you are arguing, I was just wondering.

To say that (Inaudible) that a state has a right to levy an income tax on receipts by a person out of corporation even though those money receipts came exclusively from interstate commerce.

Mr. Ben F. Johnson: Not on gross receipts.

Justice Hugo L. Black: I'm talking about -- I said net, if I didn't say net I meant net.

Mr. Ben F. Johnson: Well sir it depends, I don't know what you mean net receipts.

Justice Hugo L. Black: Net income.

Mr. Ben F. Johnson: All right, net income, yes.

Justice Hugo L. Black: Net income from receipts derived exclusively from interstate commerce.

Mr. Ben F. Johnson: Yes sir.

Justice Hugo L. Black: That's your argument?

Mr. Ben F. Johnson: Yes sir.

Now I would like to answer this question that I posed by saying that all this development need move no further, the gross receipts, the gross income, that it need not move on to net income.

Justice Felix Frankfurter: Would that be true of mail order business, Seers Roebuck coming into Georgia, their catalogues and then people sending back to Chicago orders under that catalog?

Mr. Ben F. Johnson: I think that you are getting me into the due process question again [Attempt to Laughter] and I conceive that there is a place in here where those two things come together and I'll try to get to that if I may be permitted to work this out a little bit further.

Justice Hugo L. Black: Maybe I should amend the statement I made by stating your argument, is your argument that the net income due to receipts received exclusively from interstate commerce is not barred by the Constitution merely because it is derived exclusively from instate.

Mr. Ben F. Johnson: That is my proposition, yes.

We say --

Justice Felix Frankfurter: But you can't define -- you are so helpful if I may so Mr. Johnson, the temptation to ask you a question is very considerable.

Mr. Ben F. Johnson: That's my business.

Justice Felix Frankfurter: But the fact that it has -- that there is due process is satisfied in the McGee case, the purposes of saying there is somebody there, there is such a connection, that you can subpoena or file a complaint or bring a suit, isn't that the same kind of due process, does it not, not to be barred by the commerce clause for purposes of taxation, those are very different things.

Mr. Ben F. Johnson: I do not have to disagree with you in order to make out my case I don't believe.

Now my three reasons for my position, the first, and I simply say this to pass on, first that we say that there is precedent.

We say that this is precedent in US Glue Company case, and in the West Publishing Company case.

Now of course there is disagreement about that, but I simply say that we say that those cases are precedents.

Now then I go on to say as my second reason that this Court as a proposition of law basic to both state and federal income taxation as held in other cases involving Constitutionally protected activities that a tax on net income is not a tax on the activity which is a source of that income.

Exporting for example with regard to the federal tax is a protected activity.

Now this Court held in Peck & Co. versus Lowe, 1918, just immediately preceding US Glue, that a tax on the net income, this was the federal net income tax, that the federal net income tax applied to the income derived from exporting was not a tax on exports, although, and this is important, it had previously held in the case of Brown versus Maryland, that a business activity tax or a business privilege tax on the business of exporting was a tax on exports.

Justice Felix Frankfurter: And the reason was the difference between the two is remoteness?

Mr. Ben F. Johnson: That's correct sir.

That is right sir.

Now then my third proposition, and this I think gets down to what is -- is to say this that the decisions of these -- this Court in these cases is soundly based on a judicial recognition that the incidence or the nature of a net income tax is something considerably removed from a mere representation of the activity which produced that income.

Now we can examine this proposition in two ways.

First, we can examine it analytically, and second we can examine it from on a social outlook.

Analytically a net income tax maybe a tax on residency, but when the statute applies the tax to non-residents, and foreign corporation as to income earned within the state or for example when the federal income tax taxes the income of a non-resident alien, which is derived from the sources in the United States, we have to conclude that this is at least something more than a tax on residents.

Analytically a net income tax, maybe a tax on profit, but when the statute applies the tax to business activity, it's obvious that it is something more than a tax on property.

So it comes to say third analytically a net income tax maybe a tax on business activity, and that of course is the respondent's contention in this case.

So that the – the question becomes this, analytically as a general net income tax like the Georgia tax and the federal tax for that matter, is it a direct representation of business activity and nothing more, the other side of the coin and if it is the respondent is right, and we're wrong, but if the nature of taxable income includes income which does not represent business activity, and if in the various deductions, there are reducing factors which stand in no relation whatever to economic activity, then obviously the tax is on something other than business activity.

Now I can't describe in a word or a paragraph or a label.

Pardon me please now.

Chief Justice Earl Warren: You may finish your sentence or whatever it is.

Mr. Ben F. Johnson: I can't describe it, in a word or a paragraph, Professor McGill wrote a whole book on it and that of course is our difficulty.

We have a growing concept, a developing concept here that is we just don't have the capacity to define it.

Justice Felix Frankfurter: The Difficulty is the problem Mr. Johnson.

Chief Justice Earl Warren: Thank you very much Mr. Johnson.

Mr. Izard.

Argument of John Izard, Jr.

Mr. John Izard, Jr.: Mr. Chief Justice may it please the Court.

The differences between my brother from Georgia and myself are really very narrow.

I think he has stated the state's position candidly.

Yesterday he stated the facts in a great deal of detail and generally speaking with fairness.

I will only take a minute to summarize the facts as we say and I point out the significant factors in the case.

Stockham is a Delaware corporation with its principle place of business in Alabama.

It maintains no inventories in Georgia.

It has no bank accounts there.

All orders which are received from Georgia customers are sent to the home office in Alabama for acceptance or rejection at that point.

The record shows that orders are rejected for credit or for other reasons.

All goods which are shipped to Georgia customers are shipped from warehouses or factories outside the state and our shipped FOB the factory or warehouse, so that under Georgia law title clearly passes outside the State of Georgia.

The record also shows that most orders I believe is what appears in the record are received by direct mail at the company's home office.

The salesman who does spend -- have his office in Atlanta and spend one-third of his time in the state of Georgia carries on the ordinary and usual duties of a salesman.

He takes orders from customers that are already on the company's books, he seeks out new customers, he does everything that a good salesman can do to promote the company's business and to increase the interstate sale of its products.

Under the Georgia law, Stockham is not required to do business -- to qualify to do business in Georgia.

We had it well established by decisions of the Supreme Court of Georgia that a company is not required to qualify when all of its activities are a part of interstate commerce.

That then is the simple picture of Stockham's connection with Georgia.

It has one sales representative who travels five states in that area, spending one-third of his time in Georgia and for his convenience there is a sales office in Atlanta with one secretary employed there.

This is nothing but the old drummer case once again.

It's exactly drumming.

It's nothing but drumming.

We've got a man in the modern day time trying to sell the products to a foreign corporation in interstate commerce.

The positioned --

Justice William O. Douglas: What is the penalty for non payment of this tax?

Mr. John Izard, Jr.: There is no forfeiture or -- of course he is not qualified in the first place so they couldn't take that privilege, the states would be -- have usual remedies for collecting a tax, to bring a suit or attachment, garnishment or --

Justice William O. Douglas: (Inaudible) suggest that the respondent should be qualified.

Mr. John Izard, Jr.: Should have qualified no sir, that's I think well settled under our law that it is not required to do so.

Justice William O. Douglas: Is there any aspect of double taxation here?

Mr. John Izard, Jr.: It is our view Your Honor that if this type of tax is permitted, it is relatively new development, the type of tax which Georgia is seeking to impose here and I think the record shows that Georgia is only state that has tried to impose a tax on Stockham based on this type of activity.

So under those circumstances Stockham itself is -- does not take the position that it's being taxed on more than 100% of its inocme, but we strenuously urge that if this type of tax is permitted, it will immediately result in more than 100% of the company's income being taxed.

Justice William O. Douglas: Would it get a credit to -- what its home state, Alabama?

Mr. John Izard, Jr.: In Alabama, I think under the -- it's actually a Delaware corporation, it is not so with its principle plant, the manufacturing company in Alabama.

It's our position that the domicile of the corporation alone will justify a state in taxing all of its net income under the decisions of this Court and then you've got the further question of how much a commercial domicile would presumably be Alabama in this case, what percentage they get taxed.

And I don't think it is seriously contented those states together could not tax at least a 100% of the company's income if not 200% if they exhausted their power under the Constitution.

Justice Felix Frankfurter: You said a minute --

Justice Hugo L. Black: I just thought that Georgia is only the state to impose an income tax.

Mr. John Izard, Jr.: Does either state -- Alabama does, Delaware does not.

Justice Hugo L. Black: Alabama does on the stock.

Mr. John Izard, Jr.: Yes sir, and the record shows that they pay Alabama income tax.

Justice Felix Frankfurter: You said a minute ago that it's well settled under your decision that they would not require this kind of corporation -- this corporation did not require to get a certificate from the Commission to do business, under what circumstances --

Mr. John Izard, Jr.: That's --

Justice Felix Frankfurter: -- did that come up in your --

Mr. John Izard, Jr.: That was the manufacturing company case in the Supreme Court of Georgia, in Georgia, 155 Georgia, in which a foreign company had a sales office in Atlanta very similar to this company, the facts were entirely analogous and the Supreme Court of Georgia held that that was all interstate commerce, and the state had no power either to permit or deny the company from doing business.

Justice Felix Frankfurter: How did it come up on a tax question or --?

Mr. John Izard, Jr.: Yes, it was under the franchise tax, the Georgia franchise tax.

Justice Felix Frankfurter: And the courts of that opinion, they just said they don't have to get a certificate to do business?

Mr. John Izard, Jr.: Yeah that's what qualifying does in Georgia, you have to register for the franchise tax is what they told in one form and they say it again.

Justice Felix Frankfurter: And the court has held that they did not require get a certificate of permission to do business?

Mr. John Izard, Jr.: Yes sir –-

Justice Felix Frankfurter: All right.

Mr. John Izard, Jr.: -- that's correct.

The history of the Georgia income tax I might just mention briefly in response to a question which Mr. Justice Whitaker asked yesterday, “Our statute until 1951 imposed the income tax on domestic and foreign corporations doing business in Georgia,” that's all that statute said.

And under that statute and again under facts quite similar to ours in the Stockham case, in Redwine versus Dan River Mills, the Supreme Court of Georgia held that the maintenance of a sales office and the operation of salesmen interstate was not doing business within the meaning of that statute.

And almost simultaneously in fact a few days before that decision the legislature amended our statute to put in the current definition of doing business, which I'd like to read once more so the Court can see the grasp and what Georgia is trying to tax under these circumstances.

It defines doing business as follows.

It says “every such corporation,” referring to domestic and foreign corporations, “shall be deemed to be doing business within the state if it engages within the state in any activities or transactions for the purpose of financial profit or gain whether or not such corporation qualifies to do business in the state, and whether or not it maintains an office or place of doing business within the state, and whether or not any such activity or transaction is connected with interstate or foreign commerce.”

In short, it taxes every corporation that engages in any activity for profit whether or not it's interstate or foreign commerce.

Justice Felix Frankfurter: But there's no fraction if this Court were to lift from your court, the Supreme Court of Georgia, I mean (Inaudible) of the law that commerce law does not bar this kind of taxation but under the statute as it now stands on your books, your Supreme Court would find that this statute would be designated within that statute.

Mr. John Izard, Jr.: I think it's entirely so Your Honor, I would have to also look the due process requirement too, but if you looked at both I quite agree with that.

Turning back now to the facts of this case, the Supreme Court of Georgia ruled unequivocally that all of the activities of taxpayer were intricate part of interstate commerce, the facts are down there, stipulated in the record and there was no trail in this, tried on brief stipulation of facts.

This then I think puts the problem squarely and I think Georgia has put the problem squarely.

This is the basic question of whether or not interstate commerce can be forced to pay a net income tax when admittedly all activities are a part of that commerce.

It is so important in this type of case because this again as I say is the Drummer situation and historically and basically in this country manufacturing companies must send their salesmen abroad in order to sell their goods.

That's the usual pattern of business.

It is the only effective means of distributing goods in this country.

Customarily and not by any effort to avoid taxes or any such reasons out of business keeps its manufacturing plants and its warehouses and its offices that authoritatively carry on the business of the company are localized in one, two or three states.

That's no effort to avoid taxes.

It's just a way businesses ordinarily have carried on.

We have a, there is an amicus brief filed here by the, the National Manufacturers Association showing a survey that that's the typical pattern.

We filed a supplemental brief that has some economic studies in it, showing that the ordinary medium, or a small size company has its -- most of them have their plants located in one state and don't have any other contact with another state.

And the great, great majority of them would only have plants, warehouses and offices which up to now have been felt to bring general tax obligations on a company in one, two or three states.

Now those same companies in order to sell their products in all likelihood have salesmen in almost all 48 states.

So nowadays when companies stand to make specialized products, they are very soon filled the demand in their immediate state or their immediate area.

In order to get compete they necessarily travel in all states and if this sort of activity is going to -- subjected to taxation in these states, it means a very marked change and a very tremendous effect on American business.

Chief Justice Earl Warren: Would it make any difference in your case if your company did maintain a warehouse in Georgia?

Mr. John Izard, Jr.: Yes sir we would, I would really concede that it was subject to the Georgian income tax if we maintained the warehouse there.

Justice Felix Frankfurter: And you also make it that at the beginning there are no -- your company has no bank account.

Mr. John Izard, Jr.: No bank account, I don't think to see -- contents that we engage in any local activities and say our court held that we did not.

Chief Justice Earl Warren: I understood counsel to say that you have the warehouses in several states and distributing points in several others.

Mr. John Izard, Jr.: I believe that's correct.

So we have I think four warehouses, one is located in Alabama, of course they have the product factory and they had one in California and one is Pennsylvania I believe.

Chief Justice Earl Warren: Now may I ask this?

If this same tax was levied in one of those states where you have a warehouse, would you say that it was a valid tax?

Mr. John Izard, Jr.: Not only say so, but have, the record shows that we have paid it.

For example in the state of California we have paid the California income tax because we have a warehouse there and have never contested it and I think we have no ground to contest it.

Chief Justice Earl Warren: Are there any other, any other variables between that situation and California?

Mr. John Izard, Jr.: Now we do have a, in all of the -- just the states where we have nothing but the traveling salesmen for example the man that travels out of the Atlanta office, travels regularly in Florida, North Carolina, South Carolina, part of Kentucky or Tennessee I believe.

So in that state the companies only contact would be through the salesmen who travels regularly there as part of his territory.

Chief Justice Earl Warren: But just the fact alone that and they are added to the facts of this case it was a warehouse in Georgia you would (Inaudible)

Mr. John Izard, Jr.: Yes sir.

I'd say if we engaged in anything that could be construed to be intrastate activity that you could support a tax at this time.

Justice Felix Frankfurter: What if you had a warehouse -- visit to the warehouse.

Mr. John Izard, Jr.: Well, you got your goods and products and that sort of thing there.

Justice Tom C. Clark: (Inaudible)

Mr. John Izard, Jr.: With regard to percentage, I don't know the answer to that and I think you could figure it out from the record.

All apportionment figures are in there but the company does business in the 48 states and I think pretty much on nationwide basis.

It's old well established company and has been selling these valves for years.

Justice Tom C. Clark: (Inaudible)

Mr. John Izard, Jr.: Yes sir.

Yes it ran high in California.

The three years in question we paid in California a 7000 in one year, 8000 and 8000, the amounts that we paid.

We also paid to Pennsylvania where we had a warehouse 3000, 3000 and 4000.

Chief Justice Earl Warren: Where are those figures?

Mr. John Izard, Jr.: They appear in the record at Page 11 Your Honor, Page 11, and actually Page 12 I was reading from.

Mr. Johnson pointed the question of squarely.

He said that Georgia is unequivocally taken the position that they can collect a net income tax from a company, engaged solely in interstate commerce.

The case which of course everybody refers to is most nearly bearing on the thing is the Spector Motor case decided a number of years ago and the matter was raised as to the exact significance of that case.

There are of course striking similarities between the two from a Constitutional point of view.

In Connecticut, the court found unequivocally that Spector was engaged in no local activities and that all of its activities were interstate commerce.

The Court had sent the statute back to be construed by the Court of Connecticut and they put long label on it that it was a exercise on the franchise for the privilege of engaging the business in Connecticut, I believe was the language they use.

But except for that label whatever all of those words strung together mean and I don't know without an attempt to find that many of them in one clause, except for that the facts were the same.

It was measured the same.

As Mr. Justice Douglas asked there were no sanctions to impose for Connecticut.

In fact it was collected just like any other tax and except for that name, which if it makes the difference is the only difference that can be between the cases.

It seems to me that they are identical.

The Court pointed out, I thought were plainly and as a matter of fact persuasively it says the incidence of the tax in Spector can be on no local business because there was no local business and we are in exactly the same situation here.

We say that Stockham does no local business in Georgia.

It's being required to pay the Georgia income tax solely because of the interstate commerce, which it does.

And to say that that tax is not on the commerce, it just goes into an exercising -- dialectics and semantics as we see it.

I should also point out that in the Spector case the Court went to some lengths to disavow the latest victim along the line that the Georgia people have relied on that, many statements in the cases to the effect of the tax on interstate -- net income tax on interstate commerce is valid.

That's been repeated over and over with no particular significance to the cases at hand ever since the US Glue company case.

But it is clearly dicta and everyone of its time has been used in every case where it is mentioned the court has already found local activities which would support the tax.

And the latest statement of that or repetition of that dictum was in Memphis Gas Company against Beeler, and in this Spector case in a footnote the Court pointed out carefully that was a dictum and it was unnecessary to the decision of the Beeler case.

Incidentally the tax in the Memphis Gas versus Beeler was an excise on income and I think that's nothing but an income tax.

Excise, to my way of thinking, includes all of these taxes which are not property taxes and therefore it seems to me that Spector certainly indicated the disapproval of the Court for this type of thing.

Except for that case we don't take a position if there is any controlling authority here on this point, and we think that it beyond a point it certainly has never been absolutely settled.

We would concede that.

There is nothing that demands a decision.

This Court must look into thing practically.

Justice Holmes pointed that out, the decisions on these questions are not based on highly theoretical concepts but are based on the practical application of thing.

And in order to -- we can say very easily that a net income tax is indirect or up in there but these taxes all are direct.

They got to be paid and paying them is really the least of the problem.

I mentioned a moment ago that the domicile and the commercial domicile of the corporation can surely tax up to a 100% of the corporation's income within Constitutional limitations.

These taxes then are going to be collected on account of drumming activities, may well start into the second 100% of the corporation's income.

Justice Tom C. Clark: (Inaudible)

Mr. John Izard, Jr.: In Georgia or in Alabama, I don't know sir, I don't think there is any Constitutional requirement that that be done.

For example we have amended the Georgia income tax so that you can no longer deduct federal income tax, the recent change is that.

Justice Tom C. Clark: (Inaudible)

Mr. John Izard, Jr.: Yes sir.

Justice Tom C. Clark: (Inaudible)

Mr. John Izard, Jr.: I don't --

Justice Hugo L. Black: I see you pay your taxes in the District of Columbia (Inaudible)

Mr. John Izard, Jr.: Yes sir.

Justice Hugo L. Black: What is that tax?

Mr. John Izard, Jr.: I am not thoroughly familiar with that.

I think it – the record indicates that it is a franchise tax measured by net income.

Justice Tom C. Clark: So is there a warehouse --

Mr. John Izard, Jr.: No sir, there is not a warehouse there, I believe the record indicates that there is a sales office here.

Justice Hugo L. Black: Like that in Georgia?

Mr. John Izard, Jr.: Yes sir, that's what it indicates I am not familiar with --

Justice Felix Frankfurter: (Inaudible)

Mr. John Izard, Jr.: It says on different wording, it seems to me that District of Columbia --

Justice Felix Frankfurter: District of Columbia doesn't present its problem, I mean District of Columbia can be taxed –

Mr. John Izard, Jr.: That's what I was going to say, it is that --

Justice Felix Frankfurter: (Inaudible) federal government.

Mr. John Izard, Jr.: I was going to say it's still not there including from the state.

Justice Tom C. Clark: (Inaudible)

Mr. John Izard, Jr.: As this particular company, no it were not, but of course I don't think this Court can rely on the legislative brief that the states may grant commerce under these circumstances.

I certainly don't think there is any Constitutional requirement that such a deduction to be permitted.

Chief Justice Earl Warren: What income do you pay your tax in Alabama?

Mr. John Izard, Jr.: In Alabama, I think in Alabama --

Chief Justice Earl Warren: I mean a fair amount of business.

Mr. John Izard, Jr.: I think Alabama has an apportionment formula along the lines of the Georgia one.

That really leads me Mr. Chief Justice into what I was going to speak about next is a notion of how these income taxes are collected and what we are talking about here when we say income tax can be collected on account of the activities of the solicitor who may pass through the state with some regularity.

In a unitary business there's no way to say that this man earned so many dollars, or this particular portion of the company's profit is attributable to his efforts within the state.

The only way that it has been found so far to deal with this problem is so through these concepts of apportionment formula.

Those things have been in use ever since the income tax and perhaps before.

All of the old Massachusetts cases, Alpha Portland, you remember the case (Inaudible) had apportionment formula.

Massachusetts was one of the first to get into this and growing out of that the states have developed these various and different factors.

Take the Georgia one for example and how the tax on Stockham has figured in this case, they take three predictions.

They first of all take the value of the average, monthly value of company's inventory in Georgia divide it by the average monthly value of inventory everywhere, that gives them one price.

They then take its payrolls in Georgia for the year and divide that by the total payroll everywhere.

And then they take the gross receipts from Georgia customers and divide that by the company's total gross receipts.

Those three fractions are then averaged, in this particular case the inventory fraction was zero because they maintain no inventories at all in Georgia.

The payroll fraction was de minimis.

It was almost non existent since all we had was a one third of the salesmen down there one secretary as opposed to the total payrolls of the clients selling everywhere.

And then finally they took the gross receipts fraction which over the years hovered in the neighborhood of 2% just about an average basis out of the 48 states about 2% of its sales went in Georgia.

And averaging those three together they got something a little less that 1%, and they said 1% of your income was earned in Georgia and you have to pay it there.

Now that's the system that Georgia uses.

The other states, those are incidentally are three more common formulas, but the variations and differences between all of the other states are tremendous.

The -- some of them use three of those, some of them used two of them, some of them put in other things, manufacturing costs is a factor that's quite often used as a apportionment formula.

New York has got a very odd one.

I think they put in some of your cash receivables, somehow into one of the fractions.

We have set out in the appendix to our brief, the blue brief there, a table from Prentice Hall showing the factors that are in use by the various states.

They have got an x mark under the three common columns and then footnotes I think 22 footnotes showing the other factors that are used.

And curiously this table in itself overly simplifies the thing because it shows that the great majority of states do use the gross receipts formula which is quite true, but there are six recognized ways of determining where a gross receipt is located, and the states vary themselves on take one or two of the ways, some take a particular one and those ways range all the ways from the manufacturing states which generally say that a gross receipt will be allocated to the place from which the goods are shipped to Georgia which is not an industrial state but more of the market state which says all goods shipped to Georgia customers no matter where they were manufactured, no matter where the sale was negotiated, no matter whether the sale had any connection with the state, all of those sales go into the numerator by the Georgia formula.

And in between those extremes you have states that apply the rule that the place where the sale was negotiated allocates to its numerator.

Other states say the office of the salesmen or office out of which the salesmen traveled, will allocate it to that location I guess I have it in one more.

So common ones and then there are variations on those that fit, so one particular receipt could quite possibly go into six numerators in the receipt formula.

The same basic problems appear when you come to a property formula.

I mentioned a minute ago that Georgia used inventory.

That is because we don't have great manufacturing, we do have a lot of branch warehouses in Georgia.

For that reason we just often distort that figure upward.

Much more common is the tangible property ratio which includes inventories and new plants and everything else along with it.

Likewise when you come to the payrolls there is a chart set out I believe that shows at some stage include commissions, some include salaries of officers and directors.

What I want to point out is that these formulas are all different, they all vary, they've got no similarity to them.

The only trend that runs through them is that each state selects a formula that tends to favor its – bring as much income as it can and putting as much burden on the foreign companies as possible, that's a popular form of taxation.

And there is no way that the courts can police that sort of thing as long as the formula is reasonable on its face, which all of these are, there is nothing inherently objectionable about them and they've been before this Court and other courts from time to time, and the rule is well established that the tax payer has the overwhelming burden of showing a formula brings in extra territorial values.

So what I'm trying to emphasize is that if the small or medium sized company, that up to now has been paying income taxes in one state, has no great accounting department for the record, IBM machines to figure this sort of thing out.

If it just because its salesmen are going to travel through the 48 states, which they've always done.

If this got to trial, to combine with 48 income taxes, all varied and all different, compile the necessary information, that would be required to -- merely to fill out the return is the sort of thing that would be a tremendous burden on commerce and that's the reason I'm going into this is try to describe the burden which is really the question here.

I think Georgia misconceives the point a little when it sticks to the highly technical impact of the tax or just what the incidence of it maybe.

The question here is whether this is a burden on interstate commerce.

This Court has held over the years that its fundamental problem is whether or not burdens on interstate commerce are less or greater and if it's a very slight burden, for example in property tax they've said that interest to the state and collecting the tax outweighs the burden.

But here we think the burden is very real, that it is a heavy burden, and that it far -- a small poultry manner revenue that could be derived for the states from this sort of thing is far outweighed by the tremendous burden and trouble it would be for the interstate business under these circumstances.

Justice Felix Frankfurter: And the Stockham company subsidiary for which it does business.

Mr. John Izard, Jr.: No sir.

Justice Felix Frankfurter: And this you call (Inaudible)

Mr. John Izard, Jr.: Stockham, well --

Justice Felix Frankfurter: Medium.

Mr. John Izard, Jr.: I'd call Stockham medium size.

Justice Felix Frankfurter: (Inaudible) then give indication and a possible indication, how enterprises like Stockham, which in your view, or this you think here, not -- are engaged exclusively in interstate commerce are trying to get business in Georgia.

Mr. John Izard, Jr.: Oh I would guess --

Justice Felix Frankfurter: Good many?

Mr. John Izard, Jr.: I'd say thousands, yes I'd say thousands, perhaps many thousands.

Justice Felix Frankfurter: Different situation, just one --

Mr. John Izard, Jr.: I'd say yes -- or less.

Justice Felix Frankfurter: Pardon me?

Mr. John Izard, Jr.: That matter of activity or less.

I see no distinction between Stockham's activity and another company that may merely have a salesman that travels regularly in Georgia.

Justice Felix Frankfurter: That is in your view does business, there is no more local business than Stockham does, that type of business you say there are thousands in Georgia?

Mr. John Izard, Jr.: Yes sir, I would say all of them -- excuse me, go ahead.

Justice Felix Frankfurter: Would you say that was true of other seven states?

Mr. John Izard, Jr.: Yes sir.

Justice Felix Frankfurter: I said seven, because I assume you are more familiar to that.

Mr. John Izard, Jr.: Yeah quite.

I would say that that's the overwhelming pattern of American business.

I wouldn't say just seven states or just northern states.

I'd go further --

Justice Felix Frankfurter: (Inaudible) limited.

Mr. John Izard, Jr.: Yes I don't -- I would go further and based on these studies that have made, I call the Court's particular attention to the supplemental brief which we filed in, which contains a study which was made by a leading economist (Inaudible), parties who interested in the same made a grant available and he has made an exhaustive study and he shows that, that has been the pattern of American business and that it's customary that those companies have never been called on to pay taxes in more that one or two or three states.

Justice Felix Frankfurter: Under what auspices were these studies made?

Mr. John Izard, Jr.: They we made by some industries and trade associations who had been concerned by the growing trend of the states to try to --

Justice Felix Frankfurter: Who made the study?

Mr. John Izard, Jr.: Professor Paul Studenski of New York University.

Justice Hugo L. Black: May I ask you if there is any challenge here to what Georgia has done on the ground that they have attempted to tax more of the net income Stockham that was derived from the State of Georgia?

Mr. John Izard, Jr.: No sir, except from the basic proposition that I make under due process that none of it was derived from Georgia under that sense, but as far as the fairness of formula we do not attack that.

Justice Hugo L. Black: Legally speaking you say you are not (Inaudible)

Mr. John Izard, Jr.: Yes sir.

Justice Hugo L. Black: You are not challenging that assessment that they have only taxed such proportion of the net income which was derived from the state.

Mr. John Izard, Jr.: No, for example, I don't raise the issue that inventories are an unfair way to allocate income to Georgia which is (Inaudible), is not an issue in this case.

Right now, the time, just for a moment to the due process side of this case, it's been mentioned a number of times in argument before.

It seems to me that we have two propositions under due process.

You've got first of all the question, of whether or not a company is amenable to suit within a jurisdiction, whether or not you've get personal jurisdiction over it, and this Court in the recent McGee case has certainly gone long way in saying that any reasonable connection with the state is sufficient to satisfy service of process.

But I don't understand that the McGee case purports to overrule prior decisions of this Court, such as the Miller Brothers case dealing with the Maryland use tax.

In that case, you remember is that there was a department store in Wilmington, selling furniture I believe.

They are advertising and mail circulars were delivered to Maryland customers, and customers from Maryland frequently came over to Wilmington and brought furniture at the store.

Some of the furniture that was purchased was shipped to the customers in Maryland, but even more than that the store's delivery trucks regularly transported this furniture to the state of Maryland.

In that case, Maryland tried to make the Wilmington department store an agent to collect its use tax for, and this Court stuck the tax down saying, that, that was a denial of due process of law, and that the activities of that store were not sufficient, subjective to a use tax.

There the similarity between that and this case, is there you had delivery trucks going into the state and here we've a got a salesman spending some time.

That's probably -- we've got more slightly more activities than Miller Brothers case.

On the other hand, Miller Bros.

only involved the use tax, which was growing out of the very transactions which brought this income into the state.

The very thing, the use of the goods was all that was being taxed.

In this case, we've got a general, all encompassing income tax which it being trying to put on very much the same footing.

There is an interesting decision of this Court, construing the income tax of the Philippine Islands, which I think points up the due process issue awfully well.

The Philippines a number of years ago had a taxing law that taxed all income derived from sources within the Philippine Islands, that was of the language of the taxing statute, and a Philippine concern that their business very much like Stockham, it was located in the Philippines, it has its factory there, it manufactured its goods there, and send abroad into the United States, salesmen negotiated orders and took them and sent them back for acceptance, the goods were then sent to the United States.

The Philippine company took the position that some of its income was not earned from sources within the Philippine Islands.

It says some of that income should be attributed to the activities of these salesmen in the United States and this Court just stuck that aside immediately and said of course nobody could seriously contain that income was earned in the United States under those circumstances and that's exactly what from a due process, the states up to here is an argument that they are earning income, because one man spends one-third of his time in Georgia, and they have just a sales office there for convenience, to say that they really are earning income from Georgia, within the due process concept.

I think that border concept is all the more important, when you consider the all pervasive nature of the tax.

I think it distinguishes a used tax which has been upheld under similar circumstances or the tax in International Shoe Company where it was a tax on the various salaries which the employee earned in the state, as something tangible that the state can put its hands on.

Fundamentally our position comes back to the question of weighing the interest of the states against the interest of interstate business.

Surely the old adage that interstate commerce must pay its way, as validity there is no question (Inaudible), commerce or at least the business that are carrying on commerce, we got to pay the way on the states to which they are reasonably subjected to paying that way.

And the thing that this Court must weigh is whether or not the burden that Georgia wants to put on these salesmen, based on this slight connection with the state, whether that burden and this tended revenue to Georgia is more important to it than -- or I've tried to outline the tremendous burden and confusion and difficulty would be created, if this Court was permit a tax based solely on interstate commerce.

So far as I know, the Court has never held that exclusively interstate commerce is subject to any form of taxation, except on local incidence, which can be carved out from that commerce.

And that is the thing that up to now has protected business which sends its goods into a great many states.

That is what has protected it from or terribly complicated and an overpowering taxation by all of the 48 states.

Certainly there hasn't been that leniency or desirability to favor the foreign company.

Drummers have been the subject of discriminatory taxation ever since the Commerce Clause was first developed by this Court.

It's a consistent, attractive, fundamentally popular thing to do, to put the tax on the foreign corporation if you can and here we've got it again.

We got nothing but drumming taking place in Georgia, we've got the drummer there again.

We've got a highly complicated formula whereby they calculate the tax, but I don't see how we can escape the proposition, that Georgia is seeking to tax this man or this company, solely because it does interstate commerce in the state.

And that is fundamentally a tax on commerce and that is the sort of tax that we respectfully submit is barred by Commerce Clause of the Constitution.