RAILWAY EXPRESS AGENCY v. VIRGINIA
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
Argument of Thomas B. Gay
Chief Justice Earl Warren: Number 38, Railway Express Agency, Incorporated, appellant versus Commonwealth of Virginia.
Mr. Gay, you may proceed.
Mr. Thomas B. Gay: Mr. Chief Justice, Justices of the Court.
This is an appeal by Railway Express Agency from a decision of the Supreme Court of Virginia which has found an order of the State Corporation Commission imposing upon the appellant a “franchise tax” in the amount of approximately $140,000 based on what it -- determined to be its intrastate gross receipts for the preceding year of 1955 of roughly $6.5 million.
The tax is said to be a -- a franchise tax imposed in lieu of taxes on other intangible property and rolling stock.
The applicable statutes are printed in Appendix A to the white book in our opening brief, and it might probably use for the purpose to read the first two sections which are the applicable statutes, Page29.
Justice William O. Douglas: Is this the same statute that was here before?
Mr. Thomas B. Gay: No, this is a -- the same tax under a different name, but it's not the same statute, Your Honor, please.
Justice William O. Douglas: Was it -- this -- is this a new law that was passed?
Mr. Thomas B. Gay: Yes, Your Honor, it was passed after the decision of this Court in 1954.
Justice William O. Douglas: The old -- that the old statute wasn't just amended.
Mr. Thomas B. Gay: No, it was an entirely new statute.
The -- the old law is printed in Appendix B and if the Court care to do so it -- you can see the differences, if any, between the --
Justice William O. Douglas: Well they should with you -- do you mind pointing out what the differences are?
Mr. Thomas B. Gay: I desire to do that, Your Honor because that is one of the fundamental positions that we wish to take.
Section 58-546 says “franchise tax” on express companies; “each express company doing business in this state shall on or before the first day of June of each year pay to the State a franchise tax which shall be in lieu of taxes upon all of its other intangible property and in lieu of property taxes on its rolling stock.”
The next section, model franchise tax; “The franchise tax shall be equal to 2 3/20 % of the gross receipts derived from operations within the State.
If its operations are partly within and part of an intrastate the gross receipts derived from operations within the State shall be deemed to be all receipts on business beginning and ending within the State, and all receipts derived from transportation within the State of express transported through, into or out of the state.”
Although, the question is not before the Court, in view of what I understand to be its acceptance of interpretation of constitutional and statutory application by state courts, it is significant and I -- I wish to point out to the Court that since the Commission under Virginia Court held that this tax was imposed pursuant to the authority conferred by Section 170 of the Constitution of Virginia, and that section reads “the general assembly may impose State franchise taxes, and in imposing a franchise tax may, in its discretion, make the same in lieu of taxes upon other property, in whole or in part, of a transportation, industrial or commercial corporation.”
Now it is our contention in the lower court and we think that the reasonable interpretation of the two sections of the Constitution makes it apparent that that section in authorizing the imposition of a franchise tax had reference only to corporations doing as a fully and intrastate business, or at least on inter -- any intrastate business since Section 163 of the Constitution inhibits any foreign corporation, no foreign corporation shall be authorized to carry on in the state the business or to exercise any of the powers or functions of a public service corporation.
So we urged upon the law of Court that this Section 170, authorizing the imposition of franchise taxes, should be construed in the light of the related section of the Constitution to mean and to apply to, and to authorize the imposition of franchise taxes on only those corporations that you are indeed solely in intrastate business or inter and intrastate business.
Justice Felix Frankfurter: You -- you were not a Virginia-licensed corporation and you were not required to be licensed, is that right?
Mr. Thomas B. Gay: We were inhibited from being licensed as this Court held --
Justice Felix Frankfurter: You are inhibited from being licensed to do business unless you were licensed and that's why I asked whether you never did -- you never compelled to be licensed in order to do what you did do, is that right?
Mr. Thomas B. Gay: Well I'd like to answer that by saying that when the -- if I may anticipate my argument a little bit, in 1928 when the Express Company was organized – it was a Delaware corporation.
It was qualified to do business intra and interstate in every state in the union.
It applied to the State of Virginia for authority to do an intrastate business, was denied by the Corporation Commission under this Section 163 of the Constitution, the Court of Appeals of Virginia affirmed and this Court affirmed that decision.
Justice Felix Frankfurter: And you stood there on your own Delaware charges was moved in -- to the outside of Delaware.
Mr. Thomas B. Gay: Yes, sir -- actually interstate business.
Now appellant contends that the tax imposed on it in this case, although named or called a “franchise tax,” and although stated to be in lieu of certain property taxes, is nothing but the old license tax which was previously before this Court and therefore, it's -- it's a privilege imposed upon the right to transact interstate Commerce and therefore void of a violation of the Commerce Clause; and secondly, that the amount of the tax is such and the amount in which it was assessed is such as to constitute denial of due process in the substantive sense to the appellant in this case.
Justice Felix Frankfurter: Mr. Gay, would it disturb your old order of argument if you told it at the outset, since this is an in lieu tax -- this is an in lieu tax, is it not?
Mr. Thomas B. Gay: Yes, Your Honor.
Justice Felix Frankfurter: So denominated.
What taxes, in your view, the State of Virginia or the Commonwealth, if I may say so of Virginia, could have imposed on property or what -- what taxes the State, the Commonwealth of Virginia, could have imposed on you for which this is in lieu?
Mr. Thomas B. Gay: We don't think under the Constitution 170 it could impose or even you know a property tax --
Justice Felix Frankfurter: I don't care what and not -- not under your Constitution because that's the question for your court.
Mr. Thomas B. Gay: That's right.
Justice Felix Frankfurter: But from your point of view, and since this is in lieu statute of tax of -- of what allowable under the Federal Constitution, what allowable tax could Virginia impose for which this tax is in lieu tax?
Mr. Thomas B. Gay: I'll answer that this way.
Under the constitutional system in Virginia, there is a segregation of property for State purposes and for local purposes.
All intangible property is segregated for state taxation; all tangible -- personal property and real estate -- is segregated for local taxation.
Now our contention is that the State of Virginia has the perfect right to try and to -- to tax any intangible element of value that this corporation may have in --
Justice Felix Frankfurter: In bank account –
Mr. Thomas B. Gay: Yes, sir.
Justice Felix Frankfurter: Alright.
Mr. Thomas B. Gay: They did so.
So the tax was paid.
It also had the right to pay a tax rolling stock, it did so and the tax was paid.
But it has -- and the courts found that this tax is a tax upon the going concern of goodwill value of the business, and the whole nub of case is that you can't measure goodwill or going concern value by gross receipts.
Justice Felix Frankfurter: Will you forgive me if I ask whether in view of these 56 statutes, Virginia no longer taxes receivables or rolling stock.
Mr. Thomas B. Gay: It no longer taxes receivables or rolling stock.
Justice Felix Frankfurter: Alright.
Mr. Thomas B. Gay: Well that, if I may, anticipate what I'm about to say that assuming, for the sake of argument that it has not violated with the Commerce Clause we'd get into that element of my -- our case which goes to their amount of the tax.
Justice Felix Frankfurter: I didn't want to go into argument.
I just want to know what the taxes are in Virginia.
Mr. Thomas B. Gay: Well now as I've said the -- this statute that one's that's been enacted 1906 resulted from the prior to the decision of this Court in Railway Express Agency versus Virginia which was decided in 1954.
In that case, a license tax was imposed upon the appellate for the privilege of conducting its business in the State.
Now appellant here in this appeal contends that under the doctrine respect the case and under the rule of law laid down in the prior decision between the same party in 1954, that the tax imposed under the present statute being on gross receipts just as it was in the prior act, and since those gross receipts are derived exclusively from interstate commerce, that the tax is in fact a privilege and not a property tax.
If I may give just a brief historical statement as to the nature of this company's business and the prior litigation between it and the State so that in that background the Court may better understand the issue arising here.
As I've said, the Express when it was organized in 1928 to take over all the express business.
It was organized by the Railroad and is presently owned by the Railroad.
It went to and obtained authority to do business in every State in the union, interstate and intrastate except the State of Virginia.
It was denied a part that to do an intrastate business in Virginia because of this provision of the Constitution as I've read and the Virginia freighters were affirmed by this Court in reaching that decision.
Now in consequence, as this Court said on a prior appeal -- it's just the word -- as a consequence of the state's own policy, this appellate does no business in Virginia, which a State has the power to prohibit, but thus holds as such as it can conduct on the protection of the Commerce Clause of the Federal Constitution.
The (Inaudible) state Express falls within the power of the State to control, a separate Virginia subsidiary necessarily was organized.
So the Virginia company, the Railway Express Agency Company of Virginia was organized and the record shows that under a stipulation that's -- from that time until now the Virginia Company has done wholly on intrastate business in Virginia and the appellant has done solely on interstate business in Virginia.
The Virginia Company has paid all of its profit taxes without complaint.
It paid the prior license tax; and it has paid this franchise tax based on its gross receipts derived from intrastate commerce.
The appellate here has paid all of its property taxes from the time it came down until the present year; it paid a prior license tax on the protest until this Court decided the Spector Motor Company case when it filed a petition for correction.
And it has been almost successful in that appeal.
It has not to pay it.
Thus it has paid the present franchise tax which was the first year, 1956, after legislature passed this new Act.
It paid it under protest, and filed a petition with the Commission for it's correction on the ground, as I've said, that it was violative of the Commerce Clause and that was the burden on interstate commerce and its not -- not enforced as a law.
The Commission and the Virginia Court held that property -- the tax to be a property tax and this is -- this is the meat of the case, upon the going concern or goodwill value of the business.
Now that is the property that it has -- it has sought to be taxed.
So that -- so that was, I think it was, that was what the Virginia Court had held in the prior case under the license tax statute.
And this Court reversed that holding that this statute was -- was a burden on interstate commerce was not a property tax, but a privilege tax, or the Virginia Court had held it to be such on a so-called “system or scheme” of allocating values for taxation of state and local purposes.
Then the Virginia legislature passed this 1956 Act which I have read to the Court.
Now a further statute, Mr. Justice Douglas, let these three changes.
It changed the need from a franchise -- from a privilege to a franchise tax but this Court has many times said that labels don't control its judgment.
The second, here the taxes made in lieu of certain other property whereas the old tax were in addition to other property taxes.
Our contention is, is that the tax -- if a direct tax on gross receipts was merely measured the extent of the privilege exercised and does not determine the value of the property employed in the business to produce those earnings.
Thirdly, the present tax does not say expressly that it's for the privilege of doing business.
But the important thing is since the sole basis of a levy is the fact you have done business and is computed on the basis of your gross receipts for the prior year, the absence of that language is unimportant.
So those three differences are the only differences in the (Inaudible) between the old tax and the new tax.
It seems to us that the determining factor in this Court's prior decision which has not recognized or considered or if it was, it was not accepted, the (Inaudible) Virginia Commission or the Virginia Court was that gross receipts are no proper measure of value in the formal appeal, this Court said, but the taxing dispute deal does not depend on owning any physical property nor upon the value thereon but would be levied on gross revenues even if it'd come to find some way to dispense with all local and physical property.
The fact that it's measured as gross revenue is consistent with the tax on the privilege of doing a volume of business which would yield that revenue just as that legislature indicated.
Now -- but we have declined with your mere gross receipts as a sound measure of going concern value in a practical world of commerce where value depend on profitableness of a business not merely it's volume citing the case of United States (Inaudible) Oak Creek.
We said that that is the nub of this case.
It was the principle which this Court laid down in the prior decision.
It was ignored by both the Commission and the Virginia Court and we say that the determinating factor in deciding whether or not this is a property or privilege tax.
Now it's significant too that the Virginia Commission never un -- undertook to determine the value of this going concern or goodwill.
It made no ascertainment of what it was worth.
On the contrary, as the formula which it worked out, to determine the amount of the tax is found at page 109 of the record, Gross receipts could be taxed $6.5 million, taxed at 2.15%, $139,000.
Justice William J. Brennan: Would that be just the same rate as under the old statute?
Mr. Thomas B. Gay: Yes, the rate was the same.
Justice William J. Brennan: At that time your gross receipts was about half of that --
Mr. Thomas B. Gay: Well that was in -- that would involve the year 1951 as I recall it Mr. Justice Brennan.
Justice William J. Brennan: I notice the tax in question is about $66,000 to $139 --
Mr. Thomas B. Gay: Well it's been like most taxes.
Justice William J. Brennan: That one hundred -- well is that the difference in gross receipts, not in rate.
Mr. Thomas B. Gay: No, the rate is the same but the gross receipts of what has affected the amount.
Now this tax as I've said is levied in the direct proportion to the extent of which the Virginia Commission found that the privilege of carrying on the appellant's business was exercised in Virginia.
It has -- it's done nothing else.
Now as I've said a moment ago under the Virginia's scheme of taxation intangible property is segregated for -- to state taxation.
This return was made of intangible property, so much money, that's all the intangible property had.
I digress a moment to -- to point out at what seems to us the -- the labored manner in which the Commission tried to justify this tax traditionally and historically from the time -- for this to come -- that came into Virginia.
It's automotive equipment, that is its trucks that run around the streets and these little dolly trucks in the stations have been taxed as tangible personal property.
And their value is certified to the local authorities as -- as a basis of a local property tax.
The rolling stock of this company had been so infrequent in Virginia.
And at -- on the mileage basis, the taxes for the years up to 1950 had been so negligible that after that the Commission, there were assessments.
If you had assessed them in -- in 1956 on the same basis you've had an assessment before, it would have been about $200 and some dollars as I recall it.
But the Commission said, “No longer do we regard this automotive equipment and these little dolly trucks as tangible personal property.
We're going to call them rolling stock.
Now, everything that moves on wheels, the Commission said is rolling stock.
So they increased the value of the property in lieu of which, this tax is imposed and then I would deal with that point in a moment.
Justice Felix Frankfurter: Is the rate of -- the local rate of taxation for tangibles and the state taxation for intangibles are varying rates in your --
Mr. Thomas B. Gay: Oh yes.
Justice Felix Frankfurter: -- state?
Mr. Thomas B. Gay: Every -- every taxing jurisdiction in the state, county or city more or less have a different rate.
And the state corporation Commission, I think I anticipate on what you have in mind, the state corporation Commission is the assessing body for all forms of property of public service corporations.
It merely determines the value of the intangible property and real estate and certifies it to the local taxing authorities.
It certifies the amount of intangible property, securities, tax and certifies it to the state treasurer for collection for state tax.
Justice Felix Frankfurter: And is the base -- is the base of taxation -- is the gamut considerable Mr. Gay?
I mean, did a 100% value or 80% or 10%, could it vary?
Could by changing the base the amount of the tax vary considerably?
Mr. Thomas B. Gay: I don't believe so if Your Honor please, there has been traditionally but in the Commission an accepted formula whereby it tries to equalize a tangible and real estate values throughout the state on a 40% ratio.
And to that extent, public service corporations on -- it maybe said, are not taxed at a 100% of their tangible and across property in real estate values.
Justice Felix Frankfurter: But I -- as I --
Mr. Thomas B. Gay: But -- excuse me --
Justice Felix Frankfurter: Pardon me.
Mr. Thomas B. Gay: Intangibles are assessed at their full value and so certified for state taxation.
Justice Felix Frankfurter: As I believe from cases that have come before this Court, in other States and yours, utility tangible was taxed at a higher -- on a higher basis than non-utility tax.
Specifically, we had a case from Tennessee as you probably know, the Browning Case where that very question came up whether a -- a higher base of taxation of the railroad companies as against the general property tax of the State and that at any --
Mr. Thomas B. Gay: I would say as to intangible, that is true Your Honor.
Chief Justice Earl Warren: Mr. Gay, what -- what other properties does the company own other than these intangibles, the bank accounts and the rolling stock in the State of Virginia?
Mr. Thomas B. Gay: Well I will go to enumerate that in just a moment.
Chief Justice Earl Warren: Oh yes, yes.
Mr. Thomas B. Gay: If Your Honors please.
Chief Justice Earl Warren: Alright, take your time.
Mr. Thomas B. Gay: I'll give it to you fully in just a moment.
Chief Justice Earl Warren: Yes, it's all right.
Mr. Thomas B. Gay: It had no intangible property except money.
It had no rolling stock within the constitutional law or statutory sense that the Commission had ever assessed that such part are here because it had treated it as -- as tangible personal property and allocate it for local assessment.
So the Commission and the Court took this approach to the case.
They said, “This appellant has these exclusive express privileges under their contracts to the railroads.
It's a nice little monopoly -- monopoly” and therefore these contracts certainly held -- goodwill or going concern value.
Well let's assume that could be a fact which it isn't that value has been determined to be $6.5 million in Virginia which happens to be the exact with the gross receipts of this company.
Now to put it in another way, if Virginia gross receipts of $6.5 million establishes an equal dollar amount of goodwill value for tax purposes in Virginia, then appellant's total gross receipts of $387,500,000 establishes that, it has a system goodwill value over an amount, equal to that of $387 million.
That there in determining goodwill value implies that every dollar earned is a dollar made regardless of the cost of earning that dollar.
Well now that is just not realistic in the -- in the modern concept of our economy and that is the whole case.
That's the whole basis of this case.
Justice Felix Frankfurter: Would you mind stating that again?
What you think is the whole basis of this case?
Mr. Thomas B. Gay: I said gross receipts if -- if what the Commission determined to be the gross receipts derived by this company from purely interstate commerce of $6.5 million established an equal dollar amount of goodwill value for purpose of taxation in Virginia and that's what it did because they took exactly the amount of the gross receipts and considered that to be the goodwill value, then appellant's total gross receipts from its system operation which is $387,500,000 must demonstrate that this company has a -- a national goodwill value, close to $387 million or in other words, to reduce it a little more simply, every dollar earned is a dollar made regardless of what the cost maybe of earning that dollar.
Justice Felix Frankfurter: That all depends on the basis on which other taxing authorities may assess goodwill and we know that that isn't so, that it varies from state to state.
Mr. Thomas B. Gay: That is true Your Honor but I -- I'm only applying the formula which the State of Virginia uses and if it can be applied logically to Virginia, it can be applied logically every -- elsewhere.
Now let me deal with the -- the subject matter of this -- of this so called goodwill.
That is these express contracts with the railroads.
The important part of it is printed in the record.
It shows that after its operating expenses, maintenance and -- and what taxes it has to pay, all of the income of this company are paid over to its owners, railways or the various railroads in the United States.
So the company has no net income in the -- in the taxable or practical concept of that term.
Well if it has no net income as a -- what's said in the case of Southern Railway Company v. against Kentucky, 274 U.S.
If taken separately, it is clear talking about this so-called property value arising from use, if taken separately, it is clear that the cause of lack of net earnings, no substantial and tangible elements of value could be reasonably be attributed to the railroad of that company.
And that's the case on the question of the Interstate Commerce Clause.
We submit that the use of gross receipts as an effort to determine property value reflected by going concern or goodwill value establishes the tax as a privilege rather than a property tax and it can't be -- it can't be practically applied any other way.
Now come to -- I have to briefly deal with the question involved with the Due Process Clause.
Chief Justice Earl Warren: Were you going to enumerate the properties of --
Mr. Thomas B. Gay: Right now -- right now if Your Honor, please.
This company's return showed it had a $120,000 in cash on a taxable date.
Let me -- maybe Your Honor would like to see that written rather than stated.
It is set out fully in our brief.
Well, I'll state it.
It has a $120,000 of cash.
It had a rolling stock in its true sense which if taxed at the prior -- on the prior method would have yielded a tax of over -- that would be $27.
The 50 cent tax on a $120,000 would have yielded $252.
Now if you add to that the automotive equipment and little dolly trucks which the Commission had traditionally have assessed as tangible property subject to local taxation but reclassified by it for the premise of this case as rolling stock and therefore a subject of estate taxation, you would add a value of $262,719.63 which at this tax toll rate of 250 would have yielded a tax of $6567.99 or a total tax of $7,247.76; now that does not take into account, as I have said, the so called goodwill value, arising out of the existence of these contracts for the railroads.
The total profit of tangible and the intangible, office furniture, real estate intent for the way of money was $456,565.
Now, it's obvious that a tax of $140,000 on actual computed values of $456,000 is about a 33% tax on the product.
So where -- where does the -- all the justification come from?
It comes from and only from this so called goodwill value.
As I've said the Commission has never found what that value was.
But if we know what the tax is its $120,000, we know what the rate of taxation of intangible, or personal property.
It is 50 cents on $100 of value.
So if you apply the rate to the actual tax we will have to have a goodwill value of $27,947,000 to justify this tax.
Now we said that under the in lieu provisions of the tax if Your Honors please that the tax must fall because it is not in an amount which would have been legitimate to impose all the property in lieu of which it is imposed.
Justice Charles E. Whittaker: Where did they did seek to (inaudible) that the income for the same amount that the goodwill value assessed by Virginia was the same amount as it was supposed to be?
Mr. Thomas B. Gay: It's exactly the same Your Honor.
Justice Charles E. Whittaker: And not only $6,000,000.
Mr. Thomas B. Gay: Well that's what -- that's what they put on it.
But I have tried to demonstrate a moment ago that's a fallacious -- that's a fallacious assumption because it would mean every dollar earned was a dollar gained without any account for the cost to earning that dollar and said that no goodwill can arrive until you had something profitable up -- for your operation.
But I'm going a step further now and showing that if the Commission had found some value distinct and so stated to be for this goodwill or going concern It didn't do it but if it had done so it will have -- have to amount to $27,947,000 because by applying the 50 cents to a hundred tax rate to the tax of $140,000 that -- that is the amount of property you would have to add to (Inaudible).
Now it comes to all your great deal in that brief, that's a false tax rate.
There's nothing false about it at all.
It's what the -- what the state has imposed on all the intangible or personal property, 50 cents.
And it's what should be applied here if you would work out an analogy to determine what value the Commission really attributed to this going concern.
Justice Felix Frankfurter: Mr. Gay, do I infer correctly the records if I do not but implied in your argument is the suggestion that State of the Commonwealth of Virginia could not impose the 33% tax on intangibles and intangibles within Virginia except in violation of the Federal Constitution?
Mr. Thomas B. Gay: I didn't say Your Honor.
Justice Felix Frankfurter: I know you didn't say that but is that implied?
Mr. Thomas B. Gay: That's not implicit in my argument either.
I was -- I was just saying that from the standpoint expediency I don't think it's reasonable to assume that the State of Virginia would impose a 33% tax.
Justice Felix Frankfurter: No, but if it constitutionally could then would you please tell me why I couldn't say you will help me constitutionally can do we're doing this?
Mr. Thomas B. Gay: Well it certainly would have to have some basis of property upon which to impose a tax.
Justice Felix Frankfurter: But you said they have property worth more than $65,000 and in order to -- in order to obtain the dollar tax that is left it is hinged on tangible and intangible tax rate.
It would have to accept the 33% tax, or did I misunderstand?
Mr. Thomas B. Gay: Well what I said was that the tax of $120,000 how could it be 33 and 1/3 % of the physical value of property of the State?
Justice Felix Frankfurter: And so my question is whether the Federal Constitution apart or -- or it could not assess such a tax except by appending the Federal Constitution.
Mr. Thomas B. Gay: Well unless you want it.
Justice Felix Frankfurter: I'm not saying it would though.
It's just -- I'm asking because my problem and I want to put it to you is -- my problem is this.
If Virginia could impose a tax, not that it did, but that it could constitutionally without running afoul to the United States Constitution, if it could impose such a tax then what in United States Constitution barred it from -- for imposing an in lieu tax.
Mr. Thomas B. Gay: Well, the -- you would -- if -- if the State found itself to impose a tax of 33 and 1/3 % it would be confined to a physical values.
Justice Felix Frankfurter: That's right.
Mr. Thomas B. Gay: Now --
Justice Felix Frankfurter: Physical and in -- and intangible.
Mr. Thomas B. Gay: Well that wasn't my statement, if Your Honor please.
Justice Felix Frankfurter: But I thought you said that -- that under your law, the taxation law, they may tax intangible so called localized in Virginia, is that right?
Mr. Thomas B. Gay: That's perfect.
The assessed tangible is localized, but intangible you go --
Justice Felix Frankfurter: They said --
Mr. Thomas B. Gay: So I was trying to make the Court to ask Your Honor please that the taxes -- the credibility that anyone feels -- that's -- that this $140,000 tax is made up by physical value in -- in a rationale of this case and the only way that you can assume that it was trying to reach the intangible value which a State has filed a tax is to find some sum which the Commission didn't determine to represent this goodwill value.
And I said to -- to determine that you should apply the rate of 50 cents to $100 to the tax of a $140,000 and you get this $27.5 million of value.
Justice Felix Frankfurter: But this Court insofar as the United States Constitution is concerned, both to Commerce Clause and the Due Process Clause, a State may do something that is very unwise and it could plead a similar presence so far that we go over the bounds of the Federal Constitution, that is correct, Mr. Gay?
Mr. Thomas B. Gay: That's right.
Justice Felix Frankfurter: And what I'm asking you is this, suppose the legislature of Virginia says and it recites, “We are free to impose a tax up to 33% of all values, tangible and intangible, of this corporation doing business with Virginia.
We choose not to do it that way.
We think it's a fair way to assess the power that we could exercise by letting our Corporation Commission to determine what the goodwill of this company is.”
Suppose they said that, would that be the same case as this?
Mr. Thomas B. Gay: Well, I don't think so Your Honor for this reason.
As an in lieu -- in lieu -- as an in lieu tax under the decisions of this Court the property, the tax fee yielded by the processor to employ, call it the franchise or any other competition, if that -- that tax is in lieu of a property tax it must not be greater in amount then would be legitimate directly taxed on the profit so imposed.
Now Your Honor puts to me the question, would -- could Virginia legitimately tax all the intangible values and tangible values at 33%, my answer of course is yes.
Of course it has the Constitutional power to do that, but it hasn't done that Your Honor, please and that's not the test before the Court here.
I'd like to reserve Mr. Chief Justice what time I have left.
Chief Justice Earl Warren: You may.
Argument of Frederick T. Gray
Mr. Frederick T. Gray: Mr. Chief Justice, members of the Court.
As always when I commence an argument I'd -- I've been held to say about 12 different things at once because there are so many things particularly when you follow learned from the counsel on the other side.
But I would like to ask the Court in opening to -- if they would please look at page 31 of the record because I can see that a good deal of the argument that has been heard has had to do with the amount of the tax.
And at the very bottom of page 31 of the record, the appellant's only witness is leaving the stand, Mr. Callaway asked, “Have you any other witnesses Mr. Gay?”
And Mr. Gay says, “No that is our case.”
Then if you would turn to page 32, so little had been said about the amount of the tax that Commissioner Callaway asked - “In your petition you have a paragraph stating that the amount of the tax, the amount of $139,000 was not correctly computed, do you now waive that point?”
“No sir we don't waive it because now opinion from a legal standpoint there is no way that a tax could be computed with a yearly franchise tax of the State of Virginia based on gross receipts which would not be unconstitutional.”
Now, the point I'm trying to make is the Commission and the Virginia Court both felt that the only issue which was being raised here seriously and which was being litigated here was whether this was a property tax or whether this was a -- same old privilege tax and the amount of the tax has never really since gone into fully by the Commission or by the Virginia Court.
Now next I feel --
Justice Felix Frankfurter: May I -- may to drop you down to scale, does that mean that if -- if this should be -- if this Court should affirm the judgment of your court, the case would have to go back to determine the amount of the tax or that is foreclosed?
Mr. Frederick T. Gray: No, no Your Honor.
Not the amount of the tax has been determined from that standing point.
Justice Felix Frankfurter: But you said it wasn't an issue.
Mr. Frederick T. Gray: I have to say that --
Justice Felix Frankfurter: It wasn't contested.
Mr. Frederick T. Gray: They really did not put on any evidence to show that this tax was not correctly computed though.
That it just -- It wasn't put that way.
Justice Felix Frankfurter: But didn't they challenge the basis on which you computed it?
Mr. Frederick T. Gray: No.
They challenged the fact that a $139,000 tax just as Mr. Gay's argument has done today but $139,000 tax that is so excessive that it couldn't possibly be imposed against them.
But the formula --
Justice Felix Frankfurter: But I'm not talking how numerically so excessive but the basis on which it was reached.
Mr. Frederick T. Gray: Yes that's the -- one of the important facts of this case which I believe will draw a contest in this case in the prior appeal between these two parties is the fact that all of the property of this appellant, the Delaware Corporation, is being used in intrastate commerce and the Delaware Corporation is compensated for the use of that property in intrastate commerce.
Now that comes about in this manner.
The Delaware Corporation has a contract with the various carriers throughout the country, 177 railroads, a number of airlines, boat lines and electric lines many of which operate in the Commonwealth of Virginia.
Under this contract with the various carriers, the Delaware Company has obligations to perform express services intrastate within the Commonwealth of Virginia.
Now it had the problem of doing intrastate business in Virginia as a foreign public service corporation so it created a wholly-owned, wholly-controlled Virginia subsidiary, which I shall call the Virginia Corporation, the Virginia Company.
It entered into a contract with the Virginia Company under the terms of which the Virginia Company is obligated to perform the intrastate activities and obligations of the Delaware Company.
It does not go out and make its own contracts.
It performs the obligations of the Delaware Company in Virginia.
And under the contract the Delaware Company agreed to permit the Virginia Company to use its property in the performance of the interstate function and under the contract the Del -- the Virginia Company agreed to turn over to the Delaware Company all of its revenue and the Delaware Company assumes all the bills and saves the Virginia Company owns.
So, that we have a situation of a foreign Corporation, not engaging in interstate commerce, but permitting its wholly-owned and controlled subsidiary could use its property to engage in intrastate commerce, and the parent corporation receiving all of the revenue.
Justice John M. Harlan: Were you suggesting that we should look at the operations of the Virginia Company as you call it as if they were the operations of the parent company?
Mr. Frederick T. Gray: Well if Your Honor please, there is stipulation in the record that Delaware Company does no intrastate commerce in Virginia.
What a --
Justice John M. Harlan: (Inaudible)
Mr. Frederick T. Gray: I beg your pardon?
Justice John M. Harlan: That's the end of issue of fact that --?
Mr. Frederick T. Gray: I am not suggesting, sir that the Delaware company does intrastate commerce.
I am suggesting that it permits its property in Virginia to be used in intrastate commerce.
Justice John M. Harlan: That was a consequence of Virginia statutes.
Mr. Frederick T. Gray: I beg your pardon, sir.
Justice John M. Harlan: That was the consequence of Virginia's statutes.
Mr. Frederick T. Gray: That was not -- that was of the Virginia Constitution, that's correct.
Justice John M. Harlan: And it satisfied --
Mr. Frederick T. Gray: No, no, I beg your pardon.
The fact the corporation does not engage in intrastate commerce is a consequence of the Virginia Constitution.
The fact that it permits its property to be used in Virginia is not a consequence of the constitution of Virginia.
It is done and it's testified to by Mr. (Inaudible), it is done for the economic advantage of the company – that's why they do it – because it is economically advantageous to them to permit the Virginia company to use that property and do it; they don't have to do that under our Constitution at all.
Now I make this point if Your Honor please, Mr. Justice Whittaker, for two reasons.
One, I believe that the use of the property in the state would afford a basis for taxation and secondly, because from a factual standpoint when you deal with the amount of the tax and the value of the Delaware company's property, I believe it can readily be seen that the privilege of using, having the joint use of properties between these two companies would make the Delaware Company's property in Virginia more valuable.
A truck, one truck, which has the privilege along with it of using two other trucks, is certainly more valuable than one truck standing alone.
So that the Virginia company -- the Delaware Company's property has increased value because it can be used in conjunction with the Virginia Company's value for more compensation.
Justice Charles E. Whittaker: Immediately it's available isn't it?
Mr. Frederick T. Gray: Yes, it's available.
Justice Charles E. Whittaker: And you don't intend that -- not the fact if the some fraction were introduced of the local business by (Inaudible)
Mr. Frederick T. Gray: I believe that Your Honor, please the stipulation precludes my --
Justice Charles E. Whittaker: Yes.
Mr. Frederick T. Gray: From insisting that they do intrastate business.
Justice Charles E. Whittaker: So what we have is the question whether or not you may levy this tax on interstate.
Mr. Frederick T. Gray: That's correct, that's correct.
Also, this joint use of property is important when we get to the -- to the other argument which has not been reached in oral argument but it was contained in the brief that due to the proportion of the tax or the revenues which are attributable to Virginia, it was said in our brief that the 1.7 of the revenues are attributed to Virginia under the formula whereas, only six-tenths of 1% of their property is located in Virginia.
Obviously, because part of their ownership is in a separate corporation in Virginia that is going to follow that their revenues in Virginia, since they can use the Virginia property to help earn those revenues, their -- their revenues will be proportionately greater in Virginia.
Now, I would like also in the very early stages, to comment upon the amendments to this Act.
I believe, technically, this was not -- Mr. Justice Brennan this statute, it was an amendment and reenactment of the old Act.
The Appellant says that there were three changes and only three changes made in this law.
Well, after this part of the field was decided, Virginia has re-funded the taxes through the entire period of limitation and did not thereafter assess the so-called License Act against the Appellate.
And in 1956 they re-amend -- they amended and reenacted the statute.
Appellant says it is identical in all material respects and made only were only three changes.
One, they changed the name; two, they make it in lieu of rather than in addition to certain other state property taxes; and three, that they omitted the phrase that is, “for the privilege of doing business in Virginia.”
We say that there were three additional very material changes in this tax.
The first of these is this.
Under the 1954 statute, there was contained in the statute a provision that the intangible property of Express Company should be taxed at the rate of 50 cents per $100 in value and that the money of Express Company should be taxed at the rate of 20 cents per $100 in value.
Both of those taxes were received in the process of amending and re-enacting this Act and that is why we say that the use of this 50 cents per $100 value formula which runs their going concern value up to $27 million, Mr. Justice Whittaker, I believe you were having trouble with how we arrived with a $27 million figure, but he does define a very simple process of taking the amount of the tax $139,000 and he says “if you were going to raise $139,000 taxes using the tax rate of 50 cents per 100 you'd have to have $27 million in value.”
Well the fallacy in the argument is that there isn't a tax rate of 50 cents per $100 in value applicable to express companies.
There was found in the prior appeal and this Court used that very mathematical process in the opinion of saying that if you treated it as an intangible property, the tax rate on intangible was this 50 cents per 100 then it would have to have a value of x number of million dollars.
But where there is no such tax rate applicable to express companies; that's just dreaming up a tax formula.
We may as well use 10 cents on $100 and make it $250 million in value that you'd have to have.
The tax rate, if there has to be a tax rate, the tax rate here is $2.15 -- that's the tax rate if -- if you have to find value and rate in order to arrive at the tax.
Justice Felix Frankfurter: Does the in lieu, the professed in lieuness have to have any rational relation to what it is in lieu of?
Mr. Frederick T. Gray: I believe, under the Court's decisions, Your Honor that it could not exceed a sum which could be levied against that could be not constitutionally levied.
Justice Felix Frankfurter: Without -- without being astronomical about that.
Mr. Frederick T. Gray: That's right, exactly.
Justice Felix Frankfurter: Now what is the situation as to this?
Mr. Frederick T. Gray: Well, we don't really know.
That is -- that is why I say Your Honor that we didn't go in to the amount of these taxes in that sense.
What is the value of their contract?
That's -- that is the answer.
What is the value?
What would one pay for a -- an exclusive privilege to ship express material over the railroads of the United States a monopoly in a contract which is indeterminant in rate?
I don't know what it's worth.
I don't --
Justice Charles E. Whittaker: What did -- Mr. Gray, what did you say in respect to this?
You'd have to take the contract, if at all, in whole with --
Mr. Frederick T. Gray: Yes, Your Honor.
Justice Charles E. Whittaker: The contract contains a covenant with all of the avails, the same operating cost that would be paid over to somebody else.
Mr. Frederick T. Gray: Well --
Justice Charles E. Whittaker: And so the contract would have no value, would it?
Mr. Frederick T. Gray: What would Railway Express pay you today, Your Honor to buy that contract and to buy the clause of the contract?
What other privilege is worth?
Justice Charles E. Whittaker: What would they pay to get rid of that covenant?
Mr. Frederick T. Gray: Yes, sir.
Justice Charles E. Whittaker: Well that's exactly what measures the value of the contract to the Railroad.
Mr. Frederick T. Gray: That would measure the value of the privileges to the company too -- to the Express Company.
What would you pay to continue these privileges?
They paid $2.5 million in 1956 for the privilege.
Justice Charles E. Whittaker: But the contract as it extends now is it worth it -- would it worth a dime to -- to amass the meaning of Express Company?
Mr. Frederick T. Gray: Well, if Your Honor, please, we say that the worth of the contract is the worth of the privileges which they enjoy.
What they do with their income after they get it we can't control that but --
Justice Charles E. Whittaker: No, but the contract is this thing that contains the covenant that binds you to pay out all their debt.
Now what about the value of the contract which is what you say you were going to tax?
Mr. Frederick T. Gray: I would like to say --
Justice Charles E. Whittaker: But does the -- in matter of law have no value?
Mr. Frederick T. Gray: I -- I think not, Your Honor.
I think it does value.
I think it has potential value.
Justice Charles E. Whittaker: Well I don't see how they cannot keep anything like this.
It's what --
Mr. Frederick T. Gray: Well they can't -- they don't keep anything on it.
They are as a separate corporate entity.
They like to give their proceeds away.
Justice Charles E. Whittaker: It's value to the railways.
But what would it do to the Express Company?
Mr. Frederick T. Gray: Well of course the Railroads are the owners of the company.
Justice Charles E. Whittaker: I thought they taxed it which is (Inaudible)
Mr. Frederick T. Gray: Yes, they took that --
Justice Charles E. Whittaker: On this income?
Mr. Frederick T. Gray: Not on this income.
Justice Charles E. Whittaker: (Inaudible)
Mr. Frederick T. Gray: They pay taxes on their income.
Justice Charles E. Whittaker: Well they didn't have to call for an income they -- part of their income is the income they get from the Express Company out of the contract, isn't it?
Mr. Frederick T. Gray: Well, if Your Honor, please, I -- in trying to work here some – it falls along that line.
It seems to me it works out this way.
If I were permitted to take my income and assign part of it to my groceries, and part of it to my doctor, and part of it to my clothing store, and part of it to my fuel bill so that I would have no net income for the federal government to tax, this tax is all in the hands of the people that I purchased from.
Justice John M. Harlan: You don't think that's this situation?
Mr. Frederick T. Gray: I think that -- I think that – you're missing one step of the tax, yes, sir.
Justice Felix Frankfurter: Are you standing -- are you saying in effect what Mr. Justice Harlan put to you namely that the Express Company is not a – an empty conduit for its income to the railroads if you're going to treat the Railway Express constitutionally as it coerced person within -- within Virginia, it's coerce that should be deemed as a separate entity from -- from the alternate receiver for the purpose of the income that it has.
Mr. Frederick T. Gray: What I believe is the answer to is Your Honor, if Your Honor please, is if Railway Express Agency of Delaware is not a separate corporation then the Virginia Company is not a separate corporation.
Now we have no problem because then they are engaged in intrastate commerce.
I don't think you can separate one of them and not separate the other and I don't think you can tie on the other end without tying the other.
If -- if we're going to say that the Express Company of Delaware is really a part of the railroads then the Virginia Company is merely a part of the railroads too, and they're doing an intrastate commerce in Virginia.
Justice Felix Frankfurter: If Virginia was constitutionally authorized as it were -- was by the decision in 282 to compel the local Railway Express Company from coming into being, and from the part of your Virginia in constitutional law, it has held the same thing.
You don't have to bother about where the money is going eventually.
Mr. Frederick T. Gray: To try to complete just the two other changes in the statute now before the lunch hour, I have mentioned that they took out the tax on intangibles; they took out the tax on the money.
They also amended the statute in such a way as to include within rolling stock, within the term “rolling stock,” automotive equipment.
Now the Appellant has never conceded that that statute was changed to that effect and they still contend that the Corporation Commission made a strained construction in order to get to that, but regardless of whether it was strained or unstrained, the Virginia Supreme Court has determined that under the amended statute, the automotive equipment and trucks are exempt from taxation in Virginia.
That was an additional change of the statute claimed and the final change is that the mileage formula, which was contained in the prior statute, is not contained in this statute, the apportioned that formula, they -- they apportioned the formula by mileage.
Under the present statute, the way that you arrive at gross receipts is for the company to report what its gross receipts are.
And the only reason we ever came to a mileage or an apportionment formula in this case is that the company failed to report its gross receipt.
At the record on Page 110, “all receipts earned in Virginia on business passing through into or out of this state” and the answer which they gave was “none.”
And they appended a statement saying we -- we have no way of determining what our gross receipts are.
Now in reply brief the first time --
Chief Justice Earl Warren: We'll recess now, Mr. Gray.
Argument of Frederick T. Gray
Chief Justice Earl Warren: Mr. Gray, you may proceed.
Mr. Frederick T. Gray: Thank you, sir.
As we pause for recess, if Your Honors please, I was concluding my remark with respect to the three additional changes in the statute which we say were made and which appellants have failed to recognize as being changes in the statute.
It's been pointed out that the mileage formula which was formerly in the statute, the apportionment formula is not in this statute and that the appellant, in making its return, did not attempt to assert any value for gross receipts in Virginia at all but rather answer that it had no gross receipts in Virginia.
And the Commission had to apply the section of the law which provides that where a -- a taxpayer fails or refuses to report, they shall make the return on the best information available.
And in so doing, the Commission has reached a mileage formula to determine what gross receipts are.
Now, it seems to us, a rather strange concept that a taxpayer can thus fail to report, and then come into court and complain that I didn't know what my gross receipts were, and I didn't report any gross receipts but the method you use is wrong.
Either they did know or didn't know.
The position they take is we don't know what our receipts were but we do know that what you say our receipts were -- were not our receipts in Virginia.
Justice John M. Harlan: Could I ask you a question at this point?
Mr. Frederick T. Gray: Yes.
Justice John M. Harlan: Assuming we were to conclude that this was not a property tax, do you so say the tax is all right?
Mr. Frederick T. Gray: If it were not a property tax.
If Your Honor please, if this is not a property tax, the only basis on which I say that the tax could be sustained would be that by virtue of the use of its property, the Delaware company's property by the Virginia company that that would be a sufficient basis for tax.
That is the only other basis on which it could be sustained.
Justice John M. Harlan: Pardon.
Mr. Frederick T. Gray: I believe substantially that Mr. Gay, when he stated that the noble of this case is whether a gross receipts tax can be used to measure property taxes in lieu of which the gross receipt tax is levied, that is the part of this matter.
And if -- if the decisions of the Court are such that no gross receipts tax, no matter how fairly apportioned or no matter what property it stands in lieu of, if gross receipts as such can never be used as a measure of a property tax, then I think I have very rough pleading from therein.
Justice John M. Harlan: Do you --
Mr. Frederick T. Gray: We do not believe that the cases of this Court are to that effect.
Justice Charles E. Whittaker: Even if it could be, you still have to point, is it not, Mr. Gray, in some property is subject --
Mr. Frederick T. Gray: Oh.
Justice Charles E. Whittaker: -- to the tax.
Mr. Frederick T. Gray: That would go to amount.
That would go to amount.
Justice Charles E. Whittaker: Well, there'd be no amount involved if the record affirmatively showed there was no property.
Mr. Frederick T. Gray: Oh, that's correct.
But I think the answer -- in answer to -- to the question that if -- if the decisions of this Court are that you can never have a gross receipts tax, if -- if the fact that it's gross receipts denotes it as a privilege tax, then I don't get to amount.
I'll stop it below.
I say, in connection with that, now, I would like to get in to what I conceived to be the nature of this tax and why I conceived it would be nature.
The Court will remember that under the prior tax, there was a decided -- a divided opinion of the Court.
The Court was divided 5-to-4 as to the nature of the prior tax.
And the majority of the Court, as we read the opinions, as we understand what the Court held, the Court laid great stress on what it characterized as a trinity of characterizations which it found in the statute in 1954.
The Court said, we start with the taxing statute in which the legislature gave a trinity of characterizations to the tax.
It was declared to be in addition to the property tax not an additional property tax.
It was named an annual license tax.
It was laid for the privilege of doing business.
The Court went on, it is not an easy conclusion that the legislature did not know the actual character of the taxes it was laying.
All that it misconceived what it was taxing.
Now, to look at the amended statute in the light of that language of the Court, let us look at the three amendments which the appellant says were made in the statute.
First, he says, at two places in brief and repeated in oral argument today that one of the amendment was, that we levied a tax in lieu of a tax on other property rather than a tax in addition to the tax on other property.
The error in his statement is that the old tax was not said to be in addition to a tax on other property.
It was said to be a tax in addition to the tax on property not on other property.
And this Court used that as one of the trinity of characterizations that it wasn't an additional property tax or tax in addition to the tax on other property.
This time, it is a tax in lieu of a tax on intangible property and rolling stock.
Secondly, the Court found that it was labelled a license tax.
We certainly agree.
We urged last time that the license or the -- the label had no particular significance.
We still make that argument.
But now, as before, we have taken the name license tax off of it, it should never have been there because it does not operate as a license tax.
Licenses are not issued.
It is not a prerequisite to the doing of business in the State of Virginia.
It just doesn't operate as license tax.
And the collection of the tax is left to the ordinary process, it's for collection.
Finally, the term for the --
Justice Felix Frankfurter: But that's not -- but that's not important (Inaudible) in fact that --
Mr. Frederick T. Gray: They -- they --
Justice Felix Frankfurter: -- (Voice Overlap) --
Mr. Frederick T. Gray: -- changed --
Justice Felix Frankfurter: -- and they don't -- they can do business and that they have right to do business, it hasn't forfeited.
That is not very important otherwise in easy way to put burdens on interstate commerce.
Mr. Frederick T. Gray: Well, it is merely an indicia of the nature of the tax.
It is one of the things which the Court the found to be an indicia of the nature of the tax.
Justice Felix Frankfurter: I think the other --
Mr. Frederick T. Gray: Now --
Justice Felix Frankfurter: -- way around, it's very important.
If the State tells us, "We want a license, you can do business, that's very important."
Avoid using the label is not very important.
Mr. Frederick T. Gray: No, if Your Honor please.
But I think in this particular situation, it becomes important because that was one of the basis on which the Court reached its conclusion last time.
I believe in -- in argument with -- in the Minnesota case on yesterday, Your Honor indicated that it was rather difficult for the Court to -- even though a state court may say this is a property tax, it's rather difficult when the language of the statute says this is levied for the -- for the purpose of doing business -- for the purpose of doing business in the State.
But it's rather hard to make the jump and that label license tax was taken out of the statute.
And also the language for the privilege of doing business was taken out of the statute.
The minority opinion in the prior case, a dissenting opinion seems to point out very clearly to us that the basis of decision had largely been the fact that the legislature had characterized the tax as a privilege tax because in the minority opinion, this appears in some Virginia's tax should not be held unconstitutional merely because of the name the state legislature gave it.
The constitutionality of a State's tax laws should not depend on ability of state legislatures to foresee what tax language would most likely meet this Court's approach.
Now, we say that these changes which were made not only change the label of the tax but under this Court's decision, change the nature of the tax.
It is our position -- it was our position before that Virginia has attempted to levy a property tax.
Its Constitution, Section 170 of the Constitution of Virginia envisions a property tax on this type of corporation.
Justice John M. Harlan: What is the type of corporation that is --
Mr. Frederick T. Gray: This -- public --
Justice John M. Harlan: -- covered by the --
Mr. Frederick T. Gray: Public --
Justice John M. Harlan: Public utility?
Mr. Frederick T. Gray: Public service corporation.
Justice John M. Harlan: Do you -- public service.
Do you have any other property taxes in Virginia that are measured by gross receipts?
Mr. Frederick T. Gray: Any other property tax that's measured by gross receipts.
I believe not, sir.
Justice Felix Frankfurter: You would tax public utility differently from ordinary business?
Mr. Frederick T. Gray: They are -- they are tax differently, if Your Honor please, in this very material respect.
The tangible property of a public utility is taxed by the localities.
The Constitution provides and the Court has held prior to -- with respect to mode, in the case of City of Richmond against the Commonwealth, the Court has held that in assessing the value of tangible property for local taxation, the Corporation Commission must consider the bare bones value of the property for local taxation.
That the going concern or intangible value of such corporations is left to the State for taxation and that is what is called the state franchise tax.
Justice Felix Frankfurter: So I take a -- take a -- state for your -- any of the other (Inaudible) is a store at Richmond or in Orleans, are they taxed the same way that the Office of the -- of the Railway Express Company (Inaudible)
Mr. Frederick T. Gray: That's the Office of the American Railway.
Justice Felix Frankfurter: Although -- concern or that they -- have they got offices?
Have they got --
Mr. Frederick T. Gray: They --
Justice Felix Frankfurter: -- offices in different cities of Virginia?
Mr. Frederick T. Gray: They would pay income taxes.
Public utilities do not pay income tax.
Justice Felix Frankfurter: What I want to know is the difference in taxation between property, physical property of the grocery business and (Voice Overlap) --
Mr. Frederick T. Gray: Oh, between physical property.
Physical property of the grocery business would be taxed by the locality --
Justice Felix Frankfurter: Now, what --
Mr. Frederick T. Gray: -- at full value.
Justice Felix Frankfurter: Now, what about --
Mr. Frederick T. Gray: I mean, whatever value that -- I mean whatever --
Justice Felix Frankfurter: What about --
Mr. Frederick T. Gray: -- formula is that --
Justice Felix Frankfurter: -- electric -- a local gas or electric or water company whatnot utility?
Mr. Frederick T. Gray: It would be taxed by the --
Justice Felix Frankfurter: That's the way the grocery --
Mr. Frederick T. Gray: No, no -- not.
It would be -- it would be -- if it's a public utility, it would be taxed the same way that this -- just as the Virginia company is.
Justice Felix Frankfurter: All right.
Mr. Frederick T. Gray: There is absolute and no distinction or discrimination between a foreign corporation and a local corporation if that is Your Honor's question.
Justice Felix Frankfurter: What I want to know --
Mr. Frederick T. Gray: The Virginia company here which would be the closest analogy we could find in the same business is taxed exactly the same way that this company is taxed.
This is a tax against all express companies in Virginia and is a part of a system of taxing all utilities in Virginia.
They all tax alike.
Justice Felix Frankfurter: All right.
Is the local business of a -- once a telephone company that says (Voice Overlap) --
Mr. Frederick T. Gray: Just -- just speaking to (Inaudible)
Justice Felix Frankfurter: Just speaking to (Inaudible)
Is the intrastate telephone business, just as you told it, taxed the way this company --
Mr. Frederick T. Gray: Yes, Your Honor.
Now, I would like to point out what I believe under one of the decisions of this Court is clearly as anything I have been able to find demonstrates the difference between this tax which was here in the prior case and the tax which is here now.
In the Cudahy Packing Company case, the Court discusses two earlier which were decided by this Court on the same -- very same day.
They being the Meyer against Wells Fargo and the United States Express Company case, both reported in 223 US.
The Meyer case, there was a gross receipts tax which was levied in addition to the tax on property.
And the Court held that that was bad, that was a void tax, that there was -- since there was a tax on the property already, you couldn't say it was a property tax, it had to be a privilege tax and therefore the tax fell.
But on the same day, they decided the United States Express Company case which on facts is very, very similar to this case.
It did business in the same manner.
And there, the gross receipts tax was levied in lieu of a tax on property, and the Court held that this is but a measure of the value of the corporation's property and the tax was sustained.
In addition, the Court said that this is the only tax in the State that falls upon this property.
Now, when this case was here before, there was a tax of 50 cents per $100 in value in the statute on the intangibles of the company.
This time, that tax on intangible values has been removed from the statute.
And if this tax be stricken, there will be no tax in Virginia which reaches the going concern or goodwill value of this property at all.
The localities are taxing the tangible property merely on its bare bones value.
The goodwill or going concern value which no one denies exist in a going corporation is completely immune from tax unless it'd be reach by this gross receipts tax.
Justice Felix Frankfurter: It doesn't follow.
It isn't reachable by some other taxing measure.
Mr. Frederick T. Gray: It does not follow, no, Your Honor.
We say that we are reaching it this way and measuring it by gross receipts, but that is what this tax is.
It is a gross receipts tax in lieu of a tax on property.
Now, the appellant cites the United States Glue Company case has authority for the proposition that gross receipts cannot be used to measure going concern value or property values that gross receipts indicates a privilege tax and it always has to be a privilege tax if it's measured by gross receipts.
In the first place, the United States Glue Company case, it was decided in 1918, it did not have -- the Court did not have before a gross receipts tax.
It had before a net tax.
And -- and what we submit was dicta, the Court said that a net tax does not have the vice which could be inherit in a gross receipts tax.
And Mr. Justice Black, in the Gwin case pointed out that U.S. Glue, the comments with respect to gross receipts in U.S. Glue was really dicta.
As we have read the opinions of this Court and the decisions of this Court with respect to gross receipts taxes, those taxes which have fallen, fell because they were not fairly or properly apportioned within the State.
They have not fallen just because the tax was a gross receipts tax.
And in that connection, there is in the case of Western Live Stock, Mr. Justice Stone's opinion a discussion of gross receipts taxes.
And if I may just very briefly, I will not try to read it in full but just to hit the highlights of it.
Taxation measured by gross receipts from interstate commerce has been sustained when fairly apportioned to the commerce carried on within the taxing State.
Say, Maine -- Maine against Grand Trunk, Cudahy Packing, United States Express against Minnesota, which I have just referred to you, has been rejected in other cases only because the apportionment was found to be inadequate or unfair.
Now, it goes on to say that it is a practical way of laying upon commerce its share of the local tax burden without subjecting it to multiple taxation, it would be fairly apportioned.
As we read the prior decision of this Court, we understood the prior decision of this Court, it seems to us that the Court would not have gone to the great lengths that it did go to analyze the Virginia tax to point out that it was labeled license tax, that it was said to be in addition to property and that it was said to be for the privilege of doing business.
If the law is that a gross receipts tax per se is a privilege tax, the Court could have said that and no more in the prior Virginia case.
They could merely have said, "This tax is measured by gross receipts hence, it is a privilege tax, hence, it has to fall under the facts of this case."
Now, we -- we do not believed that this Court has laid down a rule that every gross receipts tax, no matter how fairly apportioned is invalid.
I see that I -- my time is quickly passing.
I would just like to point out a few other factors.
That number one, the Constitution of Virginia in Section 170 provides that we can levy a franchise tax in lieu of a tax or other property or corporation such as this.
So that the Constitution -- the language of the Constitution, when it says in lieu of a tax on other property, clearly envisions this type of tax to be a tax on the going concern or the intangible value of the corporation.
That was what it meant.
The debates, some of the debates of the Framers of the Constitution are set forth in our brief and it can clearly be seen from those that the Framers of the Constitution envision a system of taxation where the going concern value would be reached by tax measured by gross receipts.
Justice Felix Frankfurter: Mr. Gray, I noticed that we -- I'm sure about -- I noticed that you -- you or Mr. Gay referred to a case that has always given need more light in any other single case on this subject, Galveston-Texas case.
Mr. Frederick T. Gray: If Your Honor, I -- excuse me.
Justice Felix Frankfurter: Pardon me.
Mr. Frederick T. Gray: I did not refer to it directly.
I -- I -- it is referred to in brief --
Justice Felix Frankfurter: Well, I've looked at the (Inaudible)
I'm not -- people have different views about (Inaudible)
Mr. Frederick T. Gray: Well --
Justice Felix Frankfurter: Well, I want to ask you -- that isn't -- that wasn't my question.
I just note that fact.
Mr. Frederick T. Gray: I -- I believe you would --
Justice Felix Frankfurter: But I wondered if you address yourself to the remark made by Justice Holmes in that opinion.
As a generality, it doesn't help me decide any one of these cases but it (Inaudible) argue, he said that for the Court, if it attached right this on the railroad or what do you call the organic value of the property, if it bares upon commerce among the State, first by presenting the whole (Inaudible) taxation that must be taken into account.
Mr. Frederick T. Gray: That's right.
Justice Felix Frankfurter: That's what I -- I am impressing Mr. Gay as much as I have and you are part of the other kinds of (Inaudible) they could levy.
If it is upon commerce among the State so directly as to amount to a regulation in a relatively immediate way, in a relatively immediate way, it will not be saved by name or (Inaudible)
Now, your gaps, so far as I'm concern, is to prove that this had been so far as my (Inaudible) about this concern that this is not amount to a regulation in a relatively immediate way by an indirection, when you've been denied to do it directly.
Mr. Frederick T. Gray: Well, if Your Honor please, I -- I believe we had some comments with respect to the Galveston case last time in the --
Justice Felix Frankfurter: (Voice Overlap) --
Mr. Frederick T. Gray: -- interpretation that I put on Maine against Grand --
Justice Felix Frankfurter: (Voice Overlap) --
Mr. Frederick T. Gray: -- Trunk if I recall correctly.
We submit --
Justice Felix Frankfurter: That's why I put the question (Inaudible)
Mr. Frederick T. Gray: If Your Honor please, I -- of course, if we are taxing the privilege, there is no question.
And as the Virginia court had recognized that very recently wherein in the Olan Mills case where the photographers were coming in and doing business.
And -- and the Virginia court itself brought down local license taxes against this people, then you can't so burden this company.
But whereas here, the State sets up a system of taxation and says, “Now, we ought to be able to get it all the value of this company, all of their value.
Their bare bones, their tracks, their bridges, their trucks, everything they have.”
And in addition to that, we are fairly entitled to tax the intangible element of value which it has as a going concern.
That piece of track is worth nothing but as a part of this railroad, it has a value.
Now, in order to do this, we are going to allow the localities to tax the bare bones.
No good will, no going concern value but mere bare bones.
And we are going to allow the State to impose what is called a “franchise tax” measured by the gross receipts of this company to reach this increment of the value of this corporation.
Now, that is a scheme of taxation.
Then they go on and say, “When you have done that, then we will not tax the dividend of this company in the hands of its own.
That we have gone far in -- in the stockholders.
And we have gone far enough when we get all of the value, then that's all that we should tax.”
That is the Virginia scheme of taxation.
Now, we say that it is a fair scheme and it does not over burden or does not burden interstate commerce.
It certainly does not discriminate to use just a little -- something little straight which is in the brief to point up what we would come to this tax falls in Virginia.
Two shipments could be made out of the City of Richmond, one going to Bristol, Virginia, one going to Bristol, Tennessee across the street from one another.
They could be held by the same employee of this company.
They could be written up on the same bill of lading.
They could ride in the same trucks, in the same railroad cars and one of them would be taxed because it's intrastate, the other with state tax because it goes across the street to Tennessee.
So, certainly we can see that there is no discrimination against interstate commerce under this scheme of taxation.
What we are trying to reach is a tax on the going concern value measured by what we conceive to be a fairly apportioned gross receipt.
Justice Felix Frankfurter: I'm not forecasting my -- because I -- I couldn't.
I don't know what else is about (Inaudible)
But I don't think that the Court would decide against you and fold your arms and decide the State that they can't do anything else, would you?
Mr. Frederick T. Gray: Well, [Laughter] -- well, I would certainly have to read the decision first, if Your Honor please.[Laughter]
Justice Felix Frankfurter: (Inaudible)
Chief Justice Earl Warren: Mr. Gay, you may conclude.
Argument of Thomas B. Gay
Mr. Thomas B. Gay: If Your Honor please, just a few words.
We have been summarizing our position as this.
The Spector Motor case laid down in a clear and definitive way, and I last said to have adopted a phrase that has -- had quite reasons of significance, had been accepted as the law of the land in 12 States as controlling on the principle that gross receipts or -- or net income however fairly apportioned and however non-discriminatory may not be imposed on either gross or net income from a corporation engaged solely in the interstate commerce.
Now, that's the -- that's the -- they're not in the shell of Spector Motor case.
And we rely on that for our premise and that is that if, and it is a lot of talk these briefs but the stipulation set me -- there, the record sustained that this corporation is engaged solely in interstate commerce.
Now, this tax is solely on gross receipts derived from interstate commerce.
Now, while it'd be fairly apportioned or whether be non-discriminatory, under the Spector Motor case, it's invalid if it's a tax on the gross receipts.
Now, therefore, we – and -- and it's for the reasons that I have argued, it is a tax on gross receipts and nothing else.
If it however be considered to be property tax, then this -- we rely on what this Court said in the prior appeal in this case in which was considered -- we have said but we have declined for a judge mere gross receipts of the sound measure of going concern value in a practical world of commerce where value is obtained on profits of a business and not as mere volume.
Now, there is no question about the fact that they have filed the measure, this intangible or so-called “goodwill value by gross receipts”.
And the Court meant what it said in that case, in we certainly feel it did.
That's not a proper measure of value to determine the value of property.
Now, we don't question the power of the State to tax all property of a corporation engaged in interstate commerce where it'd be tangible or intangible.
It has taxed all the tangible property and the taxes have been paid.
It's seeks to reach this in quitting this goodwill value by measurement by gross receipts.
Well, now, if it -- what does this Court said in the prior appeal in this case is sound long, we accept it -- believe it could be, then you can't use that measure of determining goodwill value.
And that's this whole case.
Thank you, Your Honor.
Chief Justice Earl Warren: Very well.