The New York and Erie Railroad Company was a corporation
organized under the laws of, and having its principal place of
business in, the State of New York. Its object was to construct and
operate a railroad between the Hudson River and Lake Erie. In 1841,
the Legislature of Pennsylvania granted to it the right to
construct a few miles of its proposed road in the County of
Susquehanna in that state. In 1846, no work having been done on the
road, the Legislature of Pennsylvania granted to it the further
right to construct a portion of its road in Pike County, and
further enacted that after the road should be completed to Lake
Erie, the company should pay annually into thy treasury of the
Pennsylvania the sum of ten thousand dollars, and that the stock of
the road should be subject to taxation in Pennsylvania to an amount
equal to the construction of so much of the road as was in that
state. The road was then completed from the Hudson to Lake Erie,
passing through portions of Pike County and of Susquehanna County,
and the requisite payments have been made, first by the original
company, and since by its successors through foreclosures of
mortgages. The plaintiff in error is now possessed of the property
and of the rights under the acts of 1841 and 1846, and has its
principal place of business in the City of New York. In 1885, the
Legislature of Pennsylvania assessed an annual tax of three mills
on the dollar on moneys, loans, stocks, moneyed capital, etc., in
the hands of individual citizens of that state, and required the
treasurer of each private corporation incorporated under the laws
of any other state and doing business in Pennsylvania, when making
payment of interest upon its bonds, etc., held by residents of that
state, to assess the tax upon it and to report to the auditor
general of
Page 153 U. S. 629
the state, and to pay the tax so assessed and collected into the
state treasury. In accordance with this law, the treasurer of the
railroad company in 1888 reported the nominal value of all its
scrip, bonds, and evidences of indebtedness to be $78,573,485.10,
and the nominal value of all such known to be owned by residents of
Pennsylvania as " None." Thereupon the state, by its Attorney
General, commenced an action to recover of the company a tax of
three mills on the whole amount returned. In the course of the
trial, it was found that the amount of bonds of the company held
and owned by residents of Pennsylvania aggregated $841,000, and
judgment was given for a tax of three mills on that amount, which
was affirmed on appeal by the supreme court of the state.
Held:
(1) That the State of Pennsylvania cannot, consistently with the
Constitution of the United States, impose upon the New York, Lake
Erie and Western Railroad Company the duty, when paying in the City
of New York the interest due upon scrip, bonds, or certificates of
indebtedness held by residents of Pennsylvania, of deducting from
the interest so paid the amount assessed upon bond and moneyed
capital in the hands of such residents of Pennsylvania.
(2) That the fourth section of the act of 1885, in its
application to the New York, Lake Erie and Western Railroad
Company, impairs the obligation of the contract originally made by
the New York and Lake Erie Railroad Company and the State of
Pennsylvania, as disclosed by the acts of 1841 and 1846, and by
what was done by the companies, upon the faith of those acts.
This writ of error brings up for review a judgment of the
Supreme Court of Pennsylvania, affirming a judgment of the Court of
Common Pleas of Dauphin County, in that state, against the New
York, Lake Erie and Western Railroad Company, a New York
corporation, for the amount of certain taxes assessed by and
alleged to be due to Pennsylvania for the year 1888 in respect to
certain bonds and evidences of indebtedness issued by that company
and which were ascertained by the court to have been held and owned
by residents of that state.
The judgment of the court of common pleas was affirmed upon the
authority of
Commonwealth v. New York, Lake Erie & Western
Railroad, 129 Penn.St. 463, and
Commonwealth v. Lehigh
Valley Railroad, 129 Penn.St. 429.
The state based its claim against the railroad company upon a
statute enacted on the 30th day of June, 1885. The
Page 153 U. S. 630
company insisted that that statute, if applied to it in respect
to taxes due and payable in Pennsylvania by residents of that
state, was repugnant to the Constitution of the United States.
The relations existing between the plaintiff in error, as the
successor of the New York and Erie Railroad Company, and the
Commonwealth of Pennsylvania at the time of the passage of the
statute of 1885 are shown by legislative enactments to which some
reference should be made.
From the preamble of a statute approved February 16, 1841, it
appears to have been represented to the General Assembly of
Pennsylvania that the New York and Erie Railroad Company, having
authority to construct a railroad from the City of New York to Lake
Erie through the southern tier of counties in the State of New
York, was hindered in building its road through Broome County,
bordering on Pennsylvania, by a mountain of such magnitude as to
require tunneling or to be surmounted by stationary power at
immense expense, and that a level and easy route could be
established if the proposed road followed the valley of the
Susquehanna River in Pennsylvania, a distance of about fifteen
miles, and near to Broome County, New York. In consequence of these
representations, and to maintain "amity between adjoining states in
respect to their internal improvement operations," it was provided
that the railroad company
"shall have full power to extend their road through such portion
of the County of Susquehanna as, in the proper construction of
their road, they may find it necessary."
This statute contained numerous provisions for the protection of
both the railroad company as well as the public, one of which
provided that if any buildings, fences, timber, or other property
situated in Susquehanna County should be destroyed by fire
occasioned by sparks falling from locomotive engines upon the road,
the company should be liable to make full compensation for all
damages sustained in consequence of such fire, § 11 -- a liability
which, according to the statement of counsel, Pennsylvania does not
impose upon its own corporations. As these provisions do not affect
the particular questions now before us, they need not be here set
out.
By an Act of the General Assembly of Pennsylvania approved
Page 153 U. S. 631
March 26, 1846, and supplementary to that of 1841, authority was
given the New York and Erie Railroad Company to construct its road
through a portion of Susquehanna and Pike Counties. That act, among
other things, required the company to so regulate its tolls that
the charge on anthracite coal should not exceed one and one-half
cents per ton per mile. § 3. It also made it the duty of the
president and managers of the company, as soon as its railroad was
completed through Susquehanna and Pike Counties, to prepare a full
and accurate account of the costs of that portion of the road
within Pennsylvania, and communicate the same to the auditor
general of the commonwealth, and after the road was completed and
in operation to Dunkirk or became connected at the western end with
any other improvement extending to Lake Erie, the company should
pay into the treasury of this state, annually, in the month of
January, $10,000, any neglect or refusal to make such payment to
work a forfeiture of the rights and privileges granted by the act.
§ 5.
That act also provided that the stock of the company to an
amount equal to the costs of the construction of that part of its
road situated in Pennsylvania should be subject to taxation by that
state, in the same manner at the same rate, as other similar
property, and the company should pay into the treasury of the
commonwealth any tax to which that proportion of stock was liable,
and make annually a statement to the legislature, under oath, of
its affairs and of the business done on said road during the
previous year, such statement to contain a full and accurate
account of the number of passengers, amount and weight of produce,
merchandise, lumber, coal, and minerals transported on its said
road east of Dunkirk and west of Piermont. § 6.
Under the authority of these statutes, the railroad company
constructed, and has ever since maintained, its road through parts
of Pennsylvania. Of the company's road extending from Jersey City
to Dunkirk and Buffalo, a distance of 446 miles, about 42 miles are
within the Counties of Pike and Susquehanna.
Page 153 U. S. 632
The taxes in question were imposed under the above statute of
1885, which assessed an annual tax of three mills on the collar for
state purposes on all mortgages, money owing by solvent debtors,
whether by promissory note, or penal or single bill, bond, or
judgment, also on all articles of agreement and accounts bearing
interest, owned or possessed by any person or persons whatsoever,
except notes or bills for work or labor done, and obligations given
to banks for money loaned and bank notes, on all public loans or
stocks except those issued by Pennsylvania or the United States, on
all moneys loaned or invested in any other state, and on all other
moneyed capital in the hands of individual citizens of
Pennsylvania, the property and interests so taxed being exempted
from all taxation except for state purposes, and the act not to
apply to building and loan associations. Penn.Laws, 1885, 193, §
1.
By the fourth section of the act it, was provided that
"hereafter it shall be the duty of the treasurer of each private
corporation, incorporated by or under the laws of this commonwealth
or the laws of any other state, or of the United States and doing
business in this commonwealth, upon the payment of any interest on
any scrip, bond, or certificate of indebtedness, issued by said
corporation to residents of this commonwealth, and held by them, to
assess the tax imposed and provided for state purposes upon the
nominal value of each and every said evidence of debt, and to
report on oath annually on the first Monday in November to the
auditor-general the amount of indebtedness of the corporation owned
by residents of this commonwealth, as nearly as the same can be
ascertained, and it shall be his further duty to deduct three mills
on every dollar of the interest paid as aforesaid, and return the
same into the state treasury within fifteen days after the
thirty-first day or December in each year, and his compensation for
his services shall be the same that city and borough treasurers
receive for similar services, and for every failure to assess and
pay said tax and make report as aforesaid the auditor general shall
add ten percentum as a penalty to the amount of the tax; in payment
of said tax by
Page 153 U. S. 633
a corporation the bonds, certificates or other evidences of
indebtedness issued by it shall be exempt from all other taxation
in the hands of the holders of the same."
In November, 1888, the treasurer of the railroad company made
the following report under oath to the auditor general of
Pennsylvania:
"In accordance with the provisions of the fourth section of the
Act of June 30, 1885, and the requirements of your department, as
treasurer of the New York, Lake Erie and Western Railroad Company,
I make the following report of the indebtedness of said company for
the year ending first Monday of November, 1888:"
Nominal value of all scrip, bonds,
and evidences of indebtedness . . . . . . . $78,573,485.10
==============
Nominal value of all scrip, bonds, and
evidences of indebtedness known to be
owned by residents of Pennsylvania. . . . . . None
Nominal value of all scrip, bonds, and
evidences of indebtedness none of which
are known to be owned by residents
of Pennsylvania . . . . . . . . . . . . . . . $78,573,485.10
This report was accompanied by a communication from the
treasurer of the railroad company stating that it was made in
deference to the wishes of the auditor general, but under protest,
and not in admission of any authority contained in the fourth
section of the act of 1885.
In 1890, the commonwealth, by its Attorney General, proceeded
against the railroad company in the Court of Common Pleas of
Dauphin County to recover the amount claimed from it under section
four of the act of 1885, for the year ending first Monday of
November, 1888, for taxes on its scrip, bonds, and certificates of
indebtedness held by residents of Pennsylvania. The amount so
claimed was $234,490.86, with 12 percentum interest from 60 days
after the settlement of the tax account by the auditor general.
That officer settled the account upon the basis that the railroad
company was subject
Page 153 U. S. 634
to taxes in Pennsylvania on the nominal value of all the scrip,
bonds, and certificates of indebtedness issued by the company, and
then outstanding, to-wit, $78,573,485.10. Having no information
whatever as to ownership, the auditor general arbitrarily assumed
in the settlement that all the company's outstanding scrip, bonds,
and certificates of indebtedness were owned by residents of
Pennsylvania.
A trial by jury was dispensed with by the parties, and the case
was heard by the court. From the evidence in the cause, the court
found the following facts:
"1, Defendant is a corporation chartered by the State of New
York, and having its principal office and place of business in the
City of New York. It has and exercises the right of way, under a
special act of the Legislature of the State of Pennsylvania, to run
its railroad for somewhat more than thirty miles through the State
of Pennsylvania, for which it pays annually to the state the sum of
ten thousand dollars. 2. The settlement appealed from is based upon
a report made by the treasurer of defendant to the Auditor General
of Pennsylvania for the year 1888, which contains a detailed
statement of the several issues of bonds, scrip, and certificates
of indebtedness by defendant, and the corporation whose successor
it is, amounting in all to $78,573,485.10, in which it is stated
that none of the indebtedness is known to be owned by residents of
Pennsylvania, and that it is believed by the officers of the
company that nearly all is owned by nonresidents of Pennsylvania.
3. In the settlement appealed from, defendant is charged with tax
upon the nominal value of all scrip, bonds, and certificates of
indebtedness issued by it, and the corporation whose successor it
is, and owing by it, amounting to the sum of $78,573,485.10, as
stated in said report. 4. All the evidences of indebtedness owing
by defendant were created and issued under authority granted by the
Legislature of the State of New York, and were issued, sold, and
delivered in the City of New York, in said state or in London,
England, and the interest accruing from time to time thereon is
payable and paid in said City of New York and in London. The right
to the interest is evidenced by coupons payable to the bearer,
Page 153 U. S. 635
which, when due, are separated from the bonds, and are presented
for payment at the office of defendant in the City of New York by
banks, bankers, and their messengers, on behalf of themselves and
their correspondents in other places, by whom the coupons have been
transmitted, either as cash or for collection, and it is
practically impossible for the treasurer or other officers of
defendant at the time the coupons are presented, to ascertain the
residence of the owner of the bonds from which they have been
separated, because of the large number of coupons presented at the
dates when they become due, the whole number of coupons due
semiannually amounting to more than one hundred and fifty thousand,
and as many as twenty thousand being presented in a single day, and
for the further reason that the bankers and their messengers, when
they present the coupons, in very many instances do not know who
are the owners of the bonds from which they have been detached, and
could not be compelled to disclose if they did know, as the coupons
are payable to bearer, and a refusal of the treasurer of the
company to pay the coupons on presentation, except upon condition
of the ownership being disclosed, would subject it to the risk and
expense and loss of credit of having the coupons protested for
nonpayment. Some of the evidences of indebtedness are coupon bonds
issued and payable to bearer, and others are coupon bonds which may
be registered or not at the option of the holders or owners. 5.
Holders of the evidences of indebtedness of defendant are entitled
to vote for directors of this company, and a register is kept in
the office of defendant, in which all holders of such evidences of
indebtedness are required to register between sixty and thirty days
prior to any election for directors at which they desire to vote.
The register for the year 1888 shows an ownership of bonds to the
amount of $28,562,700, of which we find that $338,000 were owned by
residents of Pennsylvania, but this ownership does not appear on
the register. 6. A record of registered bonds is also kept in the
office of defendant, and in 1888 there were registered $11,124,300
in value of bonds. Of this amount $2,054,000 were owned by
residents of Pennsylvania, $1,551,000 of which were owned by
Pennsylvania corporations,
Page 153 U. S. 636
leaving $503,000 which were owned by individual residents of
Pennsylvania. 7. There is no evidence in this case from which we
could find that any particular bonds, other than those which make
up the two amounts of $338,000 and $503,000, as above stated, were
held or owned, during the year 1888, in Pennsylvania, nor is there
any evidence tending to show that the treasurer of defendant at the
time the coupons were paid, could know that any, and, if any,
which, or the coupons, other than those which belonged to the bonds
above specified, belonged to bonds held or owned in this state, and
we therefore do not find that there were any other bonds, or any
greater amount of bonds, held in Pennsylvania, during the year for
which the tax is claimed in this settlement, than the bonds
specified in findings of fact numbers five and six."
Subsequently, the court found the following additional
facts:
"1. The treasurer of defendant is, and was in 1888, a resident
of the State of New York. 2. The legislation of the State of New
York constituting the charter of the company, and in pursuance of
which the bonds and mortgages were issued, is silent upon the
subject of their taxation by the State of Pennsylvania, or the
assessment or collection of a tax thereon by the company or its
officers, and that the legislation of the State of Pennsylvania
authorizing the construction of a portion of its road through a
portion of said state is silent upon the subject of the taxation of
the bonds and mortgages of the company, or of the collection of a
tax thereon by the company or its officers. 3. The railroad of
defendant extends from New York City to Buffalo, a distance of 446
miles, and that, so far as the State of Pennsylvania is concerned,
the business of the company consists chiefly in the transportation
of freight and passengers from or to, or from and to, other states,
into, out of, or through the State of Pennsylvania."
It was adjudged that the defendant was liable for the tax in
respect of the bonds held and owned in 1888 by residents of
Pennsylvania, represented by the two items of $338,000 and
$503,000, aggregating $841,000, and not on any other or greater
amount of bonds, and that view was approved by the Supreme Court of
Pennsylvania.
Page 153 U. S. 639
MR. JUSTICE HARLAN, after stating the facts in the foregoing
language, delivered the opinion of the Court.
The principal question in the case is whether the Commonwealth
of Pennsylvania may, consistently with the Constitution of the
United States, impose upon the New York, Lake Erie and Western
Railroad Company the duty, when paying in the City of New York the
interest due upon scrip, bonds, or
Page 153 U. S. 640
certificates of indebtedness held by residents of Pennsylvania,
of deducting, from the interest so paid the amount assessed upon
bonds and moneyed capital in the hands of such residents of
Pennsylvania.
The Court recognizes the far-reaching consequences of its
determination of this question, and has therefore bestowed upon it
the careful consideration which its importance demands.
It is contended that, in our examination of this question, there
are certain principal facts found by the court of common pleas
which, so far as they are pertinent, must be accepted as the basis
of any decision that may be rendered.
Commonwealth v.
Westinghouse Electric and Mfg. Co., 151 Penn.St. 265, and
authorities there cited. These facts are that all the evidences of
debt owing by the railroad company were created and issued under
the authority of the State of New York, and were sold and delivered
in that state or in London; that the interest on such indebtedness
is payable and paid in the Cities of New York and London; that the
interest coupons are payable to bearer, and, when due, are
separated from the bonds and presented for payment at the company's
office in New York by banks and their messengers, on their own
behalf or on behalf of their correspondents in other places, by
whom the coupons have been sent either as cash or for collection,
and that it is practically impossible for the company's officers at
the time the coupons are presented to ascertain the residence of
the owners of the bonds from which the coupons were detached, the
number of coupons due semiannually amounting to more than 150,000,
and those presented in a single day often amounting to 20,000, and
the bankers and their messengers, at the time of presenting their
coupons, not knowing in very many instances who own the bonds, and,
as the coupons are payable to bearer, could not be compelled to
disclose the ownership of either bonds or coupons.
In our judgment, however strongly those facts may indicate the
injustice that would be done to the railroad company by subjecting
it to the provisions of the fourth section of the
Page 153 U. S. 641
statute of 1885, and although such facts are important in some
aspects of this case to be presently examined, they are not in
themselves decisive of the question to be here determined. It is
not enough to justify the overthrow, by judicial decision, of a
state law imposing taxation simply to show that such law operates
unjustly. So far as the courts of the union are concerned, they
must recognize, and, when necessary to do so in cases within their
jurisdiction, enforce the statutes of the several states unless
those statutes encroach upon legitimate national authority or
violate some right granted or secured by the Constitution of the
United States.
Kirtland v. Hotchkiss, 100 U.
S. 491,
100 U. S. 498.
The question here is not one of mere injustice done to the railroad
company, but one of power or authority in Pennsylvania to compel
that corporation to do what the act of 1885 is held by the state
court to require at its hands in respect to taxes upon bonds and
moneyed capital in the hands of individual citizens of
Pennsylvania.
The fundamental propositions upon which the argument of counsel
for the state is based is that the New York, Lake Erie and Western
Railroad Company is a private corporation of another state; that it
has no right to do business in Pennsylvania without the permission
of that state, and that it is therefore subject at all times to
such reasonable regulations as may be prescribed by Pennsylvania,
whether those regulations relate to taxation or to the business or
property of the company in that commonwealth. This view was
expressed by the Supreme Court of Pennsylvania in
Commonwealth
v. New York, Lake Erie & Western Railroad, 129 Penn.St.
463, in the following language:
"It was competent for the Legislature of Pennsylvania to impose
as a condition upon foreign corporations doing business in this
state that they shall assess and collect the tax upon that portion
of their loans in the hands of individuals resident within this
state, and otherwise comply with the provisions of the act of 1885.
The act imposes no tax upon the company. It simply defines a duty
to be performed, and fixes a penalty for disregard of that duty.
The legislature having so provided, compliance with the act may, in
some sense, be said to form one of the conditions upon
Page 153 U. S. 642
which corporations may do business within the state, and the
corporation continuing its business subsequently would be taken to
have assented thereto. There is, however, a condition, implied even
in the case of domestic corporations, that they will be subject to
such reasonable regulations in respect to the general conduct of
their affairs as the legislature may from time to time prescribe,
and such as do not materially interfere with or obstruct the
substantial enjoyment of the privileges the state has granted.
Chicago Life Ins. Co. v. Needles, 113 U. S.
574. If this be so as to corporations who are entitled
to their charter privileges upon the footing of a contract, how
much the more is it so as to corporations who are merely permitted
by the legislature to do business within this state as a matter of
grace, and not of right."
It is found as a fact in this case that, so far as Pennsylvania
is concerned, the business of the railroad company consists chiefly
in the transportation of freight and passengers from or to other
states, into, out of, or through that state. We are not sure that
the court below, or counsel here, intended to be understood as
claiming that it was competent for Pennsylvania to make compliance
with the fourth section of the act of 1885 a condition of the right
of the railroad company to continue the use of its track in
Pennsylvania for purposes of interstate commerce. Some of the
considerations necessary to be borne in mind when any such question
arises for determination are adverted to in the recent decision of
this Court in
Crutcher v. Kentucky, 141 U. S.
47,
141 U. S. 59.
But no such question is here presented. The Commonwealth of
Pennsylvania has not attempted to impose any such condition upon
the corporations embraced by the statute of 1885.
Assuming for the purposes of this case the correctness of the
position taken by the learned Attorney General of Pennsylvania,
that the commerce clause of the Constitution of the United States
has no bearing upon the present inquiry, we are of opinion that the
fourth section of the act of 1885, in its application to this
railroad company, impairs the obligation of the contract between it
and Pennsylvania as disclosed by the acts of 1841 and 1846 and by
what was done by that company
Page 153 U. S. 643
upon the faith of those acts. Those acts prescribe the terms and
conditions upon which Pennsylvania assented to the company's
constructing and operating its road through limited portions of its
territory. Those terms have been fully indicated in the statement
of this case, and need not to be repeated. When the state, by the
acts of 1841 and 1846, gave this assent, the possibility that the
company might misuse or abuse the privileges granted to it or
violate the provisions of those acts was not overlooked, for by the
seventh section of the act of 1846, into which, by its second
section, all the restrictions, prohibitions, privileges, and
provisions contained in the act of 1841 were imported, it was
declared that the right of the legislature to repeal it was
reserved "if the said company shall misuse or abuse the privileges
hereby granted or shall violate any of the privileges [provisions]
of this act." And the question whether the privileges granted had
been misused or abused, or the provisions of the act violated, was
to be determined by
scire facias issued out of the Supreme
Court of Pennsylvania. § 7. There is no claim in the present case
of any violation by the railroad company of the provisions of the
acts of 1841 and 1846 specifying the terms and conditions upon
which it acquired the right, so far as it depended upon state
legislation, to enter Pennsylvania and construct and operate a part
of its road within the Territory of that commonwealth. Consistently
with those terms and conditions, Pennsylvania cannot withdraw the
assent which it gave, upon a valuable consideration, to the
construction and operation of the defendant's road within its
limits. Nor can the right of the company to enjoy the privileges so
obtained be burdened with conditions not prescribed in the acts of
1841 and 1846, except such as the state, in the exercise of its
police powers for purposes of taxation and for other public
objects, may legally impose in respect to business carried on and
property situate within its limits.
The argument in behalf of the state leads logically to the
conclusion that, notwithstanding the provisions of the acts of 1841
and 1846, prescribing the terms upon which the company acquired the
privilege of constructing and operating its road
Page 153 U. S. 644
in that state, Pennsylvania could, in its discretion, change
those terms and impose any others it deemed proper. If the state
amended those acts so as to increase the sum to be paid annually
into the state treasury, as a bonus, from $10,000 to $100,000, the
argument made by its Attorney General would sustain such
legislation upon the ground that the state, at the outset, could
have exacted the larger amount from the company as a condition of
its entering the state with its road. To any view which assumes
that the state could -- so long at least, as the railroad company
performed the conditions of the acts of 1841 and 1846 -- burden the
company with conditions that would substantially impair the right
to maintain and operate its road within Pennsylvania upon the terms
stipulated in those acts we cannot give our assent. No such terms
as those named in the act of 1885 were imposed prior to the
building of the road in Pennsylvania, and, the road having been
constructed in that state upon the faith of the legislation of 1841
and 1846 and with the assent of the state, given for a valuable
consideration paid by the company, its maintenance in Pennsylvania
cannot be made the pretext for imposing such conditions as those
prescribed in the act of 1885.
But it is said that regulations prescribed after the
construction of the road, applicable to railroad companies doing
business in the state, such regulations being reasonable in their
character, should be deemed to have been within the contemplation
of the parties when those acts were passed, and therefore not in
violation of the agreement under which the company entered the
state for the purpose of transacting business there, and that it
should not be assumed that the state intended to surrender or
bargain away its authority to establish such regulations.
Of the soundness of this general proposition there can be no
doubt in view of the settled doctrines of this Court. The contract
in question left unimpaired the power of the state to establish
such reasonable regulations as it deemed proper touching the
management of the business done and the property owned by the
railroad company in Pennsylvania which
Page 153 U. S. 645
did not materially interfere with or obstruct the substantial
enjoyment of the rights previously granted. But the fourth section
of the act of 1885 is not within that category. It assumes to do
what the state has no authority to do -- to compel a foreign
corporation to act, in the state of its creation, as an assessor
and collector of taxes due in Pennsylvania from residents of
Pennsylvania. Under the sanction of the laws of New York, the
defendant corporation executed, prior to the passage of the act of
1885, bonds, with interest coupons attached, payable in that state
and not elsewhere. It gave mortgages to secure the payment of those
bonds and coupons, according to their tenor. Neither the bonds nor
the coupons nor the mortgages contain anything that would in law
justify the company in refusing to meet its obligations, according
to their terms and without deduction on account of taxes due from
the holders of such bonds or coupons residing in another state. We
have seen that the bonds and coupons in question were payable to
bearer, and that it was practically impossible for the company,
when the coupons were presented for payment, to ascertain who at
that time really owned them, or the bonds from which they were
detached, or whether the coupons were owned by the same person or
corporation that owned the bonds. This fact is quite sufficient to
show the unreasonable character of the regulations attempted to be
applied to this company under the act of 1885. This view is
strengthened by the fact that the coupons were negotiable
instruments, and, being detached from the bonds, were separate
obligations, passing by delivery, upon which an action could have
been maintained by the holder independently of the ownership of the
bonds. Such is the settled doctrine of commercial law as declared
by this Court.
Clark v. Iowa
City, 20 Wall. 583;
Hartman v. Greenhow,
102 U. S. 672,
102 U. S. 684;
Koshkonong v. Burton, 104 U. S. 668. And
it is the doctrine of the Supreme Court of Pennsylvania, which has
declared that
"the coupons of railroad bonds are negotiable instruments, and
may be sued on by the holder separately from the bonds, and
interest from the date of demand and refusal of payment may be
recovered."
County of Beaver v. Armstrong, 44 Penn.St. 63.
Page 153 U. S. 646
If Pennsylvania, in order to collect taxes assessed upon bonds
issued by its own corporations and held by its resident citizens,
could require those corporations to deduct the required amount from
the interest when the coupons are presented by holders known at the
time by the corporation paying the interest to be residents of that
state -- and it may be admitted in this case that the state, if not
restrained by a valid contract to which it was a party, could
establish such a regulation -- it does not follow that the state
may impose upon foreign corporations, because of their doing
business in that state with its permission given for a valuable
consideration, any duty in respect to the mode in which they shall
perform their obligations in other states.
The New York, Lake Erie and Western Railroad Company is not
subject to regulations established by Pennsylvania in respect to
the mode in which it shall transact its business in the State of
New York. The money in the hands of the company in New York, to be
applied by it in the payment of interest, which by the terms of the
contract is payable in New York, and not elsewhere, is property
beyond the jurisdiction of Pennsylvania, and Pennsylvania is
without power to say how the corporation holding such money in
another state shall apply it and to inflict a penalty upon it for
not applying it as directed by its statutes; especially may not
Pennsylvania, directly or indirectly, interpose between the
corporation and its creditors, and forbid it to perform its
contract with creditors according to its terms, and according to
the law of the place of performance. No principle is better settled
than that the power of a state, even its power of taxation, in
respect to property, is limited to such as is within its
jurisdiction.
State Tax on Foreign-Held
Bonds, 15 Wall. 300,
82 U. S. 319;
Railroad Co. v.
Jackson, 7 Wall. 263;
St. Louis
v. Ferry Co., 11 Wall. 423;
Delaware
Railroad Tax, 18 Wall. 206.
The fallacy of the contrary view is in the assumption that this
railroad company, by purchasing from Pennsylvania the privilege of
constructing and operating a part of its road through the territory
of that state, thereby impliedly agreed
Page 153 U. S. 647
to submit to such regulations as that state should at any
subsequent period adopt in respect to the mode in which it should,
in the State of New York, apply money in its hands in discharge of
the obligation to pay interest to the holders of its bonds residing
in Pennsylvania. But for the reasons stated, this assumption is
unwarranted by any sound principle of law or by the circumstances
under which the railroad company obtained the assent of
Pennsylvania to build and maintain its road through that state.
It is due to learned counsel who argued this case that something
be said, before concluding this opinion, about certain authorities
upon which great reliance was placed.
Reference was made by counsel for the company to the decision of
this Court in the case of
State Tax on Foreign-Held
Bonds, 15 Wall. 300,
82 U. S. 320,
which case involved the validity of a Pennsylvania statute of 1868
requiring corporations created by and doing business in that state
to deduct from the interest paid on its obligations the tax
assessed on such interest by the state. It was attempted to make
that statute applicable to interest payable on bonds held by
nonresidents of Pennsylvania. This Court said:
"The tax laws of a state can have no extraterritorial operation,
nor can any law of a state inconsistent with the terms of a
contract made with, or payable to, parties out of the state have
any effect upon the contract while it is in the hands of such
parties or other nonresidents of the state. . . . It is a law which
interferes between the company and the bondholder, and, under the
pretense of levying a tax, commands the company to withhold a
portion of the stipulated interest and pay it over to the state. It
is a law which thus impairs the obligation of the contract between
the parties. The obligation of a contract depends upon its terms,
and the means which the law in existence at the time affords for
its enforcement. A law which alters the terms of a contract by
imposing new conditions or dispensing with those expressed is a law
which impairs its obligation, for, as stated on another occasion,
such a law relieves the parties from the moral duty of performing
the original stipulations of the contract, and it prevents their
legal
Page 153 U. S. 648
enforcement. The Act of Pennsylvania of May 1, 1868, falls
within this description. It directs the treasurer of every
incorporated company to retain from the interest stipulated to its
bondholders five percent upon every dollar and pay it into the
treasury of the commonwealth. It thus sanctions and commands a
disregard of the express provisions of the contracts between the
company and its creditors. It is only one of many cases where,
under the name of taxation, an oppressive exaction is made without
constitutional warrant, amounting to little less than an arbitrary
seizure of private property."
If the present case involved any question as to the authority or
duty of the railroad company to deduct anything from the interest
paid on its scrip, bonds, or certificates of indebtedness when held
by nonresidents of Pennsylvania, the case of
State Tax on
Foreign-Held Bonds would be decisive against the state. But no
such question is here presented. The statute of 1885 only applies
to scrip, bonds, or certificates of indebtedness issued to, and
held by, residents of Pennsylvania.
Counsel for the state insisted that the present case is
controlled by
Bell's Gap Railroad Co. v. Pennsylvania,
134 U. S. 232,
reaffirmed in
Jennings v. Coal Ridge Improvement & Coal
Co., 147 U. S. 147. It
is only necessary to observe that the corporations which complained
in those cases of the tax assessed, under a Pennsylvania statute,
upon their loans held by residents of Pennsylvania, were
Pennsylvania corporations. No question arose in either of those
cases as to the authority of Pennsylvania to make a corporation of
another state an assessor or collector of taxes assessed by or
under the authority of Pennsylvania against residents of
Pennsylvania. Nor does the case now before us involve any question
as to the extent to which the state may tax property within its
limits belonging to the railroad company.
The views we have expressed are sufficient for the disposition
of the case without considering other grounds upon which, it is
contended, the judgment below was erroneous.
The judgment of the Supreme Court of Pennsylvania is
reversed, and the cause is remanded for further proceedings not
inconsistent with this opinion.
Page 153 U. S. 649
The case of
New York. Lake Erie & Western Railroad
Company v. Commonwealth of Pennsylvania, No. 75, and that of
New York, Lake Erie & Western Railroad Company v.
Pennsylvania, No. 79, each upon writ of error to the Supreme
Court of Pennsylvania, involved the same questions as were
presented, and have been determined, in the above case. For the
reasons stated, the judgment in No. 75 and the judgment in No. 79
are each reversed, and those cases are remanded for further
proceedings not inconsistent with the opinion in case No. 591.
