1. In determining the validity of a state tax under the Federal
Constitution, this Court is not concluded by the name or
description found in the Act, but must ascertain for itself the
nature and effect of the tax. P. 294 U. S.
2. Chapter 149 of the Kentucky Acts of 1930 imposed a tax on the
sales of retail merchants determined by the amount of gross sales.
On the first $400,000 of gross sales the rate of tax was 1/20
Page 294 U. S. 551
1%; a different and increasing rate applied to each additional
$100,000 of gross sales up to $1,000,000; the rate on sales over
$1,000,000 was 1%. Held,
the classification of sales for
the purpose of the tax was arbitrary, and violated the equal
protection clause of the Fourteenth Amendment. P. 294 U. S.
3. A tax on sales is, in effect, a tax on the goods sold. P.
294 U. S.
4. The tax cannot be sustained as an excise on the privilege of
merchandising, for there is no reasonable relation between the
amount of the tax and the value of the privilege; there is no such
relation between gross sales -- the measure of the tax -- and net
profits as will justify the discrimination between taxpayers. P.
294 U. S.
5. The contention that the graduation of the tax was adjusted
with reasonable approximation to the net earnings of the taxpayers,
based upon a claimed relation between gross sales and net profits,
not supported by the evidence. P. 294 U. S.
6. Convenience of administration does not justify the State in
employing this method of taxing gains and ignoring the consequent
inequalities of burden. P.
294 U. S. 559
7. The claim that the tax, in its actual operation, is not shown
to be unduly burdensome or harmful to any of the complaining
taxpayers, or to amount to confiscation of their property,
irrelevant to the issue of inequality, and
contradicted by the record. P. 294 U. S.
8. Parties challenging the validity of a state statute under the
Fourteenth Amendment are not to be denied relief by resort to a
forecast of possible amelioration of their situation by the state
courts. P. 294 U. S.
9. The unrestricted power of a state legislature to determine
the amount of an otherwise valid tax applies to excises, as well as
to other forms of taxation. P. 294 U. S.
10. Clark v. Titusville, 184 U.
; Metropolis Theater Co. v. Chicago,
228 U. S. 61
recent chain store tax cases distinguished. Pp. 294 U. S.
7 F. Supp. 438 reversed.
Appeals from judgments of the three-judge District Court
upholding the constitutionality of the Kentucky Gross Sales Tax and
dismissing the bills in four suits brought to enjoin its
enforcement. The District Court, on a previous hearing, had
dismissed the bills on the
Page 294 U. S. 552
ground that complainants had an adequate remedy at law, which
judgments were reversed and remanded on appeals to this Court.
287 U. S. 9
MR. JUSTICE ROBERTS delivered the opinion of the Court.
These are four suits heard by a specially constituted District
Court in Kentucky to enjoin state officers from enforcing an act of
that Commonwealth imposing a gross sales tax. The plaintiffs are,
respectively, a domestic corporation conducting a department store
in Louisville, a partnership operating a similar store in the same
city, a Delaware corporation having 21 department stores in
Kentucky, and an Ohio corporation maintaining 289 grocery stores
within the Commonwealth. Nineteen individuals, partnerships, and
corporations, proprietors of one or more stores selling various
lines of merchandise, intervened as plaintiffs. Interlocutory
injunctions issued, but the District Court of three judges
dismissed the bills for want of equity, being of opinion there was
an adequate remedy at law. Upon appeal, this Court reversed the
decrees and remanded the causes. [Footnote 1
] At final hearing, the District Court found the
remedy at law inadequate, but sustained the act and dismissed the
bills. [Footnote 2
] The present
appeals are upon the merits.
Page 294 U. S. 553
The statute became a law March 17, 1930. The title and certain
sections are copied in the margin; other sections are there
summarized. [Footnote 3
tax imposed upon the first
Page 294 U. S. 554
$400,000 of annual gross sales is one-twentieth of one percent.
The rate increases on each additional $100,000 of sales between
$400,000 and $1,000,000, inclusive, being seventeen-twentieths of
one percent in the last bracket. On sales over $1,000,000, the rate
is one percent. The increased rates are applicable, however, only
in respect of sales in each successive bracket, and therefore the
tax burden attributable to $1,100,000 of sales is not one percent,
but a composite ascertained by adding the total tax for the sales
falling within the various brackets, and dividing by the dollar
value of all sales. Thus, the act requires the merchant to pay in
the total .05 percent on $400,000 of sales, .305 percent on
$1,000,000 of sales and .96 percent on $15,000,000 of sales.
The appellants charge that the statute violates several sections
of the Constitution of Kentucky and several provisions of the
Federal Constitution. We shall not stop to enumerate these, since
we must sustain the claim that the classification made by § 2
denies the appellants the equal protection of the laws assured by
the Fourteenth Amendment.
Page 294 U. S. 555
The trial court's relevant findings are: the act is essentially
a revenue measure. The tax is on gross sales, not on gross
collections from vendees. Sales made by merchants taxed under any
of the brackets of the act are made in competition with like sales
of the same character of merchandise by those who are taxed under
other brackets. As a general proposition, increased volume of sales
results in increased profits and increased ability to pay the tax.
The rate of profit from retail sales generally varies with the
character of the goods sold. The management of a store or stores is
one of the fundamental factors in determining whether or not a
profit is realized and the amount of profit. As a general
proposition, those merchants doing the largest amount of trade are
enabled to secure the highest type of management.
In the light of these findings, does the act tax sales in an
unequal and arbitrary way, classifying them for the imposition of
different rates without reference to any real or substantial
distinction, as appellants insists; or does it impose an excise
upon the conduct of retail business, reasonably adjusted in amount
with regard to substantial differences in the nature of the
privilege exercised, as appellees contend?
In resolving the issue, we are not concluded by the name or
description of the tax as found in the act; our duty is to
ascertain its nature and effect. [Footnote 4
] "The substance and not the shadow determines
the validity of the exercise of the power." [Footnote 5
] The act does not impose an income or
profits tax or a license tax, is not an inspection measure or a
police regulation. The tax is not confined to a particular
Page 294 U. S. 556
method of merchandising. All retailers, individual and
corporate, selling every description of commodities, in whatever
form their enterprises are conducted, make up the taxable class.
And the excise is laid in respect of the same activity of each of
them -- the making of a sale. Although no difference is suggested,
so far as concerns the transaction which is the occasion of the
tax, between the taxpayer's first sale of the year and his
thousandth, different rates may apply to them. The statute operates
to take as the tax a percentage of each dollar due or paid upon
every sale, but increases the percentage if the sale which is the
occasion of the tax succeeds the consummation of other sales of a
specified aggregate amount. As found by the court below, the act of
making a sale, which, with all others made in the taxable year,
represents a total sales price of $400,000 or less, results in the
imposition of a tax of one-twentieth of one percent upon the price,
whereas the making of the same sale by one who has theretofore sold
$400,000 but less than $500,000 worth of goods entails a tax of
two-twentieths of one percent, or by one whose prior sales
aggregate $900,000, a tax of seventeen-twentieths of one
In connection with other provisions of the fundamental law, this
Court has had occasion to analyze similar acts. In Brown v.
12 Wheat. 419, a tax on the occupation of
an importer was held a tax on imports obnoxious to the commerce
clause. Said the court (p.
25 U. S. 444
"It is impossible to conceal from ourselves, that this is
varying the form, without varying the substance. . . . All must
perceive that a tax on the sale of an article, imported only for
sale, is a tax on the article itself."
In Cook v. Pennsylvania, 97 U. S.
, a tax on the amount of an auctioneer's sales was
declared a tax on the goods sold. In Crew Levick Co. v.
Pennsylvania, 245 U. S. 292
state tax on the business of selling goods in foreign commerce,
measured by gross receipts from goods so sold and shipped, was
pronounced an impost upon exports. The court said
Page 294 U. S. 557
(p. 245 U. S.
". . . Nor is it an occupation tax, except as it is imposed upon
the very carrying on of the business of exporting merchandise. It
operates to lay a direct burden upon every transaction in commerce
by withholding, for the use of the state, a part of every dollar
received in such transactions."
Panhandle Oil Co. v. Knox, 277 U.
, decides a privilege tax imposed on sellers of
gasoline, fixed at so many cents per gallon sold, is a tax on
sales. At page 277 U. S. 222
the Court said:
"Sale and purchase constitute a transaction by which the tax is
measured and on which the burden rests. . . . To use the number of
gallons sold . . . as a measure of the privilege tax is, in
substance and legal effect, to tax the sale."
And in Indian Motocycle Co. v. United States,
283 U. S. 570
federal tax upon motorcycles "sold . . . by the manufacturer" was
held to be an excise on the sale, and the doctrine of the
case was reaffirmed.
Thus understood, the operation of the statute is unjustifiably
unequal, whimsical, and arbitrary, as much so as would be a tax on
tangible personal property -- say cattle -- stepped up in rate on
each additional animal owned by the taxpayer, or a tax on land
similarly graduated according to the number of parcels owned.
The appellees seek to avoid the arbitrary character of the
classification of sales for the purpose of imposing the levy by the
claim that the act, properly construed, lays an excise upon the
privilege of merchandising at retail, and the exaction is made only
for this privilege. They insist the amount of tax is merely
measured by the volume of sales, [Footnote 6
] and, in this view, the classification is not
arbitrary if any reasonable relation can be found between the
amount demanded and the privilege enjoyed. They endeavor
Page 294 U. S. 558
to deduce such a relation from the alleged fact that a
merchant's net income and his consequent ability to pay increase as
the volume of his sales grows. The argument does not advance the
case for the validity of the statute. Even in this aspect, the
classification is arbitrary, for the claimed relation of gross
sales -- the measure of the tax to net profits fails to justify the
discrimination between taxpayers.
The District Court found that, "generally speaking," he who
sells more is in receipt of a greater profit and hence has larger
ability to pay, and upon this basis justified the classification.
But it is to be remembered that the act in question taxes gross
sales, and not net income. As stated in United States Glue Co.
v. Town of Oak Creek, 247 U. S. 321
247 U. S.
"The difference in effect between a tax measured by gross
receipts and one measured by net income, recognized by our
decisions, is manifest and substantial, and it affords a convenient
and workable basis of distinction between a direct and immediate
burden upon the business affected and a charge that is only
indirect and incidental. A tax upon gross receipts affects each
transaction in proportion to its magnitude, and irrespective of
whether it is profitable or otherwise. Conceivably it may be
sufficient to make the difference between profit and loss, or to so
diminish the profit as to impede or discourage the conduct of the
commerce. A tax upon the net profits has not the same deterrent
effect, since it does not arise at all unless a gain is shown over
and above expenses and losses, and the tax cannot be heavy unless
the profits are large."
Argument is not needed, and indeed practical admission was made
at the bar that the gross sales of a merchant do not bear a
constant relation to his net profits; that net profits vary from
year to year in the same enterprise; that diverse kinds of
merchandise yield differing ratios of profit;
Page 294 U. S. 559
and that gross and net profits vary with the character of the
business, as well as its volume. The trial court made no finding
that the relation between gross sales and net profits, or increase
of net worth, was constant, or even that there was a rough
uniformity of progression within wide limits of tolerance. Expert
witnesses, using data assembled from various reporting agencies,
endeavored to establish that net profits or net worth grow with
increased sales. But their testimony not only indicated great
variations within each class selected for comparison, but also
showed that, in some of the classes representing the greater amount
of sales, the net profit or addition to net worth is smaller than
in a class having less aggregate sales. The best that can be said
for this evidence is that, averaging the results of the concerns
making the reports, it is true, "generally speaking," as the court
below put it, that profits increase with sales. The ratio of
increase, however, differs in different lines of activity and even
as between concerns carrying on the same business, and so many
exceptions and reservations must be made that averages are
misleading. The proofs submitted are insufficient to support the
appellees' contention that the graduation of the tax was adjusted
with reasonable approximation to the net earnings of the taxpayers,
and that such minor and incidental inequalities as may be found are
those always incident in the application of any valid general rule
of classification. We think the graduated rates imposed were not
intended to bear any relation to net profits. The argument based
upon the asserted analogy to a tax upon net income graduated in
accordance with the size of the income is unconvincing, for the
exaction here demanded is not of that kind.
We are told that the gross sales tax in question is, in truth, a
rough and ready method of taxing gains under the guise of taxing
sales; that it is less complicated and more convenient of
administration than an income tax; and
Page 294 U. S. 560
Kentucky for these reasons is at liberty to choose this form and
to ignore the consequent inequalities of burden in the interest of
ease of administration. The argument is, in essence, that it is
difficult to be just, and easy to be arbitrary. If the Commonwealth
desires to tax incomes, it must take the trouble equitably to
distribute the burden of the impost. Gross inequalities may not be
ignored for the sake of ease of collection.
The assertion that a graduated income tax, like the graduated
sales tax under consideration, ignores the varying rates of return
upon investment of those carrying on similar enterprises is
obviously inaccurate. An income levy, by its very nature, assures
equality of treatment, because the burden of the exaction varies
with increase or decrease of return on capital invested and with
the comparative success or failure of the enterprise. If, as
argued, larger merchants are more efficient, their efficiency will
be correspondingly reflected in their net earnings. If, as claimed,
they are able to procure better management, a tax upon gains will
uniformly reflect the effects of such management. And the same
principle holds true of every advantage said to adhere in the
magnitude of a business.
As we have said, the statute does not purport to levy a tax on
incomes. Plainly it does not in fact do so. A merchant having a
gross business of $1,000,000, but a net loss, must pay a greater
tax than one who has a gross of $400,000 and realizes a substantial
net profit. The record discloses such a situation. In the year
1930, 24,186 merchants were subject to the tax. Two of these, whose
gross sales amounted to 8 percent of the gross sales of all
merchants, would have paid, but for the interlocutory injunction
entered by the court below, more than half of the total tax due by
all those subject to the impost. The payment by one of them would
have been about $124,000, or $18,000 in excess of the total tax
paid by the 24,163 merchants who reported $362,000 of gross sales,
and of whom 24,128 had
Page 294 U. S. 561
sales totaling less than $400,000, and this taxpayer had in
Kentucky in that year a net income of approximately $172,000. The
figures for 1931 and 1932 exhibit a like disparity. In the latter
year, the company last mentioned, though having sales in Kentucky
amounting to $11,447,611, would, after payment of the tax, have
shown a net loss of over $6,000. To assert that a law thus
operating reasonably equates the exaction to net income is to
ignore the facts.
The appellees say there is no showing that the tax in its actual
operation is unduly burdensome or harmful to any of the appellants,
or amounts to confiscation of their property. The assertion is
irrelevant to the issue of inequality, and is, moreover,
contradicted by the record. In the case of one plaintiff whose
sales in Kentucky in 1930 were over $14,500,000, in 1931 over
$13,400,000, and in 1932 over $11,400,000, the net profits in the
same state, after deducting the sales tax, would have been in 1930,
$48,677, in 1931, $39,358, and 1932 would have shown a loss of
$9,023. In the light of this demonstration, it is difficult to
follow the argument that the Constitution of Kentucky, as construed
by her courts, is a shield against any tax law imposing an excise
the effect of which is to extinguish all profits when we are told
by appellees, in the next breath, that this very statute has been
upheld by the Supreme Court of Kentucky against constitutional
attack. [Footnote 7
] But if
that court had not spoken on the subject, these appellants are not
to be denied relief under the Fourteenth Amendment by resort to a
forecast of possible amelioration of their situation by the state
Ignoring the glaring inequalities of burden resulting from the
statute, the appellees tell us that if and when the load becomes
too heavy upon any taxpayer, he may
Page 294 U. S. 562
with confidence invoke the Fourteenth Amendment. [Footnote 8
] The position seems to be that
different principles govern various forms of taxation, and that
what has been held with respect to the unrestricted power of a
legislature to determine the amount to be exacted by other forms of
taxation has no application to an excise. We are unaware of any
such distinction in logic, and the authorities sanction none. Every
taxing law must pass the constitutional test applied by the courts
to the method of imposition, but the measure of the impost rests in
the discretion of the legislature.
To condemn a levy on the sole ground that it is excessive would
be to usurp a power vested not in the courts. but in the
legislature, and to exercise the usurped power arbitrarily by
substituting our conceptions of public policy for those of the
legislative body. In Veazie Bank v.
8 Wall. 533, a tax of 10 percent on the
notes of state banks was upheld, although it "drove out of
existence every State bank of circulation within a year or two
after its passage." See Citizens' Sav. & Loan
Association v. Topeka,
20 Wall. 655, 87 U. S.
-664. In Knowlton v. Moore, 178 U. S.
, in sustaining an excise tax, this Court said,
"if a lawful tax can be defeated because the power which is
manifested by its imposition may, when further exercised, be
destructive, it would follow that every lawful tax would become
unlawful, and therefore no taxation whatever could be levied."
P. 178 U. S. 60
See also Magnano Co. v. Hamilton, 292 U. S.
; Fox v. Standard Oil Co., ante,
294 U. S. 87
Page 294 U. S. 563
Once the lawfulness of the method of levying the tax is
affirmed, the judicial function ceases. He deludes himself by a
false hope who supposes that, if this Court shall at some future
time conclude the burden of the exaction has become inordinately
oppressive, it can interdict the tax.
The suggestion is made that the ad valorem
heretofore laid on Kentucky merchants bears more heavily upon the
little dealer than upon his bigger competitor, as the real estate
and stock of merchandise of the former is greater in proportion to
the business done than is the case with the latter. This fact may
indeed be a proper reason for adjusting the tax burden so as better
to reflect the fruits of the enterprise, but it can afford no
excuse for an arbitrary and unequal imposition as between persons
similarly circumstanced. The record fails to show that an income
tax or a flat tax on sales would not accomplish the desired end.
The adoption of laws of the latter description by many of the
states is a practical confirmation of the view that they are
effective measures. [Footnote
The appellees refer to certain decisions of this Court, but none
of them rules this case. Those claimed to be particularly pertinent
will be briefly noted.
Page 294 U. S. 564
In Clark v. Titusville, 184 U.
, the tax levied consisted of a flat fee exacted
for a license which entitled the merchant to conduct business for
the ensuing year. The lowest fee was $5 for a merchant who, during
the year preceding that covered by the license, has made sales not
in excess of $1,000. A $10 fee applied to one who had sales between
$1,000 and $2,500, a $15 fee to one having sales between $2,500 and
$5,000, a $25 fee to one whose sales were between $5,000 and
$10,000, and so on to a fee of $100 for the seller of $60,000 worth
or more. It is important to note the grounds of attack. One was
that the classes were so defined that a merchant with sales of
$2,499 would pay at one rate and another with sales of $2,501 would
pay at a higher rate; that a merchant whose sales were $1,001 would
pay the same fee as one whose sales were $2,499. In overruling this
objection, the Court relied upon the principle that some injustice
is bound to result from any general rule of classification, and
equal protection demands only reasonable uniformity in dealing with
parties similarly circumstanced. A second objection was that the
percentage of tax to sales was greater in the lower than in the
higher brackets -- that is, that a merchant selling goods for
$60,000 or more paid a less percentage of his sales by way of tax
than the smaller merchant who sold only $1,000 worth of goods. The
objection was unavailing, because the tax did not purport to be
fixed upon a percentage of sales. The purpose was to charge a
larger license fee to a larger business. Any tax measured by a
fixed and uniform percentage of gross sales would impose a heavier
burden on the taxpayer having the greater volume of sales. The
excise here involved is not of that sort, the sum exacted from the
merchant doing the larger business being not only greater in gross
amount, but larger in proportion to sales, than that demanded of
his smaller competitor.
Page 294 U. S. 565
In Metropolis Theater Co. v. Chicago, 228 U. S.
, a licensing ordinance provided for a greater license
to be paid by theaters charging a higher rate for tickets than was
exacted from those charging lower rates. This Court sustained the
classification upon the ground that the distinction between the
sorts of theaters classified obtains in every large city of the
country, and said (p. 228 U. S.
"It will immediately occur upon the most casual reflection that
the distinction the theater itself makes is not artificial, and
must have some relation to the success and ultimate profit of its
business. In other words, there is natural relation between the
price of admission and revenue, some advantage, certainly, that
determines the choice. . . . The reason for it must therefore be
substantial, and if it be so universal in the practice of the
business, it would seem not unreasonable if it be adopted as the
basis of governmental action."
The case falls within the principle that even a small difference
in the method of conducting business may be availed of by
government in imposing different taxes. It furnishes no support for
a tax upon the sales of merchants at rates varying per sale or per
dollar with the amount of their respective gross sales.
In several recent cases, [Footnote 10
] we sustained the classification of chain
stores for taxation at rates higher than those applicable to single
stores, and graduated upward on each store as the total number of
units in one ownership increased. We found this classification
reasonable because of advantages incident to the conduct of
multiple stores and obvious differences in chain methods of
merchandising as contrasted with those practised in the operation
of one store. The instant cases present a classification of quite
another kind. The Kentucky statute ignores the form of
Page 294 U. S. 566
organization and the method of conducting business. The taxable
class is retail merchants, whether individuals, partnerships, or
corporations; those who sell in one store or many; those who offer
but one sort of goods and those who through departments deal in
many lines of merchandise. The law arbitrarily classifies these
vendors for the imposition of a varying rate of taxation, solely by
reference to the volume of their transactions, disregarding the
absence of any reasonable relation between the chosen criterion of
classification and the privilege the enjoyment of which is said to
be the subject taxed. It exacts from two persons different amounts
for the privilege of doing exactly similar acts because the one has
performed the act oftener than the other.
We hold the act unconstitutional, and reverse the judgment.
287 U. S. 9
7 F. Supp. 438; 8 F. Supp. 396.
Chapter 149, Acts of 1930, p. 475:
"An Act relating to revenue and taxation, imposing an excise or
license tax on retail merchants, as the words 'retail merchants'
are used in this act; providing for the collection of such tax; the
distribution and use of the revenue derived therefrom; the
administration of said law, fixing fines and penalties for the
violation of this act; declaring an emergency to exist, and
repealing all laws in conflict with the provisions of this
"Be it Enacted by the General Assembly of the Commonwealth of
"§ 1. The words 'retail merchant,' as used in this act, shall
mean and include every person, firm, association, co-partnership or
corporation opening, establishing, operating or maintaining any
'store,' as defined herein, for the purpose of and selling goods,
wares or merchandise at retail in this State, except those actually
engaged in gardening or farming and selling garden or farm products
raised by them in this State. The term 'store,' as used in this
act, shall be construed to mean and include any store or stores or
any mercantile establishment or establishments in this State which
are owned, operated, maintained or controlled by the same 'retail
merchant,' as defined herein, either domestic or foreign, in which
goods, wares, or merchandise of any kind are sold at retail. The
provisions of this act shall be construed to apply to every 'retail
merchant' and 'store,' as defined herein, which is controlled or
held with others by majority stock ownership or ultimately
controlled or directed by one management of association of ultimate
"§ 2. Every retail merchant, as defined herein, shall pay an
annual license tax for the opening, establishing, operating or
maintaining of any store or stores, as defined herein, determined
by computing the tax on the amount of gross sales as follows:"
"One-twentieth of one percent of the gross sales of Four hundred
thousand ($400,000.00) Dollars or less; two-twentieths of one
percent on the excess of the gross sales over Four hundred thousand
($400,000.00) Dollars and not exceeding Five hundred thousand
($500,000.00) Dollars; five-twentieths of one percent on the excess
of the gross sales over Five hundred thousand ($500,000.00) Dollars
and not exceeding Six hundred thousand ($600,000.00) Dollars;
eight-twentieths of one percent on the excess of the gross sales
over Six hundred thousand ($600,000.00) Dollars and not exceeding
Seven hundred thousand ($700,000.00) Dollars; eleven-twentieths of
one percent on the excess of the gross sales over Seven hundred
thousand ($700,000.00) Dollars and not exceeding Eight hundred
thousand ($800,000.00) Dollars; fourteen-twentieths of one percent
on the excess of the gross sales over Eight hundred thousand
($800,000.00) Dollars and not exceeding Nine hundred thousand
($900,000.00) Dollars; seventeen-twentieths of one percent on the
excess of the gross sales over Nine hundred thousand ($900,000.00)
Dollars and not exceeding One million ($1,000,000.00) Dollars; one
percent on the excess of the gross sales over One million
§ 3 provides for annual returns to the state tax commission,
assessment and payment of the tax. § 4 allows certain credits for
other taxes. § 7 makes it a misdemeanor, punishable by fine or
imprisonment, to fail to file returns and pay the tax.
Galveston, H. & S.A. Ry. Co. v. Texas, 210 U.
, 210 U. S. 227
Choctaw, O. & Gulf R. Co. v. Harrison, 235 U.
, 235 U. S. 298
Crew Levick Co. v. Pennsylvania, 245 U.
, 245 U. S. 294
Shaffer v. Carter, 252 U. S. 37
252 U. S. 55
Dawson v. Kentucky Distilleries Co., 255 U.
, 255 U. S. 292
St. Louis Cotton Compress Co. v. Arkansas, 260 U.
, 260 U. S.
Postal Telegraph Cable Co. v. Adams, 155 U.
, 155 U. S.
Franchise taxes measured by net income have been sustained as
not constituting a tax on income. Educational Films Corp. v.
Ward, 282 U. S. 379
Compare Macallen Co. v. Massachusetts, 279 U.
; Pacific Co., Ltd. v. Johnson,
285 U. S. 480
See Moore v. State Board of Charities and Corrections,
239 Ky. 729, 40 S.W.2d 349.
By Public Act No. 24, Laws of 1933, Vermont imposed a graduated
gross sales tax increasing from one-eighth of one percent on sales
of from fifty thousand to one hundred thousand dollars to 4 percent
on sales above two million dollars. A levy of a similar sort
applied in Kentucky, as shown by the facts proved in the present
record, would have deprived many merchants in various tax brackets
of all net income from their stores. We were informed at the
argument that this statute has been held unconstitutional by a
court of first instance.
Arizona, Laws 1933, c. 18; California Laws, c. 1020; Georgia,
Code 1930, Supplement, Act of 1929, § 993(316) et seq.;
Illinois, Act of June 28, 1933, Laws 58th Gen. Assembly, p. 924;
Indiana, Burns' Ind. Stats.1933, c. 26, § 64-2601; Iowa, c. 82,
Laws 45th Gen.Assem.Extra Sess., § 37ff; Kentucky, c. 25, Ky.Acts,
Special Sess., 1934; Michigan, Public Acts, Sess. 1930, No. 167;
Mississippi, G.L. 1934, c. 119; Missouri Laws, Extra Sess. 1934, p.
155; New York, Cahill's Consol.Laws, 1933 Supp. c. 61, art. 17, §
390, p. 144; North Carolina, Sess. 1933, c. 445, p. 768; Ohio,
Page's Ohio General Code, § 5546-1, p. 859; Oklahoma, First
Spec.Sess. 1933, c.196, p. 456; Pennsylvania, Act Aug.19, 1932,
Special Sess.1932, § 3, p. 92; South Dakota, Laws, 1933, § 184;
Utah, Laws, 1933, c. 63, as amended by c. 20, Second Special
Sess.1933; Washington, Laws, 1933, c.191, p. 869; West Virginia,
Act of May 26, 1933, Extra Session, c. 33, p. 219.
State Board of Tax Commissioners v. Jackson,
283 U. S. 527
Louis K. Liggett Company v. Lee, 288 U.
; Fox v. Standard Oil Co., ante,
294 U. S. 87
MR. JUSTICE CARDOZO, dissenting.
The prevailing opinion commits the court to a holding that a tax
upon gross sales, if laid upon a graduated basis, is always and
inevitably a denial of the equal protection of the laws, no matter
how slight the gradient or moderate the tax.
In the view of the majority, the relation between the taxpayer's
capacity to pay and the volume of his business is, at most,
accidental and occasional. In the view of the Legislature of
Kentucky and of its highest court (Moore v. State Board of
Charities and Correction,
239 Ky. 729, 40 S.W.2d 349), the
relation, far from being accidental or occasional, has a normal or
average validity, attested by experience and by the judgment of
trained observers. The one view discovers in the attempted
classification an act of arbitrary preference among groups
essentially the same. T he other perceives in the division a
sincere and rational endeavor to adapt the burdens of taxation to
the teachings of economics and the demands of social justice.
Page 294 U. S. 567
A theory readily intelligible, whether it be sound or unsound,
underlies the adoption of the graduated levels. Economically, the
theory is that there is a minimum of size for business units below
which efficiency is less on the average than expansion would tend
to make it; that there are intermediate levels within which
efficiency is subject on the average to progressive development,
and that there is an ultimate level beyond which efficiency, even
if promoted, goes forward more slowly and at a diminishing ratio.
Socially, the theory is that, just as in taxes upon income or upon
transfers at death, so also in imposts upon business, the little
man, by reason of inferior capacity to pay, should bear a lighter
load of taxes, relatively as well as absolutely, than is borne by
the big one. For the purposes of retail business, the first or less
efficient class is identified by the Kentucky statute with
merchants whose gross sales are $400,000 or less; the six
intermediate classes begin at that point and end with a million
dollars; the final class is made up of those whose sales are over a
million. For the first class, the effective rate is one-twentieth
of one percent; for the last it gradually approaches, though it can
never quite reach, one percent, this by reason of the fact that the
taxpayer in the higher brackets gets the benefit of the application
of the lower rates to those parts of the gross sales that fall
within the lower levels.
For many years, Kentucky taxed her retail merchants upon the
basis of property or capital employed within the state. Tolman, The
Gross Sales Tax in Kentucky, 10 Tax Mag. 89, 112. The tax thus
apportioned bore heavily upon the small retailer in comparison with
the large one. This was so for several reasons developed with full
statistics by students of taxation. Tolman, loc. cit.,
citing Government of Kentucky, Report of the Efficiency
Commission of Kentucky, vol. 2, p. 232, and Martin & Patton,
"Operations of Real Estate Tax in Lexington, Ky." (Bureau of
Business Research, University of Kentucky,
Page 294 U. S. 568
MS.). Perhaps the chief reason is the rapidity of turnover in
large scale enterprises; the effect of this mobility being to
reduce the value of the property that must be kept on hand at tax
day as well as at other times. Tables in the record bear witness in
a striking way to the resulting inequality. Upon the basis of a
property tax, a merchant with sales of $10,000,000 was found to pay
less than one-half as much tax per dollar of sales as did a
merchant whose sales were $150,000 or less. Cf.
loc. cit., supra;
also Statutes of Kentucky, § 4189-2.
More concretely, Kroger, one of the petitioners, with gross sales
of many millions, paid a tax upon the old basis of only 137/1000 of
one percent in proportion to its sales in comparison with an
average of 934/1000 of one percent paid by the 16,535 merchants
whose sales were less than $400,000 annually. Tolman, loc.
Kentucky is not chargeable with oppressive
discrimination in superseding such a method of taxation by one more
nearly equal in its burdens.
The choice of a new method made it necessary for the legislature
to strike a balance of advantage. Tolman, op. cit. supra
at 90; Haig and Shoup, The Sales Tax in the American States,
Columbia University Press (1934) p. 159 et seq.
time, there was a suggestion of a tax on chain stores only, but a
lower federal court had held that method to be unlawful,
Jackson v. State Board of Tax Comm'rs, 38 F.2d
, and the decision of this Court to the contrary, State
Board of Tax Commissioners v. Jackson, 283 U.
, had not yet been announced. To be sure, there
was the possibility of a tax upon gross sales at a flat rate
without graduated levels, but a burden so imposed might be subject
to new objections. In the view of serious students of the problem,
a flat tax upon gross sales is not always shifted to the consumer.
It is often absorbed more or less by the seller, for a time, even
if not permanently, to prevent the falling off of sales.
Page 294 U. S. 569
National Industrial Conference Board, General Sales or Turnover
Taxation (1929) pp. 8, 9 et seq.;
Developments of the General Sales Tax, 36 Journal of Pol.Econ. 83,
92-93. Such, at least, is the teaching of a school of economists,
though the subject is one as to which the learned are divided.
] At times, absorption
is accomplished by a reduction of the price even when, in form, the
amount of the tax has been added to the bill. Haig and Shoup,
op. cit. supra,
pp. 29, 31, et seq.;
General Sales Taxation (1932) pp. 194, 195. An impressive body of
opinion is back of the view that, insofar as the tax is not passed
to the consumer, the flat rate bears more heavily on the small
business than on the large one. This tendency is corrected when the
tax is imposed on a graduated basis. One of the consequences of
such a tax is to make the shifting of the burden easier for those
who pay the lower rates than for those who pay the higher ones. For
that reason, the flat rate is thought to be less efficient than the
graded one as an instrument of social justice. The large dealer, it
is said, occupies, both absolutely and relatively, a position of
economic superiority by reason of the volume of his business. In
that view, to make his tax heavier, both absolutely and relatively,
is not arbitrary discrimination, but an attempt to proportion the
payment to capacity to pay, and thus to arrive in the end at a more
genuine equality. By the statute in controversy, the Commonwealth
of Kentucky is aligned with that position. It is not the function
of a court to make itself the arbiter between competing economic
theories professed by honest men on grounds not wholly frivolous.
Otis v. Parker, 187 U. S. 606
187 U. S. 609
Responsibility for economic wisdom has been laid upon the
legislature. There is finality in its choice, even though
Page 294 U. S. 570
may be lacking, unless choice can be found to be so void of
rationality as to be the expression of a whim, rather than an
exercise of judgment.
The question, then, is whether there is rationality in the
belief that capacity to pay increases, by and large, with an
increase of receipts. Certain it is that merchants have faith in
such a correspondence, and act upon that faith. A witness for the
petitioners tells us:
"The policy prevailing throughout the United States, so far as
retail merchandising department stores are concerned, is to get as
large a volume as possible with a small percentage of profit,
allowing the volume to produce the net profit."
If experience did not teach that economic advantage goes along
with larger sales, there would be an end to the hot pursuit for
wide and wider markets. Official statistics in Kentucky confirm the
impulse of her merchants, an impulse shared with merchants
everywhere. Tables prepared by a witness on the basis of returns to
the state tax commission show that persons and corporations whose
sales were over $1,000,000 had net earnings between $125,000 and
$400,000; those with sales between $600,000 and $800,000 had net
earnings of $35,000 to $60,000; those with sales between $200,000
and $450,000 had net earnings of $5,000 to $34,000, with the
exception of one concern which was conducted at a loss, and those
with smaller sales had net earnings ranging from $10,000 to
nothing. This does not mean that an increase of gross sales in one
business brought the same increase of net earnings as an increase
of gross sales in every other business. It does not mean that
larger sales brought net earnings in a mounting ratio, relatively
as well as absolutely. It does mean, however, that, on the whole,
net earnings in a business were higher when sales were large than
they were in the same business when sales were comparatively small.
In brief, there is a relation of correspondence between capacity to
pay and the amount of business done. Exceptions,
Page 294 U. S. 571
of course, there are. The law builds upon the probable, and
shapes the measure of the tax accordingly.
It is no answer to say that, as between one business and
another, or even as between one person and another engaged in the
same business, there will be varying rates of return upon the
amount of the investment. This is true also of a tax on net income.
Net earnings of $100,000 may represent for one man a return on a
capital of $2,000,000 and for another a return on a capital of
double that amount, yet the tax will be the same for each. So also
it is no answer to say that, in the administration of this statute,
two merchants whose sales are very large are subject to as heavy a
tax as many thousands of merchants whose sales are in the lowest
brackets. One might as well compare the federal income tax of a
banker whose net earnings are in the millions with that of a
thousand clerks who, by reason of exemptions, are to pay no tax
whatever. The comparison proves nothing unless it be the obvious
fact that taxpayers are few when the count is at the highest level.
Once more, it is no answer to say that, though capacity to pay is
enlarged on the average by an increase of the sales, there are
times when sales increase, and yet the outcome is a loss. No loss
has been suffered by any of the petitioners, unless it be in one
instance as the result of inefficiency, and so the findings show.
Insofar as the statute fails to make allowance for the contingency
of loss, it is certainly not arbitrary in its operation as to those
realizing a gain, and they will not be heard to complain that it is
arbitrary as to others. Hatch v. Reardon, 204 U.
, 204 U. S. 160
Keeney v. New York, 222 U. S. 525
222 U. S. 536
Hendrick v. Maryland, 235 U. S. 610
235 U. S. 621
Oliver Iron Mining Co. v. Lord, 262 U.
, 262 U. S. 180
But the result will not be changed if their standing be assumed.
The law has regard in these matters not to invariable sequences,
but to probabilities and tendencies.
"The problems of government are practical ones, and may justify,
if they do not require,
Page 294 U. S. 572
rough accommodations -- illogical, it may be, and
Metropolis Theater Co. v. Chicago, 228 U. S.
, 228 U. S. 69
"The fact that a better taxing system might be conceived does not
render the law invalid." Salomon v. State Tax Commission,
278 U. S. 484
278 U. S. 491
At the very least, an increase of gross sales carries with it an
increase of opportunity for profit, which supplies a rational basis
for division into classes at all events when coupled with evidence
of a high decree of probability that the opportunity will be
Many a pertinent analogy reinforces this conclusion. The tax
upon a long chain of stores is often at a higher rate than the tax
upon a short one (State Board of Tax Commissioners v. Jackson,
), yet it may happen that, in lean years, still more in
financial crises, the greater the number of stores, the less the
actual gain (Fox v. Standard Oil Co., ante,
294 U. S. 87
presence of such a possibility does not make the graduation
wrongful. The theater charging a high price for tickets of
admission may be taxed at a higher rate than one whose admission
price is low. A showing that the revenue of the high-priced
theaters is less than that of some of the others will not cause the
tax to fail. Metropolis Theater Co. v. Chicago, supra.
McKenna, J., sagely pointed out in that case that the choice
between high and low prices had been made by the theater itself,
and made in response to its own conception of advantage. A
conception good enough for the taxpayer was thought to be good
enough for the government. So here under the challenged statute.
Larger and larger sales are sought for by business, and sought for
with avidity. They are not the products of whim and fancy. They
represent a conception of probabilities and tendencies confirmed by
long experience. The conception is no more arbitrary in the brain
of a government official than it is in the mind of a company
Page 294 U. S. 573
The striving to expand being so general, there is no occasion
for surprise at the discovery of a relation between profit and
expansion when expansion is kept within the bounds of moderation.
In tracing that connection, it will not do to compare the profits
of one line of business with those of a different one viewed in
isolation. Many factors enter to make one kind of enterprise more
gainful than another. Cf.
Tolman, op. cit. supra,
at 112. Moreover, the rule is undoubted that different occupations
may be taxed in different ways. Bell's Gap R. Co. v.
Pennsylvania, 134 U. S. 232
134 U. S. 237
Stebbins v. Riley, 268 U. S. 137
268 U. S. 142
Ohio Oil Co. v. Conway, 281 U. S. 146
281 U. S. 159
Union Bank & Trust Co. v. Phelps, 288 U.
. Comparison must be between large and small
enterprises in the same line of business, or in many lines of
business viewed in combination. This comparison being made, large
sales will be found in the main to have the advantage over small
ones. There are those who hold that growth may be so large as to
make the business clumsy and inefficient, destroying unity of
management, but enterprises swollen to that extent are not the
common run that fix the patterns of a statute. It is significant
that graduation stops, according to the plan of the Kentucky
statute, before size becomes inordinate.
In what has been written, the effort has been to show that
enhancement of the gross sales has a tendency in respect of the
average business enterprise to increase capacity to pay by making
the gains larger than they would be if sales were small. This, if
it has been made out, will serve, without more, to sustain the
separation into classes that is now under attack. Magoun v.
Illinois Trust & Savings Bank, 170 U.
, 170 U. S. 293
170 U. S. 296
Knowlton v. Moore, 178 U. S. 41
178 U. S. 54
But statistics are not lacking to give color to a broader claim.
The studies of the Harvard Bureau of Business Research show
(Bulletins 74, 78, 83, and 85) that, despite occasional
aberrations, gross sales have
Page 294 U. S. 574
a direct bearing on the ratio of net gain to sales and on the
ratio of net gain to net worth. [Footnote 2/2
] In brief, there is not only an increment
of profit expressed in terms of dollars, but an increment also when
the profit is expressed as a percentage. How far the teachings of
these tables are to be credited as accurate it is not for us to
say. Williams v. Mayor, 289 U. S. 36
289 U. S. 42
O'Gorman & Young v. Hartford Fire Insurance Co.,
282 U. S. 251
282 U. S. 257
They are confirmed by economists of standing who testified for the
state. Opposed are other scholars, also men of high repute, who
have studied the results of large scale enterprises and small ones
and, on the basis of that study, advance a different doctrine. They
find that the high percentages of profit are more likely to be
earned when capital
Page 294 U. S. 575
and sales are moderate. Epstein, Industrial Profits in the
United States, pp. 45, 46, 131, 132. On the other hand, they are
not hostile to the doctrine that, on the average, the net earnings
of a business increase absolutely, though not proportionately, as
the sales increase in volume. [Footnote
] Even as to percentages, the lawmakers of Kentucky were at
liberty to reach their own conclusion in the face of these
conflicting judgments pronounced by men of learning. If their
conclusion is not arbitrary, it is not for us to set them
The studies back of these statistics are instructive not merely
as to results, but also as to causes. Harvard Bureau of Business
Research, Bulletin 85, p. 9. Sales on a large scale are
accompanied, it seems, by differences of method, as well as
differences of quantity. Some of the attendant advantages are
matters of common knowledge. The big shops, having ample capital,
can get the best locations. This is a form of advertising,
productive of goodwill. The big shops can practice economics
impossible for small ones. In particular, they can make their
purchases in bulk, and hence at cheaper prices. The big shops
acquire a prestige that makes customers eager to buy of them. Here
and there, they can even charge a little more than others, at least
for high-priced goods, or goods not wholly standardized, and the
buyer will ignore the difference. If they happen to be department
stores, they stimulate a customer to buy at one shop without the
bother of going elsewhere. If they happen to be chain stores, they
have other methods of attraction. Even management tends to be more
efficient unless the business becomes unwieldy by reason of its
size. Bulletin 85, supra.
The president of the Kroger
Company tells us: "Kroger trains
Page 294 U. S. 576
its men, having regular training schools and diplomas." As
already pointed out, the scheme of the Kentucky statute puts a stop
to graduation before size becomes immoderate. From all this it
comes about that many avenues of profit closed to the little dealer
are open to his big competitor.
The framers of a system of taxation may properly give heed to
convenience of administration, and, in the search for that good,
may content themselves with rough and ready compromises. Elaborate
machinery, designed to bring about a perfect equilibrium between
benefit and burden, may at times defeat its aim through its own
elaboration. A crippling result of the decision just announced will
be to restrict the choice of means within bounds unreasonably
narrow. Hereafter, in the taxation of business, a legislature will
be confined, it seems, to an income or profit tax if it wishes to
establish a graduated system proportioning burden to capacity. But
profits themselves are not susceptible of ascertainment with
certainty and precision except as the result of inquiries too
minute to be practicable. The returns of the taxpayer call for an
exercise of judgment as well as for a transcript of the figures on
his books. They are subject to possible inaccuracies, almost
without number. Salaries of superintendence, figuring as expenses,
may have been swollen inordinately; appraisals of plant, of
merchandise, of patents, of what not, may be erroneous or even
fraudulent. In the words of a student of the problem,
"statements of profits are affected both by accounting methods
are by the optimistic or pessimistic light in which the future is
viewed at the time when the accounts are made up."
Epstein, op. cit. supra,
p. 5. These difficulties and
dangers bear witness to the misfortune of forcing methods of
taxation within a Procrustean formula. If the state discerns in
business operations uniformities and averages that seem to point
the way to a system easier to administer than one based upon a
Page 294 U. S. 577
of profits, and yet likely in the long run to work out
approximate equality, it ought not to be denied the power to frame
its laws accordingly.
For answer to all this, the thrust will not avail that "it is
difficult to be just, and easy to be arbitrary." The derogatory
epithet assumes the point to be decided. There is nothing arbitrary
in rescuing a vast body of taxpayers from the labor and expense of
preparing elaborate reports, at best, approximately accurate. There
is nothing arbitrary in rescuing a government from the labor and
expense of setting up the huge and unwieldy machinery of an income
tax department with a swarm of investigators and accountants and
legal and financial experts. To frame a system of taxation in
avoidance of evils such as these is no act of sheer oppression, no
abandonment of reason, no exercise of the general will in a
perverse or vengeful spirit. Far from being these or any of them,
it is a pursuit of legitimate ends by methods honestly conceived
and rationally chosen. More will not be asked by those who have
learned from experience and history that government is, at best, a
makeshift, that the attainment of one good may involve the
sacrifice of others, and that compromise will be inevitable until
the coming of Utopia.
The argument is made that the principle of graduation, once it
has gained a lodgment, may be extended indefinitely, with the
result that, in some other statute, the rate for the upper levels,
instead of being confined as it is here to something less than one
percent, may be 10 percent or 20, thus wiping out profits when
business is done on a large scale. A sufficient answer may well be
that no such act is now before us; but if this answer be
inadequate, another is at hand. The more effective answer is that,
under the law of Kentucky, the danger is illusory. There is no need
to consider, in respect of an excise upon sales, whether the
doctrine of Magnano Co. v. Hamilton, 292 U. S.
, and Fox v. Standard Oil Co., supra,
Page 294 U. S. 578
invoked successfully to uphold a destructive measure of taxation
if the standard of validity were to be looked for in the Fourteenth
Amendment, and not in any other law. The significance of whatever
distinctions there may be will be weighed when the event arises.
For the present, it is enough to say that, under the Constitution
of Kentucky as interpreted by repeated decisions of her highest
court, no tax law in the nature of an excise will be upheld if its
effect is so drastic as to extinguish profits altogether.
Fiscal Court of Owen County v. F. & A. Cox Co.,
Ky. 738, 117 S.W. 296; City of Louisville v. Pooley,
Ky. 286, 124 S.W. 315; Sperry & Hutchinson v.
151 Ky. 389, 151 S.W. 932. Because of those
decisions, we refused only recently to sustain a statute of
Kentucky imposing a prohibitory tax upon the sale of oleomargarine
(Glenn v. Field Packing Co., 290 U.
5 F.Supp. 4), though, in
Magnano Co. v. Hamilton, supra,
a like tax, adopted by the
State of Washington, was held to be consistent with the
Constitution of the nation. The relevant provisions of the Kentucky
Constitution and of the explanatory judgments of her courts are
written by implication into the Kentucky tax act as if put there in
so many words. The act is to be interpreted as if it said:
"The tax hereby imposed is not to be collected if the result
will be to wipe out the profits of a business conducted with
ordinary efficiency, or to reduce the profits to a level
Such an extinguishment of profits is not the outcome of the tax
when the act is applied to the business of these petitioners, and
so the court below has found. [Footnote
] Such can never be the outcome either under this
Page 294 U. S. 579
act or any other as long as the Constitution of Kentucky
continues what it is today.
The case has thus far been considered almost wholly without
reference to the precedents. When these are examined, the
conclusion is even clearer. To dwell upon the chain store decisions
is needless. State Board of Tax Commissioners v. Jackson,
supra; Fox v. Standard Oil Co., supra; Liggett Co. v. Lee,
288 U. S. 517
They are too recent to be forgotten. Classification in those cases
ran athwart the lines of profit, yet it was nonetheless sustained.
There is no magic, however, in the catchword of a "chain." In cases
not so recent, other forms of business enterprise have been
subjected to graduated taxes on the basis of size alone, without
reference to profits. Thus, in Clark v. Titusville,
184 U. S. 329
license tax was laid upon wholesale and retail merchants; the rate
for each class varying progressively with the amount of the gross
sales. The court upheld the classification as one reasonably
related to capacity to pay. In Metropolis Theater Co. v.
already summarized in this opinion, a tax upon
theaters proportioned to the cost of tickets was upheld against the
contention of the taxpayer that the price of tickets was unrelated
to the profits of the venture. In Pacific American Fisheries v.
Territory of Alaska, 269 U. S. 269
tax had been laid on salmon canneries at graduated levels; the
percentage of the tax increasing with the number of cases packed.
It was pressed that the tax discriminated against large canneries
in favor of small ones. The argument was dismissed with the remark
that "classification of taxes by the amount of the corpus taxed has
been sustained in various connections heretofore." Cf. Maine v.
Grand Trunk Ry. Co., 142 U. S. 217
142 U. S. 228
Dow v. Beidelman, 125 U. S. 680
125 U. S. 691
Chicago, Burlington & Quincy R. Co. v. Iowa,
94 U. S. 155
94 U. S. 164
Chesapeake & Ohio R. Co. v. Conley, 230 U.
, 230 U. S. 522
Spreckels Sugar Refining Co. v. McClain, 192 U.
; Hope Natural Gas Co. v. Hall,
274 U. S. 284
Page 294 U. S. 580
Telephone Co. v. Fuller, 229 U.
; Heisler v. Thomas Colliery Co.,
260 U. S. 245
Brown-Forman Co. v. Kentucky, 217 U.
; Postal Telegraph Cable Co. v. Adams,
155 U. S. 688
See also Louisville Gas & Electric Co. v. Coleman,
277 U. S. 32
277 U. S. 43
which brings the precedents together. Other cases could be
In fine, there may be classification for the purpose of taxation
according to the nature of the business. There may be
classification according to size and the power and opportunity of
which size is an exponent. Such has been the teaching of the law
books at least until today.
I am authorized to state that MR. JUSTICE BRANDEIS and MR.
JUSTICE STONE join in this opinion.
The problem is discussed by Stone, J., with a reference to many
treatises on finance, in his dissenting opinion in Indian
Motocycle Co. v. United States, 283 U.
, 283 U. S.
Bulletin 74 deals with the operations of department stores for
1927. One set of tables includes stores whose sales are in excess
of a million dollars. They are divided into four classes (one
million to two million; two million to four million; four million
to ten million; ten million and over). Referring to these classes,
the report says (p. 10):
"While noticeable differences appeared in net profit for stores
grouped according to volume of sales, these differences were even
greater in the case of total net gain both as a percentage of net
sales and as a percentage of net worth. In each instance, these
figures varied directly with the volume of sales, and a distinctly
more favorable showing was made by the larger firms."
Another set of tables includes stores whose sales were under a
million dollars. Among these, the most favorable net profit showing
was that of the group with volume of sales between one-quarter and
one-half million. Between half a million and a million, the ratio
of increase declined. Even there, however, the showing was more
favorable than for stores under a quarter of a million, where the
average was one of loss. Bulletins 78, 83, and 85 state the
operations for later years with results not greatly different. Even
in years of loss, the percentage of loss had, in the main, a
tendency to be lower as the volume of the sales increased.
"It is quite clear that the larger stores operated on a
distinctly more satisfactory basis than the smaller stores, and
that success as measured by earnings varies directly with
Bulletin 85, p. 8.
The prevailing opinion in effect concedes "that, averaging the
results of the concerns making the reports, it is true,
generally speaking,' as the court below put it, that profits
increase with sales."
A loss of $9,023 would have been suffered by one of the
petitioners if the tax had been paid in 1932, but the finding is
that for that year the business was conducted without reasonable
skill, and that with a change of the methods of management the loss
was turned into a profit. At most, the operations of that year
might call under the Kentucky decisions for a modification of the
judgment. The petitioners seek an injunction that will annul the