1. The tax imposed on foreign corporations by Art. 9-A of the
Tax Law of New York, as amended, is not a direct tax on allocated
income, but a tax for the privilege of doing business in the state
measured by allocated income of the previous year. P.
266 U. S.
280.
2. When the business of a foreign corporation consists in a
series of transactions beginning with the manufacture of goods in
its home country and ending in their sale there and in other
places, the profits accruing only with the sales, a this country in
which part of the business is transacted is justified in
attributing to that part a just proportion of the net profits
earned by the corporation from its business as a whole during the
preceding year, as a basis for a tax upon its privilege of doing
local business during the year to follow.
Underwood Typewriter
Co. v. Chamberlain, 254 U. S. 113;
Wallace v. Hines, 253 U. S. 66,
253 U. S. 69. P.
266 U. S.
280.
3. A tax on a British corporation for the privilege of doing
business in New York during the ensuing year computed under Art.
9-A of the state Tax Law on a portion of the total net income of
the year last preceding, the portion being determined by the ratio
between the value of such assets of the corporation of certain
classes -- real and tangible personal property, bills and accounts
receivable, and shares in other corporations -- as were located in
New York, and the value of all its assets of those classes,
held not arbitrary or unreasonable, and not a violation of
due process of law or an unconstitutional burden on foreign
commerce. P.
266 U. S.
282.
4. A tax thus computed on allocated net income of the past year
for the privilege of continuing local business during the year
ensuing should not be deemed invalid merely because the local
business of the preceding year yielded no net income, especially
where the state law relieves the corporation from any personal
property tax. P.
266 U. S.
284.
5. An objection to a state tax not raised before the state
taxing authorities or in the state courts cannot be assigned for
error and reviewed in this Court. P.
266 U. S. 285.
198 App.Div. 963, 232 N.Y. 42, affirmed.
Page 266 U. S. 272
Error to a judgment of the Supreme Court of New York, entered on
remittitur from the Court of Appeals, confirming a tax
assessment.
Page 266 U. S. 277
MR. JUSTICE SANFORD delivered the opinion of the Court.
This cases involves the constitutional validity of Article 9-A
of the Tax Law of New York under consideration in
Gorham
Manufacturing Co. v. Tax Commission, ante, 266 U. S. 265.
This Article [
Footnote 1]
provides that, for the privilege of doing business in the state, a
foreign manufacturing and mercantile corporation shall pay, in
advance, an annual franchise tax, to be computed by the State Tax
Commission at the rate of three percentum, upon the net income of
the corporation for the preceding year. §§ 209, [
Footnote 2] 215. This net income is
"presumably the same" as that upon which the corporation is
required to pay a tax to the United States, § 209, but the amount
thereof as returned to the United States is subject to any
correction for fraud, evasion, or errors ascertained by the
Commission, § 214. If the entire business of the corporation is not
transacted
Page 266 U. S. 278
within the state, the tax is to be based upon the portion of
such ascertained net income determined by the proportion which the
aggregate value of specified classes of the assets of the
corporation within the state bears to the aggregate value of all
such classes of assets, wherever located. The classes of assets
which are to enter into this ratio -- hereinafter termed the
segregated assets -- are: real property and tangible personal
property, bills and accounts receivable resulting from the
manufacture and sale of merchandise and services performed, and
shares of stock owned in other corporations, not exceeding ten
percentum of the real and tangible personal property, which are to
be allocated according to the location of the physical property
representing such stock. § 214. [
Footnote 3] The corporation is to be exempt from any
personal property tax. § 219-j.
Bass, Ratcliff & Gretton, Limited, is a British corporation
engaged in brewing and selling Bass' ale. All its brewing is done
and a large part of its sales are made in England, but it formerly
imported a portion of its product into the United States which it
sold through branch offices
Page 266 U. S. 279
located in New York City and in Chicago. On its report to the
New York Tax Commission, amended under protest, the Commission
computed and assessed its franchise tax for the year commencing
November 1, 1918. At a hearing granted on an application for
revision, the Commission adhered to the original assessment. The
company then paid the tax under protest. The determination of the
Commission was subsequently confirmed, upon a writ of certiorari,
by the Appellate Division of the certiorari, by the Appellate
Division 189 N.Y.S. 952, and the order of that court was affirmed,
upon appeal, by the Court of Appeals, 232 N.Y. 42. The record was
remitted to the Supreme Court, to which this writ of error was
directed.
Hodges v. Snyder, 261 U.
S. 600.
It is undisputed that, for the year preceding that for which
this franchise tax was assessed, the company, as reported to the
United States, had no net income upon which it was subject to a
federal income tax. Its total net income, however, from all its
business wherever carried on, was $2,185,600. [
Footnote 4] The value of its segregated assets,
wherever located, was: real property, $785,675; tangible personal
property, $2,105,105; bills and accounts, $321,625, and shares of
stock of other corporations, $845,195. Limiting the value of the
shares of stock to ten percentum of the aggregate real and tangible
personal property -- that is, to $289,078 -- made the aggregate
value of its segregated property, wherever located, $3,501,483. The
value of its segregated assets in New York was as follows: bills
and accounts, $20,449, and tangible personal property, $23,668.
This made the aggregate value of its segregated property in New
York, $44,177. Taking the entire net income, $2,185,600, as the
basis for the assessment of the tax, the Commission allocated to
New York
Page 266 U. S. 280
the proportion thereof which the segregated assets in New York
bore to the segregated assets wherever located, amounting to
$27,537.68, and upon this sum computed the franchise tax at the
rate of three percentum -- that is, $826.14.
The company contends that this tax is not based upon any net
income derived from the business which it carried on in New York,
but upon a portion of its net income derived from business carried
on outside of the United States which, under the provisions of the
statute, has been arbitrarily allocated to its New York business,
and that such imposition of the tax deprives it of its property in
violation of the due process clause of the Fourteenth Amendment,
and imposes a direct burden upon its foreign commerce in violation
of the commerce clause of the Constitution.
1. We see no reason to doubt the accuracy of the statement made
by the Court of Appeals in the present case that the franchise tax
imposed by the statute is "primarily a tax levied for the privilege
of doing business in the state." It is not a direct tax upon the
allocated income of the corporation in a given year, but a tax for
the privilege of doing business in one year measured by the
allocated income accruing from the business in the preceding year.
See New York v. Jersawit, 263 U.
S. 493,
263 U. S.
496.
2. The question of the constitutionality of this tax as applied
in the present case is controlled, in its essential aspects, by the
decision in
Underwood Typewriter Co. v. Chamberlain,
254 U. S. 113,
254 U. S. 120.
There, the Connecticut statute imposed upon foreign corporations
doing business partly within and partly without the state an annual
tax of two percent upon the net income earned during the preceding
year on business carried on within the state, ascertained by taking
such proportion of the whole net income on which the corporation
was required to pay a
Page 266 U. S. 281
tax to the United States as the value of its real and tangible
personal property within the state bore to the value of all of its
real and tangible personal property. The Underwood Typewriter Co.,
a Delaware corporation, was engaged in manufacturing and selling
typewriters and supplies. All its manufacturing was done in
Connecticut, but the greater part of its sales was made from branch
offices in other states. It contended that the tax was an
unconstitutional burden on interstate commerce, and that it
violated the Fourteenth Amendment in that it imposed, directly or
indirectly, a tax on income arising from business conducted outside
of the state. In support of the latter objection, it showed that,
while 47 percent of its real estate and tangible personal property
was located in Connecticut, resulting, under the method of
apportionment of the net income required by the statute, in
attributing 47 percent of its total net income to the operations in
Connecticut, in fact, about $1,300,000 of its net profits were
received in other states, and only about $43,000 in Connecticut.
The Court, in sustaining the validity of the tax, said:
"But this showing wholly fails to sustain the objection. The
profits of the corporation were largely earned by a series of
transactions beginning with manufacture in Connecticut and ending
with sale in other states. In this, it was typical of a large part
of the manufacturing business conducted in the state. The
legislature, in attempting to put upon this business its fair share
of the burden of taxation, was faced with the impossibility of
allocating specifically the profits earned by the processes
conducted within its borders. It therefore adopted a method of
apportionment which, for all that appears in the record, reached,
and was meant to reach, only the profits earned within the state.
'The plaintiff's argument on this branch of the case,' as stated by
the Supreme Court of Errors,"
"carries the burden of showing that 47 percent of its net income
is not reasonably
Page 266 U. S. 282
attributable, for purposes of taxation, to the manufacture of
products from the sale of which 80 percent of its gross earnings
was derived after paying manufacturing costs."
The corporation has not even attempted to show this, and for
aught that appears, the percentage of net profits earned in
Connecticut may have been much larger than 47 percent. There is
consequently nothing in this record to show that the method of
apportionment adopted by the state was inherently arbitrary, or
that its application to this corporation produced an unreasonable
result.
So, in the present case, we are of opinion that, as the company
carried on the unitary business of manufacturing and selling ale,
in which its profits were earned by a series of transactions
beginning with the manufacture in England and ending in sales in
New York and other places -- the process of manufacturing resulting
in no profits until it ends in sales -- the state was justified in
attributing to New York a just proportion of the profits earned by
the company from such unitary business. In
Wallace v.
Hines, 253 U. S. 66,
253 U. S. 69, it
was recognized that a state, in imposing an excise tax upon foreign
corporations in respect to doing business within the state, may
look to the property of such corporations beyond its borders to
"get the true value of the things within it, when they are part of
an organic system of wide extent," giving the local property a
value above that which it would otherwise possess, and may
therefore take into account property situated elsewhere when it
"can be seen in some plain and fairly intelligible way that it adds
to the value of the [property] and the rights exercised in the
state." This is directly applicable to the carrying on of a unitary
business of manufacture and sale partly within and partly without
the state.
Nor do we find that the method of apportioning the net income on
the basis of the ratio of the segregated
Page 266 U. S. 283
assets located in New York and elsewhere was inherently
arbitrary, or a mere effort to reach profits earned elsewhere under
the guise of legitimate taxation. The principal factors entering
into this allocation are, as in the
Underwood case, the
real and tangible personal property of the corporation. We see
nothing arbitrary in also including bills and accounts receivable
resulting from the manufacture and sale of merchandise and services
performed, or in taking average monthly values as the measure of
all the segregated assets except shares of stock. And, in the
present case, the inclusion of a portion of the shares of stock in
other corporations -- none of which were allocated to New York --
resulted in the company's favor, and reduced the income allocated
to New York to less than it otherwise would have been.
It is not shown in the present case, any more than in the
Underwood case, that this application of the statutory
method of apportionment has produced an unreasonable result. The
fact that the company may not have had any net income upon which it
was subject to payment of income tax to the federal government
obviously does not show that it received no net income from the
business which it carried on in New York. There is no evidence in
the record as to whether the company received any net income from
its New York business, or the amount of the profit and loss on that
business, if any, either considered separately or in connection
with the manufacturing business carried on in Great Britain.
[
Footnote 5]
Page 266 U. S. 284
3. Furthermore, the statutory method of apportionment not being
shown to be arbitrary or unreasonable, we think that the Court of
Appeals rightly held that the tax imposed for the carrying on of
the business in New York is not invalid merely because, in the
preceding year, the business conducted in New York may have yielded
no net income. There is no sufficient reason why a foreign
corporation desiring to continue the carrying on of business in the
state for another year, from which it expects to derive a benefit,
should be relieved of a privilege tax because it did not happen to
have made any profit during the preceding year. This is especially
true where, as in the present case, the corporation is entirely
relieved of any personal property tax.
See
U.S. Express Co. v.
Minnesota, 223 U. S. 335,
223 U. S.
346.
4. The company furthermore urges that, in any event, it should
have been permitted to include in the statutory ratio the entire
value of the stocks which it owned in other corporations. This
contention is based upon the fact that, in the previous case of
People v. Knapp, 230 N.Y. 48, it had been held that
insofar as the statute provided that in the allocation of income
the value of stocks of other corporations should not be taken into
consideration beyond ten percent of the real and tangible personal
property, although the entire dividend from such stocks was
included in the net income which was the basis of the allocation,
the statute was unconstitutional, and that the taxpayer in such
case should be permitted to include in the statutory allocation the
entire value of the stocks which it owned in other corporations. As
to this matter, it is sufficient to say that it does not appear
from the record in the present case that the shares of stock which
the company owned in other corporations had yielded any dividends
which were included in its total net income, and further, that this
question, so far
Page 266 U. S. 285
as appears from the record, was not raised by the company either
before the Commission or the state courts, in each of which its
objections to the validity of the tax were phrased in terms having
no reference to this specific question. And, not having been raised
in the Court of Appeals or passed on by that court, it is not a
question which can now be reviewed by this Court under an
assignment of errors raising it here for the first time.
The judgment of the Court of Appeals is accordingly
Affirmed.
MR. JUSTICE McREYNOLDS dissents.
[
Footnote 1]
Consol.Laws of 1909, c. 60, as amended by the Laws of 1917, c.
726, and the Laws of 1918, cc. 271, 276, 417.
See the
opinion in the
Gorham Mfg. Co. case, note 2,
ante, 266 U. S.
266.
[
Footnote 2]
This section is entitled "Franchise tax on corporations based on
net income."
[
Footnote 3]
The average value of the shares of stock is taken, the average
monthly value of the other assets. The entire provision as to the
allocation of net income, which is here broadly summarized, is set
forth in the margin of the opinion in
People v. Knapp, 230
N.Y. 48, 53.
This Article also provides that the corporation shall make a
report to the Commission showing its net income as returned to the
United States and the matters which are to enter into the
allocation of the net income; that the Commission shall state the
account and compute the tax, and that, if an application for
revision is made, the Commission shall grant a hearing, upon
evidence, and adjust the tax, "according to law and the facts." And
it further provides for a review of the determination of the
Commission, upon certiorari by the Supreme Court, both upon the law
and the facts, and for an appeal from the Supreme Court to the
Court of Appeals. These various provisions are set forth in the
opinion in the
Gorham Mfg. Co. case.
[
Footnote 4]
If the corporation is organized under the laws of another
country, it is required to state its entire net income. § 211.
[
Footnote 5]
The statement in the opinion of the Court of Appeals that the
company's "net income from the New York business was nothing" was
apparently made inadvertently. There is no showing except as to the
gross sales, and the "expenses," which were about one-fourth of the
gross sales; nothing appearing as to manufacturing costs or other
charges, and nothing from which the question of ultimate net profit
or loss that entered either into the separate business in New York
or into the total net income of the company accruing from the
manufacture and sale of the ale, can be ascertained.