1. A corporation which is allowed to come into a State and there
carry on its business may claim, as an individual may claim, the
protection of the Fourteenth Amendment against a subsequent
application to it of state law. P.
303 U. S.
79.
2. A Connecticut corporation conducted part of its life
insurance business in California under license from that State and
also entered into contracts with other insurance corporations
likewise licensed to do business in California, reinsuring them
against loss on policies of life insurance effected by them in
California and issued to residents there. These reinsurance
contracts were entered into in Connecticut, where the premiums were
paid and where the losses, if any, were payable.
Held that, as applied to such reinsurance business, a
California tax on the privilege of the corporation to do business
within the State, measured by the gross premiums received, was void
under the due process clause of the Fourteenth Amendment. Pp.
303 U. S. 78,
303 U. S.
82.
3. A State may not tax the property and activities of a foreign
corporation which are not within its boundaries. P.
303 U. S.
80.
The limits placed by the Fourteenth Amendment on the State's
jurisdiction to tax are to be ascertained by reference to the
incidence of the tax upon its objects, rather than the ultimate
thrust of the economic benefits and burdens of transactions within
the State which it might, but does not, tax.
93 Cal.Dec. 4650; 67 P.2d 675, reversed.
Appeal from judgments affirming the dismissal on demurrer of two
actions by the above named insurance company against Johnson, State
Treasurer of California, to recover taxes paid under protest. The
cases were heard together in the court below.
Page 303 U. S. 78
MR. JUSTICE STONE delivered the opinion of the Court.
Appellant is a Connecticut corporation, admitted to do an
insurance business in California. In addition to its business
conducted within that state, it has entered into contracts with
other insurance corporations likewise licensed to do business in
California, reinsuring them against loss on policies of life
insurance effected by them in California and issued to residents
there. These reinsurance contracts were entered into in
Connecticut, where the premiums were paid and where the losses, if
any, were payable. The question for decision is whether a tax laid
by California on the receipt by appellant in Connecticut of the
reinsurance premiums during the years 1930 and 1931 infringes the
due process clause of the Fourteenth Amendment.
In suits brought in the state court by appellant against
respondent, state treasurer to recover the taxes paid, the Supreme
Court of California sustained demurrers to the complaints and gave
judgments for the respondent. The cases, having been consolidated,
come here on a single appeal under section 237(a) of the Judicial
Code, 28 U.S.C. § 344(a).
Section 14 of Art. XIII of the California Constitution, as
supplemented by Act of March 5, 1921 (Stats.1921, c. 22, pp. 20,
21, Political Code, § 3664b), fixing the rate of tax, lays upon
every insurance company doing business within the state an annual
tax of 2.6 percent
"upon the amount of the gross premiums received upon its
business done in this state, less return premiums and reinsurance
in companies or associations authorized to do business in this
state."
The Supreme Court of California has declared that the
constitutional provision imposes
Page 303 U. S. 79
"a franchise tax exacted for the privilege of doing business" in
the state.
Consolidated Title Securities Co. v.
Hopkins, 1 Cal. 2d 414,
419, 35 P.2d 320, 323;
compare Carpenter v. People's mutual
Life Insurance Co., 74 P.2d 708.
Although, in terms, the "gross premiums received upon . . .
business done in this state," less the specified deductions, are
made the measure of the tax, the state court in this, as in an
earlier case,
Connecticut General Life Insurance Co. v.
Johnson, 3 Cal. 2d 83, 43
P.2d 278,
appeal dismissed for want of a properly presented
federal question, 296 U.S. 535, has held that the measure
includes the premiums on appellant's reinsurance policies effected
and payable in Connecticut. In this case, it has declared also that
the policy of the state, expressed in the constitutional provision,
is "to avoid double taxation without any loss of revenue to the
state." To accomplish that end, the deduction of reinsurance
premiums paid to companies authorized to do business within the
state is allowed, it is said, on the theory that the benefit of the
deduction will be passed on to the reinsurer, who, being authorized
to do business within the state, may be taxed on the reinsurance
premiums as a means of equalizing the tax and as an offset against
the benefit of the deduction which he ultimately enjoys.
No contention is made that appellant has consented to the tax
imposed as a condition of the granted privilege to do business
within the state. Nor could it be, for it appears that appellant
had conducted its business in California under state license for
many years before the taxable years in question, and before the
taxing act was construed by the highest court of the state, in
Connecticut General Life Insurance Co. v. Johnson, supra,
to apply to premiums received in Connecticut from reinsurance
contracts effected there. A corporation which is allowed to come
into a state and there carry on its business may
Page 303 U. S. 80
claim, as an individual may claim, the protection of the
Fourteenth Amendment against a subsequent application to it of
state law.
Hanover Fire Insurance Co. v. Harding,
272 U. S. 494,
compare Kentucky Finance Corp. v. Paramount Auto Exchange
Corp., 262 U. S. 544.
It is said that the state could have lawfully accomplished its
purpose if the statute had further stipulated that the deduction
should be allowed only in those cases where the reinsurance is
effected in the state or the reinsurance premiums paid there. But,
as the state has placed no such limitation on the allowance of
deductions, the end sought can be attained only if the receipt by
appellant of the reinsurance premiums paid in Connecticut upon the
Connecticut policies is within the reach of California's taxing
power. Appellee argues that it is, because the reinsurance
transactions are so related to business carried on by appellant in
California as to be a part of it and properly included in the
measure of the tax, and because, in any case, no injustice is done
to appellant, since the effect of the statute, as construed, is to
redistribute the tax, which the state might have exacted from the
original insurers, but did not, by assessing it upon appellant to
the extent to which it has received the benefit of the allowed
deductions.
But the limits of the state's legislative jurisdiction to tax,
prescribed by the Fourteenth Amendment, are to be ascertained by
reference to the incidence of the tax upon its objects, rather than
the ultimate thrust of the economic benefits and burdens of
transactions within the state. As a matter of convenience and
certainty, and to secure a practically just operation of the
constitutional prohibition, we look to the state power to control
the objects of the tax as marking the boundaries of the power to
lay it. Hence it is that a state which controls the property and
activities within its boundaries of a foreign corporation admitted
to do business there may tax them. But the due process clause
denies to the state
Page 303 U. S. 81
power to tax or regulate the corporation's property and
activities elsewhere.
Union Refrigerator Transit Co. v.
Kentucky, 199 U. S. 194;
New York Life Insurance Co. v. Head, 234 U.
S. 149;
New York Life Insurance Co. v. Dodge,
246 U. S. 357;
St. Louis Cotton Compress Co. v. Arkansas, 260 U.
S. 346;
Compania General de Tabacos v.
Collector, 275 U. S. 87;
Home Insurance Co. v. Dick, 281 U.
S. 397;
Hartford Accident & Indemnity Co. v.
Delta & Pine Land Co., 292 U. S. 143;
Boseman v. Connecticut General Life Ins. Co., 301 U.
S. 196;
People ex rel. Sea Insurance Co. v.
Graves, 274 N.Y. 312, 8 N.E.2d 872;
compare Provident
Savings Life Assurance Society v. Kentucky, 239 U.
S. 103. It follows that such a tax, otherwise
unconstitutional, is not converted into a valid exaction merely
because the corporation enjoys outside the state economic benefits
from transactions within it which the state might, but does not,
tax, or because the state might tax the transactions which the
corporation carries on outside the state if it were induced to
carry them on within.
Appellant, by its reinsurance contracts, undertook only to
indemnify the insured companies against loss upon their policies
written in California. The reinsurance involved no transactions or
relationship between appellant and those originally insured, and
called for no act in California.
Connecticut General Life,
insurance Co. v. Johnson, supra, 3 Cal. 2d
83, 87, 43 P.2d 278;
compare Morris & Co. v.
Skandinavia Insurance Co., 279 U. S. 405,
279 U. S. 408.
Apart from the facts that appellant was privileged to do business
in California, and that the risks reinsured were originally insured
against in that state by companies also authorized to do business
there, California had no relationship to appellant or to the
reinsurance contracts. No act in the course of their formation,
performance, or discharge took place there. The performance of
those acts was not dependent upon any privilege or authority
granted by it, and California laws afforded to them no
protection.
Page 303 U. S. 82
The grant by the state of the privilege of doing business there,
and its consequent authority to tax the privilege, do not withdraw
from the protection of the due process clause the privilege, which
California does not grant, of doing business elsewhere.
Western
Union Telegraph Co. v. Kansas, 216 U. S.
1;
International Paper Co. v. Massachusetts,
246 U. S. 135;
Louisville & Jeffersonville Ferry Co. v. Kentucky,
188 U. S. 385,
188 U. S. 398.
Even though a tax on the privilege of doing business within the
state in insuring residents and risks within it may be measured by
the premiums collected, including those mailed to the home office
without the state,
Equitable Life Assurance Society v.
Pennsylvania, 238 U. S. 143, and
though the writing of policies without the state insuring residents
and risks within it is taxable because within the granted
privilege,
Compania General de Tabacos v. Collector,
supra, 275 U. S. 98,
there is no basis for saying that reinsurance which does not run to
the original insured, and which, from its inception to its
termination, involves no action taken within California, even the
settlement and adjustment of claims, is embraced in any privilege
granted by that state.
Provident Savings Life Assurance Society
v. Kentucky, supra, 239 U. S. 112;
Compania General de Tabacos v. Collector, supra,
275 U. S. 96;
compare Equitable Life Assurance Society v. Pennsylvania,
supra, 238 U. S. 147;
Compania General de Tabacos v. Collector, supra,
275 U. S. 98.
All that appellant did in effecting the reinsurance was done
without the state, and for its transaction, no privilege or license
by California was needful. The tax cannot be sustained either as
laid on property, business done, or transactions carried on, within
the state, or as a tax on a privilege granted by the state.
Reversed.
MR. JUSTICE CARDOZO took no part in the consideration or
decision of this case.
Page 303 U. S. 83
MR. JUSTICE BLACK, dissenting.
I do not believe that this California corporate franchise tax
has been proved beyond all reasonable doubt to be in violation of
the Federal Constitution, [
Footnote
1] and I believe that the judgment of the Supreme Court of
California should be affirmed. Traditionally states have been
empowered to grant or deny foreign corporations the right to do
business within their borders, [
Footnote 2] and "may exclude them arbitrarily or impose
such conditions as [they] will upon their engaging in business
within [their] jurisdiction." [
Footnote 3]
California laid an annual tax upon gross insurance premiums
which the Supreme Court of California,
Consolidated Title
Securities Co. v. Hopkins, 1 Cal. 2d 414,
35 P.2d 320, 323, has construed to be "a franchise tax exacted for
the privilege of doing business." In measuring this franchise tax
imposed upon corporations, the state includes reinsurance premiums
paid to the corporation on contracts made without the state
where such reinsurance protects citizens of the State of
California. There is no attempt by this tax to regulate the
business of the insurance company in any state except
California.
The record does not indicate that California made any contract
with this Connecticut corporation guaranteeing it a permanent
franchise to do business in California on the same terms and
conditions upon which it entered the state.
"A state which freely granted the corporate privilege for
intrastate commerce may change its policy. . . . In the absence of
contract, there is no vested interest which requires the
continuance of a legislative policy -- however
Page 303 U. S. 84
expressed -- whether embodied in a charter or in a system of
taxation. [
Footnote 4]"
It may be that California believes that, by this tax, it can
stimulate the reinsurance business of companies making their
reinsurance contracts in California. The right of a state to foster
its own domestic industries by its taxing system has been sustained
by this Court. [
Footnote 5]
This Court has also frequently sustained the right of a state to
impose conditions on foreign corporations in order to favor its own
corporations. [
Footnote 6] If a
state did not have this privilege, it could not protect the
domestic business of its own corporations from undesirable
competition by foreign corporations. The state of California has
the constitutional right to limit the privileges of its own
corporations and to reserve the right to control their privileges
and to define and limit their activities. [
Footnote 7] If California has the lawful constitutional
right (as this Court has many times said it has) to impose
conditions upon foreign corporations so as to protect domestic
corporations, its own elected legislative representatives should be
the judges of what is reasonable and proper in a democracy.
With reference to a corporate tax imposed by the state of
Louisiana, this Court has said:
"The appellants, by incorporating in some other state, or by
spreading their business and activities over other states, cannot
set at naught the public policy of Louisiana [California?]. . . .
The policy Louisiana [California?] is free to adopt with
Page 303 U. S. 85
respect to the business activities of her own citizens she may
apply to the citizens of other states who conduct the same business
within her borders, and this irrespective of whether the evils
requiring regulation arise solely from operations in Louisiana
[California?] or are in part the result of extrastate transactions.
[
Footnote 8]"
But it is contended that the due process clause of the
Fourteenth Amendment prohibits California from determining what
terms and conditions should be imposed upon this Connecticut
corporation to promote the welfare of the people of California.
I do not believe the word "person" in the Fourteenth Amendment
includes corporations. "The doctrine of
stare decisis,
however appropriate and even necessary at times, has only a limited
application in the field of constitutional law." [
Footnote 9] This Court has many times changed
its interpretations of the Constitution when the conclusion was
reached that an improper construction had been adopted. [
Footnote 10] Only recently, the case
of
West Coast Hotel Company v. Parrish, 300 U.
S. 379, expressly overruled a previous interpretation of
the Fourteenth Amendment which had long blocked state minimum wage
legislation. When a statute is declared by this Court to be
unconstitutional, the decision, until reversed, stands as a barrier
against the adoption of similar legislation. A constitutional
interpretation that is wrong should not stand. I believe this Court
should now overrule previous decisions which interpreted the
Fourteenth Amendment to include corporations.
Neither the history nor the language of the Fourteenth Amendment
justifies the belief that corporations are included
Page 303 U. S. 86
within its protection. The historical purpose of the Fourteenth
Amendment was clearly set forth when first considered by this Court
in the
Slaughter House
Cases, 16 Wall. 36, decided April, 1873 -- less
than five years after the proclamation of its adoption. Mr. Justice
Miller, speaking for the Court, said:
"Among the first acts of legislation adopted by several of the
States in the legislative bodies which claimed to be in their
normal relations with the Federal government were laws which
imposed upon the colored race onerous disabilities and burdens and
curtailed their rights in the pursuit of life, liberty, and
property to such an extent that their freedom was of little value,
while they had lost the protection which they had received from
their former owners from motives both of interest and humanity. . .
."
"These circumstances, whatever of falsehood or misconception may
have been mingled with their presentation, forced . . . the
conviction that something more was necessary in the way of
constitutional protection to the unfortunate race who had suffered
so much. [Congressional leaders] accordingly passed through
Congress the proposition for the
fourteenth amendment, and . .
. declined to treat as restored to their full participation in the
government of the Union the States which had been in
insurrection until they ratified that article by a formal vote
of their
legislative bodies."
Certainly, when the Fourteenth Amendment was submitted for
approval, the people were not told that the states of the South
were to be denied their normal relationship with the Federal
Government unless they ratified an amendment granting new and
revolutionary rights to corporations. This Court, when the
Slaughter House Cases were decided in 1873, had apparently
discovered no such purpose. The records of the time can be searched
in vain for evidence that this amendment was adopted for the
benefit of corporations. It is true
Page 303 U. S. 87
that, in 1882, twelve years after its adoption and ten years
after the
Slaughter House Cases, supra, an argument was
made in this Court that a journal of the joint Congressional
Committee which framed the amendment, secret and undisclosed up to
that date, indicated the committee's desire to protect corporations
by the use of the word "person." [
Footnote 11] Four years later, in 1886, this Court, in
the case of
Santa Clara County v. Southern Pacific
Railroad, 118 U. S. 394,
decided for the first time that the word "person" in the amendment
did, in some instances, include corporations. A secret purpose on
the part of the members of the committee, even if such be the fact,
however, would not be sufficient to justify any such construction.
The history of the amendment proves that the people were told that
its purpose was to protect weak and helpless human beings, and were
not told that it was intended to remove corporations in any fashion
from the control of state governments. The Fourteenth Amendment
followed the freedom of a race from slavery. Justice Swayne said in
the
Slaughter Houses Cases, supra, that: "By
any
person' was meant all persons within the jurisdiction of the State.
No distinction is intimated on account of race or color."
Corporations have neither race nor color. He knew the amendment was
intended to protect the life, liberty, and property of human
beings.
The language of the amendment itself does not support the theory
that it was passed for the benefit of corporations.
The first clause of § 1 of the amendment reads:
"All persons born or naturalized in the United States, and
subject
Page 303 U. S. 88
to the jurisdiction thereof, are citizens of the United States
and of the State wherein they reside."
Certainly a corporation cannot be naturalized, and "persons"
here is not broad enough to include "corporations."
The first clause of the second sentence of § 1 reads: "No State
shall make or enforce any law which shall abridge the privileges or
immunities of citizens of the United States." While efforts have
been made to persuade this Court to allow corporations to claim the
protection of
this clause, these efforts have not been
successful. [
Footnote
12]
The next clause of the second sentence reads: "Nor shall any
State deprive any person of life, liberty, or property, without due
process of law." It has not been decided that this clause prohibits
a state from depriving a corporation of "life." This Court has
expressly held that "the liberty guaranteed by the 14th Amendment
against deprivation without due process of law is the liberty of
natural, not artificial, persons." [
Footnote 13] Thus, the words "life" and
"liberty" do not apply to corporations, and, of course, they could
not have been so intended to apply. However, the decisions of this
Court which the majority follow hold that corporations are included
in this clause insofar as the word "property" is concerned. In
other words, this clause is construed to mean as follows:
"Nor shall any State deprive any
human being of life,
liberty or property without due process of law, nor shall any State
deprive any corporation of property without due process of
law."
The last clause of this second sentence of § 1 reads: "nor deny
to any person within its jurisdiction the equal protection of the
laws." As used here, "person" has been construed to include
corporations. [
Footnote
14]
Page 303 U. S. 89
Both Congress and the people were familiar with the meaning of
the word "corporation" at the time the Fourteenth Amendment was
submitted and adopted. The judicial inclusion of the word
"corporation" in the Fourteenth Amendment has had a revolutionary
effect on our form of government. The states did not adopt the
amendment with knowledge of its sweeping meaning under its present
construction. No section of the amendment gave notice to the people
that, if adopted, it would subject every state law and municipal
ordinance, affecting corporations (and all administrative actions
under them) to censorship of the United States courts. No word in
all this amendment gave any hint that its adoption would deprive
the states of their long recognized power to regulate
corporations.
The second section of the amendment informed the people that
representatives would be apportioned among the several states
"according to their respective numbers, counting the whole number
of
persons in each State, excluding Indians not taxed." No
citizen could gather the impression
here that, while the
word "persons" in the second section applied to human beings, the
word "persons" in the first section
in some instances
applied to corporations. Section 3 of the amendment said that "no
person shall be a Senator or Representative in Congress"
(who "engaged in insurrection"). There was no intimation here that
the word "person" in the first section
in some instances
included corporations.
This amendment sought to prevent discrimination by the states
against classes or races. We are aware of this from words spoken in
this Court within five years after its adoption, when the people
and the courts were personally familiar with the historical
background of the amendment.
"We doubt very much whether any action of a State not directed
by way of discrimination against
Page 303 U. S. 90
the negroes as a class, or on account of their race, will ever
be held to come within the purview of this provision. [
Footnote 15]"
Yet, of the cases in this Court in which the Fourteenth
Amendment was applied during the first fifty years after its
adoption, less than one-half of 1 percent invoked it in protection
of the negro race, and more than 50 percent. asked that its
benefits be extended to corporations. [
Footnote 16]
If the people of this nation wish to deprive the states of their
sovereign rights to determine what is a fair and just tax upon
corporations doing a purely local business within their own state
boundaries, there is a way provided by the Constitution to
accomplish this purpose. That way does not lie along the course of
judicial amendment to that fundamental charter. An amendment having
that purpose could be submitted by Congress as provided by the
Constitution. I do not believe that the Fourteenth Amendment had
that purpose, nor that the people believed it had that purpose, nor
that it should be construed as having that purpose.
I believe the judgment of the Supreme Court of California should
be sustained.
[
Footnote 1]
Cf. 25 U. S.
Saunders, 12 Wheat. 213,
25 U. S.
270.
[
Footnote 2]
Bank of Augusta v.
Earle, 13 Pet. 519;
Paul v.
Virginia, 8 Wall. 168;
Ducat v.
Chicago, 10 Wall. 410;
Horn Silver Mining Co.
v. New York, 143 U. S. 305.
[
Footnote 3]
Hanover Fire Insurance v. Harding, 272 U.
S. 494,
272 U. S.
507.
[
Footnote 4]
Brandeis, J., dissenting,
Liggett Co. v. Lee,
288 U. S. 517,
288 U. S.
546.
[
Footnote 5]
New York v. Roberts, 171 U. S. 658;
Magnano Co. v. Hamilton, 292 U. S. 40;
Fox v. Standard Oil Co., 294 U. S. 87;
Aero Mayflower Transit Co. v. Georgia Public Service
Comm'n, 295 U. S. 285;
Alaska Fish Salting & By-Products Co. v. Smith,
255 U. S. 44,
255 U. S.
48.
[
Footnote 6]
Prudential Insurance Co. v. Cheek, 259 U.
S. 530,
259 U. S. 536;
Pembina Mining Co. v. Pennsylvania, 125 U.
S. 181,
125 U. S.
189.
[
Footnote 7]
Fifth Avenue Coach Co. v. New York, 221 U.
S. 467;
Stone v. Mississippi, 101 U.
S. 814,
101 U. S.
820.
[
Footnote 8]
Great Atlantic & Pac. Tea Co. v. Grosjean,
301 U. S. 412,
301 U. S.
427.
[
Footnote 9]
Stone and Cardozo, JJ., concurring,
St. Joseph Stock Yards
Co. v. United States, 298 U. S. 38,
298 U. S. 94.
[
Footnote 10]
See collection of cases, Notes 1, 2, 3 and 4,
Dissenting Opinion of Justice Brandels,
Burnet v. Colorado Oil
& Gas Co., 285 U. S. 393,
285 U. S.
406-409.
[
Footnote 11]
San Mateo County v. Southern Pacific Railroad,
116 U. S. 138.
See Benj. B. Kendrick, "Journal of the Joint Committee on
Reconstruction" (1914, New York); Howard J. Graham, "The
"Conspiracy Theory" of the Fourteenth Amendment," 47 Yale Law
Journal 371; Donald Barr Chidsey, "The Gentleman from New York -- A
Life of Roscoe Conklin," Yale University Press (1935).
[
Footnote 12]
Selover, Bates & Co. v. Walsh, 226 U.
S. 112,
226 U. S. 126.
[
Footnote 13]
Western Turf Assn. v. Greenburg, 204 U.
S. 359,
204 U. S.
363.
[
Footnote 14]
Gulf, C. & S.F. Ry. Co. v. Ellis, 165 U.
S. 150,
165 U. S.
154.
[
Footnote 15]
Slaughter House Cases, supra.
[
Footnote 16]
Charles Wallace Collins, "The Fourteenth Amendment and the
States," Boston (1912), page 138.