[266 U.S. 271, 272] Messrs. James M. Beck, of Washington, D. C., and George Carlton Comstock and Robert C. Beatty, both of New York City, for plaintiff in error.
[266 U.S. 271, 275] Messrs. Carl Sherman and C. T. Dawes, both of Albany, N. Y., for defendant in error.
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, No. 5, 45 S. Ct. 80, 69 L. Ed. --, just decided.
This Article1 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 per centum, upon the net income of the corporation for the preceding year. 209,2 215. This net income is 'presumably the same' as that upon which the corporation is required to pay a tax to the United States, section 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, section 214. If the entire business of the corporation is not transacted [266 U.S. 271, 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 per centum of the real and tangible personal property, which are to be allocated according to the location of the physical property representing such stock. Section 214.3 The corporation is to be exempt from any personal property tax. Section 219-j.
Bass, Ratcliff & Gretton, Limited, is a British corporation, engaged in brewing and selling Bass's 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 [266 U.S. 271, 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, 133 N. E. 122. The record was remitted to the Supreme Court, to which this writ of error was directed. Hodges v. Snyder, 261 U.S. 600 , 43 S. Ct. 435.
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 $ 2,185,600.4 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 per centum 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 [266 U.S. 271, 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 per centum, 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, 496 , 44 S. Ct. 167.
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, 120 , 41 S. Ct. 45. There the Connecticut statute imposed upon foreign corporations doing business partly within and partly without the State an annual tax of two per cent 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 [266 U.S. 271, 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 per cent. of its real estate and tangible personal property was located in Connecticut, resutling, under the method of apportionment of the net income required by the statute, in attributing 47 per cent. 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:
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, 69 , 40 S. Ct. 435, 436 (64 L. Ed. 782) 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 [266 U.S. 271, 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. 5
[266 U.S. 271, 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 the 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, 346 , 32 S. Ct. 211.
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, 129 N. E. 202, it had been held that in so far 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 per cent. 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 [266 U.S. 271, 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
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. 1.
[ 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, 129 N. E. 202.
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. Section 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.