Opinion
19838.
ARGUED SEPTEMBER 12, 1957.
DECIDED NOVEMBER 8, 1957. REHEARING DENIED NOVEMBER 26, 1957.
Action for tax refund. Before Judge Shaw. Fulton Superior Court. July 19, 1957.
John Izard, Jr., William K. Meadow, Spalding, Sibley, Troutman, Meadow Smith, White, Bradley, Arant, All Rose, for plaintiff in error.
Sutherland, Asbill Brennan, Crenshaw, Hansell, Ware Brandon, Moise, Post Gardner, Arnall, Golden Gregory, Smith, Kilpatrick, Cody, Rogers McClatchey, Bird Howell, Alston, Sibley, Miller, Spann Shackelford, Jones, Williams, Dorsey Kane, Powell, Goldstein, Frazer Murphy, for parties at interest not parties to record.
Eugene Cook, Attorney-General, William L. Norton, Jr., Assistant Attorney-General, Ben F. Johnson, Jr., Deputy Assistant Attorney-General, contra.
The Georgia Income Tax Statute (Code, Ann., § 92-3113) as applied to the plaintiff, a nonresident corporation with its home office and manufacturing plant outside of the State of Georgia — which maintained only a sales-service officer in this State, which was used as headquarters by one of its sales representatives, who spent about one-third of his time in that office or travelling within this State, and in which office a small amount of office furniture, valued at approximately $1,000, was maintained, and one woman secretary was employed, and where the sales representative carried on the ordinary duties of a salesman in Georgia calling on customers and prospective customers, but no orders were accepted within the State of Georgia, and all sales were made on an "f. o. b. warehouse" basis and were completed at warehouse outside of the State by deliveries to customers or to common carriers consigned to customers — violates both the commerce and due-process clauses of the Federal Constitution (Code §§ 1-125 (3), 1-815), and the trial court erred in sustaining its validity as against such attacks.
ARGUED SEPTEMBER 12, 1957 — DECIDED NOVEMBER 8, 1957 — REHEARING DENIED NOVEMBER 26, 1957.
This was an action brought by Stockham Valves Fittings, Inc., (hereinafter referred to as the plaintiff) against T. V. Williams as Revenue Commissioner of the State of Georgia, to recover income taxes paid by the plaintiff under protest to the State for the calendar years 1952, 1954, and 1955, assessed against the plaintiff under the following Georgia Income Tax Statutes: Code (Ann.) § 92-3102, which provides that "Every domestic corporation and every foreign corporation shall pay annually an income tax equivalent to four per cent. of the net income from property owned or from business done in Georgia, as defined in section 92-3113"; and Code (Ann.) § 92-3113, which provides that "The tax imposed by this law shall apply to the entire net income, as herein defined, received by every corporation, foreign or domestic, owning property or doing business in this State. Every such corporation shall be deemed to be doing business within this State if it engages within this State in any activities or transactions for the purpose of financial profit or gain, whether or not such corporation qualifies to do business in this State, and whether or not it maintains office or place of doing business within this State, and whether or not any such activity or transaction is connected with interstate or foreign commerce." Claims for a refund of the taxes paid having been denied by the defendant, the present suit was brought.
The plaintiff contends that all of its activities within the State of Georgia are a part of and inseparable from interstate commerce, and that any income tax assessed against the plaintiff is a direct burden on such commerce and violates the commerce clause of the Federal Constitution (Code § 1-125 (3)); that the fact that the plaintiff maintains one sales-service office in Georgia and one of its sales representatives spends one-third of his time in Georgia does not make the plaintiff present in the State in any substantial sense, and an attempt to subject it to an income tax violates the due-process clause of the Federal Constitution (Code § 1-815). No question is raised by the plaintiff as to the reasonableness of the apportionment of its net income to Georgia under the prescribed statutory apportionment formula or to the amount of taxes, if liable; but the plaintiff contends that the State is without jurisdiction to impose a net income tax upon a foreign corporation engaged within Georgia in exclusively interstate commerce.
The facts were stipulated, and the issue was submitted to the trial judge without a jury; and to the judgment upholding the validity of the statute and the tax the plaintiff excepts.
From the stipulation of facts it appears that the plaintiff is a corporation organized under the laws of Delaware with its principal or home office and its manufacturing plant located in Birmingham, Alabama. Since 1905, and including the tax years in question, it has been engaged in the business of manufacturing and selling values and pipe fittings and in promoting the sale and use of values and pipe fittings which it manufactured. For the tax years in question, it maintained inventories of its products in established warehouses at Birmingham, Ala., Philadelphia, Pa., Chicago, Ill., Houston, Tex., and Vernon, Calif, It maintained established sales-service offices at the foregoing locations and also at Cambridge, Mass., New York, N. Y., Atlanta, Ga., Pittsburgh, Pa., San Francisco, Calif., Washington, D.C., Dallas, Tex., and St. Louis, Mo. Purchasers of plaintiff's valves and pipe fittings were located in all the United States.
As a matter of policy and practice, during the tax years in question, the plaintiff made sales only to established local wholesalers and jobbers and (except for sales to makers of automatic-sprinkler systems) made no sales directly to users and installers of valves and pipe fittings. The local wholesalers and jobbers who handled the plaintiff's products, however, were in no way tied in or committed by any type of license, franchise, or other authorized or exclusive dealership arrangement, to the distribution of the plaintiff's products. Any established local wholesaler or jobber, having established credit, was considered as a prospective customer and could buy from the plaintiff. Established local wholesalers and jobbers who did buy from the plaintiff were entirely free to discontinue buying from it at any time and for any reason; they were also free to deal in competitive products and usually did handle one or more lines of competing products.
The plaintiff, during the years in question, made no sales on a consignment basis and maintained no inventories of its own at any place except at the aforesaid warehouses, none of which were located in Georgia. Through its sales representative, it encouraged every local wholesaler and jobber who handled its products to carry a local inventory, and to those local wholesalers and jobbers who did maintain a local inventory of valves, it gave a price concession, which was not available to wholesalers and jobbers who did not. Pipe fittings were, however, sold at uniform prices whether or not carried in inventory.
All orders for the plaintiff's products were contractually accepted or rejected at the home office of the plaintiff in Birmingham, Alabama. No representative of the company at any sales-service office had any authority to, or did, contractually accept or reject any order under any circumstances. Contractual authority was vested exclusively in the home office in Birmingham, Alabama. For the most part, orders were received by mail at the company's home office in Birmingham directly from wholesalers and jobbers. Such orders as were received at sales-service offices, or by the solicitation of sales representatives working out of sales-service offices, were relayed by mail, telephone or teletype to the home office at Birmingham for contractual acceptance or rejection. Some such orders were rejected by the home office for credit or other reasons.
The plaintiff had no plant or warehouse in Georgia. All sales were made on an "f.o.b. warehouse" basis, and were completed at the plant or warehouse by deliveries to customers or to common carriers consigned to customers.
Since 1950, and during the tax years in question, the plaintiff maintained a sales-service office in Atlanta. One of its sales representatives used this office as his headquarters. He worked in a territory which included Georgia, North Carolina, South Carolina, and parts of Tennessee and Virginia. Part of Florida was also included in his territory until 1954. This representative spent approximately one-third of his time at the Atlanta sales officer or traveling in the State of Georgia. The other two-thirds of his time was spent traveling outside of Georgia. He was paid a salary plus a commission on the amount of business derived from the territory served by the Atlanta office.
The plaintiff also employed at its sales-service office in Atlanta a full-time woman secretary. She functioned on the basis of her own knowledge and experience and literature furnished by the company as a source of information concerning the plaintiff's products. She performed stenographic and clerical duties and facilitated communications between the plaintiff's home office in Birmingham, the plaintiff's sales representative when he was out in the territory, and customers, prospective customers, contractors, and users of the plaintiff's products. She operated the teletype machine and sometimes obtained information from Birmingham to give to architects, engineers, or other people interested in the plaintiff's products.
The Atlanta sales-service office was listed in the Atlanta telephone directories in the plaintiff's name in both the alphabetical and classified business listings. The office was listed in the plaintiff's name in the Atlanta city directories. The company, on its sales-service office letterheads, in its catalogues and discount sheets, and on some promotional material, listed the fact that it maintained a sales-service office in Atlanta. A small amount of office furniture was maintained there of the approximate value of $1,000. The representative carried on the ordinary duties of a salesman in Georgia. No orders were, however, accepted within the State of Georgia. All sales were completed at warehouses outside of the State by deliveries to customers or to common carriers consigned to customers. All such sales took place outside of Georgia.
At no time during the tax years in question did the plaintiff qualify to do business within the State of Georgia; no officer or director of the plaintiff was a resident of Georgia; the Atlanta sales representative was a resident of the State. During the tax years in question, rent, salaries, and all other expenses of the Atlanta office were paid by check drawn by officers located at the home office on bank accounts of the company in banks outside the State of Georgia. No employee of the plaintiff in Georgia had authority, either alone or with any other person, to draw checks upon or make withdrawals from any bank account of the company. Expense accounts of employees at the Atlanta office were forwarded to the home office, where they were reviewed and paid by checks. The plaintiff kept no bank account in the State of Georgia. All credit matters were handled at the plaintiff's Alabama office, where credit information was obtained and all credit questions were passed on. All invoices were prepared and mailed from and all collections were made by the plaintiff's office in Alabama. No employee of the plaintiff in Georgia had authority to accept nor did any employee accept any order, bind plaintiff to furnish goods, arrange credit terms, or make collections.
That the decision of the questions here presented is not without difficulty, is pointed out by the Supreme Court of the United States in the recent decision in Freeman v. Hewit, 329 U.S. 249, 252 ( 67 Sup. Ct. 274, 91 L. ed. 265), where it is said: "The history of this problem is spread over hundreds of volumes of our Reports. To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future. Suffice it to say that especially in this field opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts." In Leloup v. Port of Mobile, 127 U.S. 640, 648 ( 8 Sup. Ct. 1380, 32 L.ed. 311), the Supreme Court stated the fundamental limitations of the commerce clause on State taxation as follows: "In our opinion such a construction of the Constitution leads to the conclusion that no state has the right to lay a tax on interstate commerce in any form, whether by way of duties laid on the transportation of the subjects of that commerce, or on the receipts derived from that transportation, or on the occupation or business of carrying it on, and the reason is that such taxation is a burden on that commerce, and amounts to a regulation of it, which belongs solely to Congress." In Forrester v. Culpepper, 194 Ga. 744, 748 ( 22 S.E.2d 595), this court quoted with approval from Interstate Bond Co. v. State Revenue Com., 50 Ga. App. 744, 751 ( 179 S.E. 559), the following: "The general view is that an income tax is not a property tax, but more in the nature of an excise tax." In Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203, 218 ( 45 Sup. Ct. 477, 69 L. ed. 916, 44 A.L.R. 1219), a Massachusetts excise tax, based on the proportion of a company's assets employed in the State and the proportion of its net income derived in the State, was held unconstitutional as applied to a taxpayer engaged exclusively in interstate commerce. The taxpayer maintained a branch sales office in Massachusetts, which was used as headquarters by its traveling salesmen. It owned office equipment there, and its local manager handled petty cash items for the company through a bank account maintained in his own name. The court found that all of the taxpayer's activities were an integral part of interstate commerce, and therefore held the excise unconstitutional. The court said: "The local business of a foreign corporation may support an excise measured in any reasonable way, if neither interstate commerce nor property beyond the state is taxed. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, approved such an excise measured by income reasonably attributed to intrastate business; but nothing there said was intended to modify well established principles. It must be read with the essential facts in mind. Local business was a sufficient basis for the excise, and there was no taxation of interstate commerce or property beyond the state." In Spector Motor Service v. O'Connor, 340 U.S. 602, 609 ( 71 Sup. Ct. 508, 95 L. ed. 573), it is said: "This Court heretofore has struck down, under the Commerce Clause, state taxes upon the privilege of carrying on a business that was exclusively interstate in character. The constitutional infirmity of such a tax persists no matter how fairly it is apportioned to business done within the state."
From the foregoing statement of facts it appears without dispute that the plaintiff was engaged exclusively in interstate commerce in so far as its activities in Georgia are concerned; and in Atlantic Lumber Co. v. Commissioner of Corporations and Taxation of Massachusetts, 298 U.S. 553, 555 ( 56 Sup. Ct. 887, 80 L. ed. 1328), it was held: "If appellant did nothing but transact interstate business, the tax would constitute a burden upon that commerce, and could not stand under the commerce clause of the Constitution."
Counsel for the defendant contend that a tax on net income does not stand upon the same basis and is not the equivalent of a license, occupation, franchise, or privilege tax on interstate commerce; but, as previously pointed out, we have held that an income tax is in the nature of an excise tax, and in the footnote added to the dissenting opinion written by Mr. Justice Reed in Interstate Oil Pipe Line Co. v. Stone, 337 U.S. 662, 677 ( 69 Sup. Ct. 1264, 93 L. ed. 1613), it is said: "Since we perceive no difference for the purposes of this case between franchise, privilege, and excise taxes, insofar as they are exacted for the privilege of doing or the doing of interstate business, we have treated them as identical as far as their validity under the commerce clause is concerned. In Ozark and Anglo-Chilean Nitrate the taxes were called franchise taxes; in Alpha it was labeled an excise tax." In Dennison Mfg. Co. v. Wright, 156 Ga. 789 (3b) ( 120 S.E. 120), this court held: "Where a foreign corporation rents and maintains an office in this State, with a stock of samples and force of office employees and traveling salesmen, merely to obtain orders in this State and other States, subject to approval by its home office, for its goods to be shipped directly to its customers from its home State, such an arrangement is part of its interstate commerce, and not subject to a local excise tax."
We are also of the opinion that the income-tax statute here under consideration, as applied to the plaintiff, violates the due-process clause of the Federal Constitution. We take it that no one will question the fact that a State may not tax activities carried on outside its borders without violating this provision of the Constitution. The question in every such case is whether such a connection exists between a business and the taxing State as to permit the imposition of a general income tax on a portion of the net income of the business; and in Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444 ( 61 Sup. Ct. 246, 85 L. ed. 267), the Supreme Court said: "That test is whether property was taken without due process of law, or, if paraphrase we must, whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return." See also Miller Brothers Co. v. Maryland, 347 U.S. 340, 344 ( 74 Sup. Ct. 535, 98 L. ed. 744), where the foregoing rule was applied to facts quite similar to those in the instant case. There the court said: "The question here is whether this vendor, by its acts or course of dealing, has subjected itself to the taxing power of Maryland or whether it has afforded that State a jurisdiction or power to create this collector's liability." After referring to its previous decisions, that court said: "Our decisions are not always clear as to the grounds on which a tax is supported, especially where more than one exists; nor are all of our pronouncements during the experimental period of this type of taxation consistent or reconcilable. A few have been specifically overruled, while others no longer fully represent the present state of the law. But the course of decisions does reflect at least consistent adherence to one time-honored concept; that due process requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax."
This court, in Redwine v. Dan River Mills, 207 Ga. 381 ( 61 S.E.2d 771), held that activities more extensive than those carried on by the plaintiff did not constitute "doing business" within the meaning of the income-tax act then in effect; and in Suttles v. Owens-Illinois Glass Co., 206 Ga. 849 ( 59 S.E.2d 392), it was held that accounts growing out of similar activities in Georgia did not have a tax situs in Georgia. See also Norton Co. v. Department of Revenue of Illinois, 340 U.S. 534 ( 71 Sup. Ct. 377, 95 L. ed. 517).
We hold, therefore, that as applied to the plaintiff the Georgia Income Tax Act violates both the commerce and due-process clauses of the Federal Constitution, and the trial court erred in rendering judgment against the plaintiff. The cases mainly relied upon by the defendant, namely, U.S. Glue Co. v. Town of Oak Creek, 247 U.S. 321 ( 38 Sup. Ct. 499, 62 L. ed. 1135); Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113 ( 41 Sup. Ct. 45, 65 L. ed. 165); Atlantic Coast Line R. Co. v. Doughton, 262 U.S. 413 ( 43 Sup. Ct. 620, 67 L. ed. 1051); Memphis Natural Gas Co. v. Beeler, 315 U.S. 649 ( 62 Sup. Ct. 857, 86 L. ed. 1090); West Publishing Co. v. McColgan, 27 Cal.2d 705 ( 166 P.2d 861), and others, are clearly distinguishable on their facts. In those cases the taxpayers were either residents of the taxing State, or were carrying on within the State extensive interstate as well as interstate business, or else the statements therein made which would seem to conflict with the rulings here made were obiter. In Freeman v. Hewit, 329 U.S. 249, 255 ( 67 Sup. Ct. 274, 91 L. ed. 265), the Supreme Court of the United States recognized that the taxing power permitted by the U.S. Glue Company case, supra, was applicable only to residents of a State. It was said: "It [a State] can tax the privilege of residence in the State and measure the privilege by net income, including that derived from interstate commerce." The Underwood Typewriter decision, supra, was explained and limited in Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203, 218 ( 45 Sup. Ct. 477, 69 L. ed. 916, 44 A.L.R. 1219), where the court said: "The local business of a foreign corporation may support an excise measured in any income reasonable way, if neither interstate commerce nor property beyond the state is taxed. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, approved such an excise measured by income reasonably attributed to intrastate business; but nothing there said was intended to modify well established principles." The dictum in the Beeler case, supra, was expressly disapproved as such by the Supreme Court in Spector Motor Service v. O'Connor, 340 U.S. 602, 609 (footnote) ( 71 Sup. Ct. 508, 95 L. ed. 573), in the following language: "Any suggestion in that opinion as to the possible validity of such a tax if applied to earnings derived wholly from interstate commerce is not essential to the decision in the case."
As already pointed out by the United States Supreme Court, its decisions dealing with the problem here presented are spread through hundreds of volumes of its reports, and all of its pronouncements are not consistent or reconcilable. To attempt to harmonize all that has been said, would neither clarify what has gone before nor guide the future, and to undertake here to point out the distinguishing features of each of the numerous decisions would only consume unnecessary time and space.
Judgment reversed. All the Justices concur, except Head., J., who dissents.