March 6, 1935.
Before GRIMBALL, J., Charleston, April, 1934. Affirmed.
Suit by Trapier K. Marshall against the South Carolina Tax Commission and Walter G. Query and others, Commissioners. Judgment for defendants, and plaintiff appeals.
The order of Judge Grimball follows:
This action was brought by the plaintiff against South Carolina Tax Commission and W.G. Query, J.P. Derham, and F.C. Robinson, as individuals, who compose South Carolina Tax Commission. Plaintiff paid a tax under protest, which tax is levied under Section 8, subdivision (e), of Act No. 406, approved the 31st day of May, 1933 (38 St. at Large, p. 572). The defendants Query, Derham, and Robinson demur to the complaint upon the ground that it fails to state facts sufficient to constitute a cause of action as to them. There is no question as to these individual defendants acting in good faith and in pursuance of the statute above cited. They have certainly acted with color of authority of law and for that reason, are not liable to the taxpayer in this case for any error of fact or law they may have committed. Western Union Telegraph Company v. Query et al., 144 S.C. 234, 142 S.E., 509.
However, in no event would the action lie against them, as it appears, upon consideration of the whole case, that South Carolina Tax Commission, composed of its individual members, have collected this tax which is sought to be recovered under an Act of the Legislature, which, as will hereinafter appear, is without constitutional defect. For the above reasons, the demurrer on the part of the individual defendants is sustained.
The complaint states the cause of action in the alternative, to which South Carolina Tax Commission demurs. One alternative is that should it be a property tax, it is violative of certain provisions of both Federal and State Constitutions.
It is very clear to my mind that this is not a property tax. It is true that Section 8, Subdivision (e), providing when the tax should become effective, refers to taxes on incomes and intangibles. If the word "intangibles" was intended by the Legislature to refer to the provision of Subdivision (e) of the section which imposes a tax of 5 per cent. on all dividends and interest in excess of $100.00, it nevertheless does not change the character, operation, or effect of the tax. It makes no difference what name the Legislature called it, or what label it placed upon this tax; the character of the tax will be determined by its operation and effect. Educational Films Corp. of America v. Ward, Atty. Gen. of N.Y., 282 U.S. 379, 51 S.Ct., 170, 171, 75 L.Ed., 400, 71 A.L.R., 1226; Shaffer v. Carter 252 U.S. 37, 40 S.Ct., 221, 64 L.Ed., 445; Lawrence et al. v. State Tax Commission of Miss., 286 U.S. 276, 52 S.Ct., 556, 76 L.Ed., 1102, 87 A.L.R., 374; Macallen Co. v. Commonwealth of Mass., 279 U.S. 620, 49 S.Ct., 432, 73 L.Ed., 874, 65 A.L.R., 866.
No descriptive epithet can make a tax upon the net receipts of a business of the whole year the same as one upon the property located on a particular day of the year within the area of the taxing district.
The tax in question is very clearly a tax upon income, which income is derived from certain intangible property. It is not a tax upon the intangible property itself. If an interest-bearing security or a stock in fact pay no interest or dividends, there is no tax; yet if this tax were intended to be upon the intangible property itself, there would be some tax according to value, regardless of whether any interest was earned or dividend paid during the year. I do not think it desirable to dwell further upon the nature and character of this tax. It is so clearly a tax upon a certain kind of income that we may lay on one side all considerations of the objections to it on the ground that it is a property tax.
Upon argument of the case before me, it was stated by plaintiff's attorney that this action was brought under Section 2469, Code of Laws, 1932, Vol. 2, which provides that income taxes may be paid under protest and suit brought to recover. If this tax should be decided to be a property tax, the Court would be without jurisdiction to entertain this suit, as in such case it would be a suit against the State without the permission of the State having been given to be sued. It will be noted that the above section of the Code provides only for payment of income taxes under protest and suit brought to recover. It includes no other tax. Ware Shoals Mfg. Co. v. Jones, 78 S.C. 211, 58 S.E., 811, decided September 21, 1907; Santee River Cypress Lumber Co. v. Query, 168 S.C. 112, 167 S.E., 22, decided December 8, 1932.
It therefore follows that if this is a property tax the Courts are without jurisdiction to entertain the suit to recover it.
The tax for which recovery in this suit is sought is clearly an income tax, and, being such, we will consider in detail the several constitutional grounds upon which the Act of the Legislature is challenged.
It is alleged that the Act is unconstitutional as violative of Section 1, Article 10, of the Constitution of South Carolina, which provides "that the General Assembly may provide for a graduated tax on incomes." I do not think the Legislature is limited and restricted by the Constitution to imposing a graduated tax on incomes. It may subject incomes to a tax which is not graduated if it sees fit to do so. However, the tax complained of is graduated. It is graduated in accordance with the amount of interest and dividends received by the taxpayer. It is not a flat sum upon each person receiving interest and dividends. It is true that the rate of the tax is not graduated, but the graduation is based upon the varying amounts of dividends and interest received. Article 10, § 1, of the Constitution of the State, among other things provides: "That the General Assembly may provide for a graduated tax on incomes, and for a graduated license on occupations and business."
For years the Legislature has regarded a tax at a fixed rate payable upon the amount of sales as being a graduated license on occupations and business, to wit: The tax on sellers of gasoline is graduated at the rate of six cents per gallon on the number of gallons sold, and so it is with the business license tax on sellers of tobacco, candy, ammunitions, etc. In order to comply with the provision of the Constitution as to graduation, it is not necessary that the rate of the tax shall be graduated. The Constitution is satisfied if the amount of the tax be graduated in accordance with the amount of the income.
"The determination of the amount of income that shall be wholly exempted and the method and ratio of graduation were left by the Constitution to the discretion of the Legislature, and with the exercise of that discretion the courts have no concern. Necessarily the exercise of such a discretion must to some extent be arbitrary." Alderman v. Wells, 85 S.C. 507, 67 S.E., 781, 784, 27 L.R.A. (N.S.), 864, 870, 21 Ann. Cas., 193.
The complaint also alleges that the Act makes a hostile and arbitrary discrimination against persons whose income is received from interest and dividends and in favor of persons whose income is received from other sources, and thus creates an illegal classification. I do not think this objection sound. The Legislature has exceedingly broad powers in classifying subjects for taxation. It was said in a decision of the United States Supreme Court that: "It is established that a distinction in legislation is not arbitrary, if any state of facts reasonably can be conceived that would sustain it, and the existence of that state of facts at the time the law was enacted must be assumed." Rast v. Van Deman Lewis Co., 240 U.S. 342, 36 S.Ct., 370, 374, 60 L.Ed., 679, L.R.A., 1917-A, 421, Ann. Cas., 1917-B, 455.
I think it is sufficient to say that the Legislature may put in one class and tax differently persons who receive interest and dividends from those who earn an income otherwise; that is, by personal or professional service. The plaintiff must be able to satisfy the Court that the classification has its origin in nothing better than whim and fantasy and tyrannical exercise of arbitrary power, before the tax in question will be stricken down. The plaintiff has failed to do this.
It would unduly prolong this opinion to quote from the many interesting authorities on the point. I will content myself with citing the following: American Sugar Refining Co. v. State of Louisiana, 179 U.S. 89, 21 S.Ct., 43, 45 L.Ed., 102; Alaska Fish Salting By-Products Co. v. Smith, 255 U.S. 44, 41 S.Ct., 219, 220, 65 L.Ed., 489; Heisler v. Thomas Colliery Co., 260 U.S. 245, 43 S.Ct., 83-85, 67 L.Ed., 237; State Board of Tax Commissioners of Indiana v. Jackson, 283 U.S. 527, 51 S.Ct., 540-543, 75 L.Ed., 1248, 73 A.L.R., 1464; A. Magnano Co. v. Hamilton, Atty. Gen., 292 U.S. 40, 54 S.Ct., 599, 78 L.Ed., 1109, decided April 2, 1934.
"The rate levied upon gains from the sales of intangible personal property is 3 per cent. (Section 5 (c)) while that upon the dividends from stock and interest on bonds and notes is 6 per cent. (Section 2). But these two sources of income do not belong to the same class." Tax Com'r v. Putnam, 227 Mass. 522, 116 N.E., 904, 909, L.R.A., 1917-F, 806.
The complaint also alleges that the tax is an arbitrary and unjust discrimination against individuals receiving interest and dividends, in that it exempts from the tax corporations, estates, and fiduciaries. The above objection is raised in slightly varying form in another allegation as to unconstitutionality.
The principles of law and authorities upon which these questions must be determined are not different from the law and supporting authorities which have been set forth in regard to the other alleged arbitrary discriminations, and I shall not again set forth those principles and authorities bearing upon the same subject though stated in slightly varying form.
Under a former income tax law of this State, adopted in the '90s and contained in the Civil Code 1912, §§ 354-360, individuals only were taxed, but the validity of that law was sustained by the Supreme Court of South Carolina. The point was therein made that corporations were not taxed while individuals were. Alderman v. Wells, 85 S.C. 507, 67 S.E., 781, 27 L.R.A. (N.S.), 864, 21 Ann. Cas., 193.
That individuals may be required to bear such tax, and corporations, estates, and fiduciaries be exempted, I think needs no further treatment. The two are in separate and distinct classes and the Legislature has exercised its discretion and power to classify in this respect.
It all comes to the point as to whether this tax is imposed under a classification which is permitted under the fourteenth amendment to the Constitution of the United States. From the decisions cited, it clearly appears that the Legislature possesses the power to classify income derived from interest and dividends, when received by individuals, in one class, and may exempt corporations, estates, and fiduciaries receiving interest and dividends from the payment of the tax. The tax applies impartially to all constituents of the class designated by the Legislature and operates equally and uniformly on all persons similarly circumstanced. Magoun v. Illinois Trust Savings Bank, 170 U.S. 283, 18 S.Ct., 594-598, 42 L.Ed., 1037.
The complaint also alleges that this tax violates the rules of equality of taxation as provided by the Constitution of South Carolina which prohibits the taxation of the same property twice for one purpose (Article 10, § 1). This question has been decided adversely to the contention of the plaintiff by the Supreme Court as follows: "The next objection to the act is that it results in double taxation. The contention is that plaintiff's income was derived from dividends received upon his stock in corporations chartered and doing business under the laws of the State, and as these corporations had paid taxes on their property, and also on their franchises, a tax on plaintiff's income is double taxation. There is much room for discussion and difference of opinion as to what really amounts to double taxation. But the weight of authority and reason sustains the taxation of shares of stock in a corporation to the holder thereof, notwithstanding the corporation has paid taxes on its property and also on its franchises. The rents and profits derived from real estate, and the products of the farm, may be taxed, though the land from which they are derived has also been taxed. The profits of a business may be taxed, though the property in the business, bought on credit, has been taxed to the owner, and the debt he owes therefor has been taxed to the creditor, and the property covered by mortgage may be taxed to the owner, and the mortgage thereon to the mortgagee. Cooley on Taxation (3d Ed.), 387 et seq. These may be instances of double taxation in one sense, yet they are not within the rule of uniformity and equality prescribed by the Constitution, which forbids the taxation twice of the same property for the same purpose, while other property, under similar circumstances and conditions, is taxed only once. There is no constitutional inhibition against such taxation; and, in the absence of constitutional restriction, the power of the Legislature to tax is limited only by its own discretion and its responsibility to its constituents. It has been said the power to tax is an inherent right of sovereignty necessary to its existence, and limited only by its necessities. Judge Cooley, in his work on Taxation, at page 392, says: `We make out, therefore, no conclusive case against a tax when we show that it reaches twice the same property for the same purpose. This may have been intended, and, in many cases, at least is admissible.'" Alderman v. Wells, 85 S.C. 507, 67 S.E., 781, 784, 27 L.R.A. (N.S.), 864, 21 Ann. Cas., 193.
I am therefore, of the opinion that no cause of action has been stated against the members of the Tax Commission individually; that the tax sought to be recovered is an income tax; and that the statute imposing this tax does not violate either the Federal or State Constitutions.
It is therefore ordered, adjudged, and decreed that the demurrers to the complaint be, and the same hereby are, sustained.
Messrs. Nathans Sinkler and Lionel K. Legge, for appellant, cite: As to tax on intangible property: 279 U.S. 620; 73 L.Ed., 874; 2 Pet., 449; 158 U.S. 601; 177 N.E., 567; 220 Mass. 613; 129 S.C. 480; 124 S.E., 761; 76 L.Ed., 526. Classification for taxation: 253 U.S. 412; 64 L.Ed., 989; 252 U.S. 60; 64 L.Ed., 460; 277 U.S. 389; 72 L.Ed., 927; 278 U.S. 515; 73 L.Ed., 483; 13 F., 722; 168 S.C. 112; 167 S.E., 22. Messrs. John M. Daniel, Attorney General, Claude K. Wingate and J. Fraser Lyon, for respondents, cite: Income tax defined: 231 U.S. 399; 34 S.Ct., 136; 292 P., 813. Classification: 148 Wis. 458; L.R.A., 1915-B, 569; 134 N.W., 673; Ann. Cas., 1913-A, 1147; 7 A.L.R., 1617; 85 S.C. 507; 67 S.E., 781; 286 U.S. 276; 52 S.Ct., 556. As to payment under protest: 78 S.C. 211; 58 S.E., 811; 167 S.E., 22; 142 S.E., 509. Discretion of Legislature to tax: 85 S.C. 507; 67 S.E., 781; 27 L.R.A. (N.S.), 864; 240 U.S. 342; 36 S.Ct., 370; 255 U.S. 44; 260 U.S. 245; 134 U.S. 232; 33 L.Ed., 892; 217 U.S. 114; 54 L.Ed., 688; 217 U.S. 563; 54 L.Ed., 883; 179 U.S. 89; 45 L.Ed., 102; 240 U.S. 342; 60 L.Ed., 679; L.R.A., 1917-A, 421; 223 U.S. 59; 56 L.Ed., 350; 217 U.S. 573; 184 U.S. 349; 46 L.Ed., 569. As to due process clause in tax question: 240 U.S. 1; 60 L.Ed., 493; 181 U.S. 324; 45 L.Ed., 879; 285 U.S. 312; 76 L.Ed., 772; 4 L.Ed., 579; 259 U.S. 20; 66 L.Ed., 817; 21 A.L.R., 1432; 195 U.S. 27; 49 L.Ed., 78; 1 Ann. Cas., 561; 240 U.S. 24; 60 L.Ed., 493; 173 U.S. 592; 43 L.Ed., 823; 274 U.S. 531; 71 L.Ed., 1184; 195 U.S. 56; 49 L.Ed., 78; 1 Ann. Cas., 561; 22 L.Ed., 455; 195 U.S. 56; 259 U.S. 38; 66 L.Ed., 817.
March 6, 1935. The opinion of the Court was delivered by
The appellant brought this action against the South Carolina Tax Commission and Walter G. Query, John P. Derham and Frank C. Robinson, commissioners, to test the validity of Subdivision (e) of Section 8, Act No. 406 of the Acts of the General Assembly of South Carolina 1933.
The defendant South Carolina Tax Commission filed its demurrer to the complaint on the ground that same did not state facts sufficient to constitute a cause of action, in that it appears from the complaint that the tax had been assessed and collected under a valid and constitutional Act of the South Carolina Legislature.
The defendants Walter G. Query, John P. Derham, and Frank C. Robinson, commissioners, likewise demurred to the complaint on the ground that even though the Act be unconstitutional, no cause of action against them was stated in the complaint and further that the complaint showed that the tax was assessed and collected under a valid Act of the South Carolina Legislature.
Subdivision (e) of said Section 8 of Act No. 406 of the Acts of 1933 reads as follows: "In addition to all other taxes herein otherwise provided, every individual receiving dividends or interest in excess of One Hundred ($100.00) Dollars, shall file a return and pay a tax at the rate of 5% on the excess of over One Hundred ($100.00) Dollars and no deductions or exemptions thereon shall be allowed."
Under the provisions of this Subdivision (e), the appellant filed a return with the South Carolina Tax Commission in the form required by it showing all interest and dividends thus received, and at the same time made payment of $42.84, which tax represented 5 per cent. of the interest and dividends received by him in excess of $100.00, within the year beginning January 1, 1933, and ending December 31, 1933, which said payment was made under protest to the said Tax Commission.
Thereafter, the appellant by his suit in the Court of Common Pleas for Charleston County sought to recover the tax thus paid under protest, and contends that said tax and the Act levying said tax and the Acts and actions of respondents in enforcing and collecting said tax are in violation of the Constitution of the State of South Carolina and of the Constitution of the United States of America, and are therefore illegal, null, void, and of no effect.
Respondents' demurrers to the complaint were heard before Judge W.H. Grimball, who, on July 10, 1934, filed his order sustaining both demurrers, and from said order this appeal has been taken.
In their brief appellant's counsel state the general question raised by the appeal to be: "Is the tax, commonly referred to as the `intangibles tax' levied by the General Assembly in the year 1933 a valid one, from the standpoint of the Constitution of the State of South Carolina and the Fourteenth article of Amendments to the Constitution of the United States of America?"
The eight exceptions to the order of Judge Grimball are reduced by appellant to five questions, as follows:
(1) Is the tax in substance and essence a property tax, and therefore, void, in that (a) it is not uniform and equal in that it imposes a tax on property held by one class and exempts property of the same kind held by another class in violation of Section 1, Article 10 of the Constitution of the State of South Carolina, and in violation of Article 14 of the amendments of the Constitution of the United States of America; (b) the amendments to Section 1, of Article 10 of the Constitution of the State of South Carolina, provided the sole means of taxing intangible property, and that since the method and manner prescribed in this amendment has not been followed the tax in question is in violation thereof?
(2) Does the tax lie in the category of an income tax, and if so is it invalid because of Section 1, Article 10 of the Constitution of the State of South Carolina, which provided that income taxes should be graduated?
(3) Does the Act in question create an unjust, arbitrary, and illegal classification of those required to pay this tax, which render the Act in question unconstitutional and void by reason of Section 1, Article 10, of the Constitution of the State of South Carolina, and the fourteenth Article of the amendments to the Constitution of the United States of America, regardless of the nature of the tax therein imposed?
(4) If the tax in question is a property tax, does it follow that suit cannot be maintained under Section 2469 of the Code of Laws of South Carolina, 1932, Vol. 2, which provided that income taxes may be paid under protest and suit brought to recover, although for the purpose of assessment and levy the General Assembly has classified the tax as an income tax and the South Carolina Tax Commission has so collected this tax?
(5) Is there any personal liability imposed upon the individual members of the Tax Commission for collecting an illegal tax?
Judge Grimball, in his order sustaining respondents' demurrers, carefully considered each of these questions. After a careful consideration of the entire case, we are of the opinion that Judge Grimball's order fully and properly disposes of each of the questions raised.
All exceptions are overruled, and the judgment below is hereby affirmed.
MESSRS. JUSTICES STABLER, CARTER and BONHAM and MR. ACTING ASSOCIATE JUSTICE M.M. MANN concur.