State v. Wells Fargo & Co.

Gross earnings tax on carriers — no abatement authorized. 1. The Minnesota Tax 'Commission has no power to abate any part of the percentage of gross earnings tax fixed by statute. Same — Constitution not violated. 2. The system of gross earnings taxation as applied to transportation companies violates no provision of the state or Federal Constitution. Same —- form of taxation on express companies valid. 3. The legislature has the power, since the constitutional amendment of .1906, as well as before, to impose this form of taxation upon express companies. Commerce — property used, not the commerce, taxable — tax on express companies valid. 4. A state may in good, faith tax property engaged in interstate commerce. It may not tax the commerce itself. The statute of -this state imposing .a gross earnings tax of 8 per cent upon express companies is a good faith exercise of the taxing power. Taxation — classification of property — inequality of taxation. 5. Matters of classification of property for taxation are matters of state policy. The state may resort to unequal taxation so long as the inequality is not -based upon' arbitrary distinctions. Same — gross earnings tax and ad valorem tax. 6. A gross earnings tax is not required to ibe an exact equivalent of the ad valorem tax imposed on qther property. Same — tangible and intangible property. 7. The state may tax defendant’s entire property, tangible and intangible, as used within its limits, at its real value as part of a going concern. Same —— valuation of property may be computed by capitalising net earnings. 8. There is evidence that defendant’s property had substantial in tangible value. The market value of defendant’s -stock and bonds is not conclusive evidence of the value of its property used in the express business which is only part of its whole property. A recognized method of arriving at property value, including intangible value, is that of capitalizing net earnings-. There is evidence that the value of defendant’s property computed on this basis largely exceeded the value of its tangible -assets, and -the evidence -sustains the finding of the court that the tax is a fair and reasonable exaction.

Action in the district court for Ramsey county under Laws 1913, chapter 454, to recover gross earnings taxes for the years 1914 to 1917, both inclusive. In its answer defendant among other matters alleged that these taxes constituted an unlawful interference and burden upon interstate commerce, and operated to deprive defendant of its property without due process of law, contrary to article 1, section 8, subdivision 3, of the Federal Constitution and of section 1 of the Fourteenth Amendment thereto. The case was tried before Olin B. Lewis, J., who made findings and ordered judgment against defendant in the sum of $47,355.98. Defendant’s motion for amended findings was granted in part and denied in part. From the judgment entered pursuant to the order for judgment defendant appealed. In the case of all commuted or substituted systems of taxation, if the method employed is but a fair means of measuring a tax upon the value of the property employed in interstate commerce, it is valid; but if it results in producing a tax exceeding that -which would be levied against the property on an ad valorem basis, it is invalid as a burden upon the commerce. The Minnesota gross earnings tax on the earnings of express companies is, or purports to be, a substituted form of taxation. U. S. Express Co. v. Minnesota, 223 U. S. 335, 32 Sup. Ct. 211, 56 L. ed. 459. Only as such can it be upheld. It represents a system, presumably more convenient to administer, of reaching the same result as an ad valorem property tax. Unless it does produce an equivalent result, it cannot be justified. The theory is that the earnings themselves are not taxes at all, but that they are merely taken into account as a convenient measure of the value of the property from the use of which they arise. On its face such a system is a tax upon earnings. It should therefore be held to be a burden upon interstate commerce in the absence of some showing that the receipts are used only as a fair and reasonable measure of the actual property value. The Supreme Court of the United States has taken a -similar view of the burden of proof in a case in which it held that an alleged inspection fee was void as a burden upon interstate commerce. Foote & Co. v. Maryland, 232 U. S. 494, 34 Sup-. Ct. 377, 58 L. ed. 698. In the language used in Postal Telegraph Cable Co. v. Adams, 155 U. S. 688, 15 Sup. Ct. 360, 39 L. ed. 311, and Galveston, H. & S. A. E. Co. v. Texas, 210 U. S. 217, 28 Sup. Ct. 638, 52 L. ed. 1031, the court clearly had in mind that the ordinary property tax which.the substituted tax must not exceed, was an ordinary single ad valorem tax upon the property, and there could be no clearer expression of the proposition that the gross earnings tax or any substituted tax would be held invalid if it had no relation to the value of the property upon which it was imposed. The same principle was followed and the language of the Adams case was quoted iu Western Union Tel. Co. v. Kansas, 216 U. S. 1, 27, 30 Sup. Ct. 190, 54 L. ed. 355, where a tax of a given per cent of authorized capital, imposed by a statute of Kansas, was held unconstitutional as a burden upon interstate commerce, the court there refusing to be concluded as to the fact of such a burden being imposed by “the disavowal by the state of any purpose to burden interstate commerce.” The case of U. S. Express Co. v. Minnesota, 223 U. S. 335, 32 Sup. Ct. 211, 56 L. ed. 459, involved the validity of taxes imposed under a statute similar to that under consideration, save that the tax rate was 6 per cent. The items of the earnings involved were of the same character as those in the present case. The court referred to Fargo v. Michigan, 121 U. S. 230, 7 Sup. Ct. 857, 30 L. ed. 888, and Philadelphia & S. M. S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 Sup. Ct. 1118, 30 L. ed. 1200, the Galveston Case and others, saying (p. 346) •/ “The supreme court of Minnesota construed the tax to be a property tax, measured by the gross earnings within the state, which, under their construction of the tax, included the earnings here in question. That court held that the statute was part of a system long in force i,n Minnesota, passed under the authority of the state Constitution, and was intended to afford a means of valuing the property of express companies within the state. While the determination that the tax is a property tax measured by gross receipts is not binding upon this court, we are not prepared to say that this conclusion is not well founded, in view of the provisions and purposes of the law. * * * There is no suggestion in the present record, as was shown in Fargo v. Hart, 193 U. S. 490, that the amount of the tax is unduly great, having reference to the real value of the property of the company within the state and the assessment made. * * * Upon the whole we think the statute falls within that class where there has been an exercise of good faith of a legitimate taxing power, the measure of which taxation is in part the proceeds of interstate commerce which could not, in itself, be taxed, and does not fall within that class of statutes uniformly condemned in this court, which show a manifest attempt to burden the conduct of interstate commerce, such power, of course, being beyond the authority of the state.” In Fargo v. Hart, 193 U. S. 490, 24 Sup. Ct. 498, 48 L. ed. 761, referred to in the passage just quoted, the court placed a limitation upon the use of the so-called unit rule of valuation, so as to prevent the taking into account by the taxing authorities of property outside of the state which in no way contributed to the value of the property within the state. In that case express business was involved, and the taxing authorities were urging that bonds held in another state entered into the value of the property within the state. It was held that the tangible assets outside of the state, although they contributed to the valué of the express company’s capital stock, could not be admitted to contribute anything in the way of credit, good will or otherwise, to the value of the company’s system as a whole, or proportionately to the value of that part of it within the state. We do not suppose that it will be seriously contended by the state in the case at bar that the assets of the appellant located outside of Minnesota, such as stocks, bonds and other investments, can in any way be considered as contributing to the value of the property within the state. It is apparent that in the United States Express Company case, the Supreme Court considered the question whether the statute on its face was a tax upon earnings, a doubtful one, and that it was only because of the interpretation placed by this court upon the statute there involved, and because of the fact that there was no objection to the tax as unduly great, “having reference to the real value of the property,” that the court, with obvious hesitancy, concluded that “upon the whole” the tax must be deemed one upon the property, and not one upon the earnings of the express company. There can be no other legitimate inference from the reference to Fargo v. Hart and the value of the property, than that if it had appeared from the record and had been urged that the tax was unduly great, it would have been held invalid as a burden upon commerce. That the court attributed the greatest importance to the absence of such a contention in the United States Express Company case is shown by its comment upon that decision shortly afterward in Johnson v. Wells Fargo & Co. 339 U. S. 334, 36 Sup. Ct. 63, 60 L. ed. 343, where a statute of South Dakota imposing a tax upon the gross earnings of an express company was held to be in violation of certain provisions of the state constitution, and where the court, referring to its decision in the United States Express Company case said, on page 243: “There was no contention in the case that the method used resulted in an excessive valuation.” In Cudahy Packing Co. v. Minnesota, 246 U. S. 450, 38 Sup. Ct. 373, 62 L. ed. 827, another statute of Minnesota similar to-that involved in the United States Express Company case was in question. The statute imposed- a tax upon the Cudahy Packing Company as a freight line company measured by a stated percentage of its gross earnings from mileage within the state on both intrastate and interstate commerce. The company objected to the tax upon the ground that it was a direct burden upon interstate commerce, and that it was not the fair equivalent of a property tax. It showed that the cash value of each of its cars as a separate article of tangible property was from $700 to $900, and that a tax levied and assessed in the ordinary way upon such property at the prevailing tax rate in each year would have produced only some $1,722, whereas the tax produced by the gross earnings method was $2,111. The argument chiefly relied upon was that the case fell within the decisions in Eargo v. Michigan, 121 U. 43. 230, 7 Sup. Ct. 857, 30 L. ed. 888; Philadelphia & S. M. S. S. Co. v. Pennsylvania, 122 U. S. 326, 7 Sup. Ct. 1118, 30 L. ed. 1200; and Galveston, H. & S. A. E. Co. v. Texas, 210 U. S. 217, 28 Sup. Ct. 638, 52 L. ed. 1031, as a direct tax on the gross earnings of the company, and, as such, a burden upon interstate commerce, but it was also urged that the tax was invalid because it exceeded the fair equivalent of an ad valorem tax. Tne discrepancy between the amount of the ordinary property tax upon the tangible value of the cars and the actual amount claimed by the state under the gross earnings.law was so comparatively small, being less than $400 for the six years in question, that the second argument urged by the defendant was without convincing force. The court held that in addition to the cash value of each' car as a separate article of tangible property, the record showed that the intangible property incident to their combined use under the contractual arrangement with the railroads was of substantial value, and said on page 456: “The record makes it reasonably certain that the property, valued with reference to its use and what it earns, is worth considerably more than the cash value of the cars taken separately —enough more to indicate that the tax is not in excess of what would be legitimate as an ordinary tax on the property, taken at its real or full value.” The court took the occasion briefly to re-affirm the principles upon which its decisions had rested, citing some of the more important cases, and then proceeding on page 453: “On the other hand, if what is done is to reach the property and not to tax the gross earnings, the latter being taken merely as an index or measure of the value of the former, it well may be that the objection urged against the tax is untenable; for, as this court has said: ‘By whatever name the tax or taxes may be called that are fixed by reference to the value of the property, if they are not imposed because of its use in interstate or foreign commerce, and: if they amount to no more than would he legitimate as an ordinary tax upon the property, valued with reference to the use in which it is employed, they are not open to attack as restraining or burdening such commerce. St. Louis Southwestern By. Co. v. Arkansas, 235 U. S. 350, 367; [35 Sup. Ct. 99, L. ed. 265]; Postal Telegraph Co. v. Adams, 155 U. S. 688; [15 Sup. Ct. 360, 39 L. ed. 311]; Wisconsin & Michigan By. Co. v. Powers, 191 U. S, 379, 387; Fargo v. Hart, 193 H. S. 490, 499; Galveston, Harrisburg & San Antonio Ry. v. Texas, supra.” Referring to the United States Express case, the court said on page 455 of its opinion: “The statute declared that the tax was to be in lieu of other taxes on the company’s property, and the state court held that it was not in reality a tax on-the gross earnings, but was a tax on the property, the earnings being taken merely as a measure of the value of the property for taxing purposes. We accepted and gave effect to that holding, not as being conclusive on us, but on the grounds that the property from which the earnings were' derived was not to Be otherwise taxed, that the tax was part of a system intended to reach the full value of the company’s property in the state as reflected by the gross earnings, and that the amount of the tax did not appear to be in excess of what would be legitimate as an ordinary tax on the property, valued with reference to its use as part of a going concern.” The court therefore held that the tax in question in the Cudahy case was not distinguishable from that sustained in the United States Express Company case, and therefore held" it also to be valid. It is quite obvious from all the quotations from the court’s opinion that if it had appeared that the tax in question exceeded what would have been legitimate as an ordinary tax on the property taken at its real or full value, it would have been declared invalid. See also Northwestern Mut. Life Ins. Co. v. Wisconsin, 247 U. S. 132, 38 Sup. Ct. 444, '62 L. ed. 1025; Union Tank Line Co. v. Wright, 249 U. S. 275, 39 Sup. Ct. 276, 63 L. ed. 602. In U.' S. Express Co. v. Minnesota, 223 U. S. 335, 32 Sup. Ct. 211, 56 L. ed. 459, the Supreme Court of the United States affirming 114 Minn. 346, 131 N. W. 489, held that the gross earnings law of Minnesota, which provided for the taxation of the property of express companies, was not in violation of the interstate commerce clause of the 'Federal Constitution. Cudahy Packing Co. v. Minnesota, 246 U. S. 450, 38 Sup. Ct. 373, 62 L. ed. 827, affirming 129 Minn. 30, 151 N. W. 410. The law involved in this case is the exact duplicate of the law considered by the United States Supreme Court in the case of United States Express Company v. Minnesota, supra, the only difference being that the rate of assessment has been increased from 6 to 8 per cent. So paraphrasing the court’s statement in the Cudahy Packing Company case “Unless this tax be otherwise distinguishable, it must, under the decision in that case, be regarded as a property tax and not as laid on the gross earnings.” The Supreme Court has declared in these two cases that if a tax “is not in excess of what would be legitimate as an ordinary tax on the property taken at its real or full value,” it will not be held to violate the commerce clause of the United States Constitution. Appellant does not show that it was excessively assessed by mere proof that' according to one or more methods of determining values its taxes were too high. A tax assessed upon an ad valorem basis by a board or an assessor will not be set aside unless the valuation cannot be sustained upon any reasonable or fair basis. Western Union Tel. Co. v. Massachusetts, 125 U. S. 530, 8 Sup. Ct. 961, 31 L. ed. 790; Louisville & Nashville E. Co. v. Greene, 244 U. S. 660, 37 Sup. Ct. 683, 61 L. ed. 1291; Illinois Cent. Ey. Co. v. Greene, 244 U. S. 555, 37 Sup. Ct. 697, 61 L. ed. 1309; Western Union Tel. Co. v. Taggart, 163 U. S. 1, 16 Sup Ct. 1054, 41 L. ed. 49. Certainly if an ad valorem tax will not be set aside upon mere proof that it is excessive, a commuted tax will not be set aside upon the showing that it is excessive in comparison with an ad valorem tax calculated by one of many different acceptable methods. The contrary is true that the tax will be upheld if it can be accounted for upon any basis of valuation, not fundamentally wrong or fraudulent, which the legislature might have adopted. The question really is whether the evidence in the record compels acceptance of defendant’s assertion that its tangible property in Minnesota had no value by reason of its relation to the whole property of the Wells-Fargo system over and above its actual cost as shown in its inventories.