Spector Motor Service v. O’Connor

340 U.S. 602

Case Year: 1951

Case Ruling: 6-3, Reversed

Opinion Justice: Burton

FACTS

Spector Motor Service, an interstate trucking company based in Illinois, hauled goods across the United States. It engaged only in interstate commerce, never carrying goods from point to point within the same state. In 1942 the company received a $7,795.50 tax bill from the state of Connecticut. The amount was assessed for the years 1935 through 1940 under the Connecticut Corporation Business Act of 1935. The specific tax obligation was based on a complicated formula for determining the amount of earnings an interstate company produced based upon business conducted in Connecticut. By all estimates the tax calculation formula was fair, and companies involved in interstate commerce were not discriminated against relative to companies that did intrastate business in Connecticut. Spector challenged the tax, claiming that the Commerce Clause precludes a state taxing exclusively interstate commerce. The litigation became very complicated and was considered in various lower courts for more than eight years before it finally reached the U.S. Supreme Court.

MR. JUSTICE BURTON DELIVERED THE OPINION OF THE COURT.

This proceeding attacks, under the Commerce Clause of the Constitution of the United States, the validity of a state tax imposed upon the franchise of a foreign corporation for the privilege of doing business within the State when (1) the business consists solely of interstate commerce, and (2) the tax is computed at a nondiscriminatory rate on that part of the corporation’s net income which is reasonably attributable to its business activities within the State. For the reasons hereinafter stated, we hold this application of the tax invalid....

Taxing power is inherent in sovereign states, yet the states of the United States have divided their taxing power between the Federal Government and themselves. They delegated to the United States the exclusive power to tax the privilege to engage in interstate commerce when they gave Congress the power “To regulate Commerce with foreign Nations, and among the several States....” U.S. Const., Art. I, 8, cl. 3. While the reach of the reserved taxing power of a state is great, the constitutional separation of the federal and state powers makes it essential that no state be permitted to exercise, without authority from Congress, those functions which it has delegated exclusively to Congress....

The answer in the instant case has been made clear by the courts of Connecticut. It is not a matter of labels. The incidence of the tax provides the answer. The courts of Connecticut have held that the tax before us attaches solely to the franchise of petitioner to do interstate business. The State is not precluded from imposing taxes upon other activities or aspects of this business which, unlike the privilege of doing interstate business, are subject to the sovereign power of the State. Those taxes may be imposed although their payment may come out of the funds derived from petitioner’s interstate business, provided the taxes are so imposed that their burden will be reasonably related to the powers of the State and nondiscriminatory.

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.

Our conclusion is not in conflict with the principle that, where a taxpayer is engaged both in intrastate and interstate commerce, a state may tax the privilege of carrying on intrastate business and, within reasonable limits, may compute the amount of the charge by applying the tax rate to a fair proportion of the taxpayer’s business done within the state, including both interstate and intrastate. The same is true where the taxpayer’s business activity is local in nature, such as the transportation of passengers between points within the same state, although including interstate travel.

In this field there is not only reason but long-established precedent for keeping the federal privilege of carrying on exclusively interstate commerce free from state taxation. To do so gives lateral support to one of the cornerstones of our constitutional law-- M’Culloch v. Maryland.

The judgment of the Court of Appeals, which reversed that of the District Court, is accordingly Reversed.

MR. JUSTICE CLARK, WITH WHOM MR. JUSTICE BLACK AND MR. JUSTICE DOUGLAS JOIN, DISSENTING.

The Court assumes, and I think it has been clearly demonstrated, that the tax under challenge is nondiscriminatory, fairly apportioned and not an undue burden on interstate commerce. Hence, if appellant had been engaged in an iota of activity which the Court would be willing to call “intrastate,” Connecticut could have applied its tax to the company’s interstate business in the precise form which it now seeks to employ--a tax on the privilege of doing business in Connecticut measured by the entire net income attributable to the State, even though derived from interstate commerce.

But solely because Spector engages in what the Court calls “exclusively interstate” business, a different standard is applied. The Court does not ask whether the State is merely asking interstate commerce to pay its way, or whether the State in fact provides protection and services for which such commerce may fairly be charged. Nor is the Court concerned whether the tax puts interstate business at a competitive disadvantage or is likely to do so. Instead, the tax is declared invalid simply because the State has verbally characterized it as a levy on the privilege of doing business within its borders. The Court concedes, or at least appears to concede, that if the Connecticut legislature or highest court had described the tax as one for the use of highways or in lieu of an ad valorem property tax, Spector would have had to pay the same amount, calculated in the same way, as is sought to be collected here. In acknowledging this, the Court’s own opinion totally refutes its protestation that the standard employed to strike down Connecticut’s tax is more than a matter of labels. Spector remains free--as it has since the tax law was adopted in 1935--from paying any share of the State’s expenses, and its tax-free status continues until Connecticut renames or reshuffles its tax....

Objections to the fairness of Connecticut’s apportionment formula have been correctly disposed of by the Court of Appeals. I would affirm its judgment.