Supreme Court of United States.
*356 Mr. William T. Wooldridge, with whom Mr. Samuel H. West, Mr. Edward A. Haid and Mr. Frank G. Bridges were on the brief, for plaintiff in error.
Mr. William H. Rector, with whom Mr. William L. Moose, Attorney General of the State of Arkansas, Mr. De E. Bradshaw, Mr. Lewis Rhoton and Mr. Thomas E. Helm were on the brief, for defendant in error.
*360 MR. JUSTICE PITNEY, after making the foregoing statement, delivered the opinion of the court.
The validity of Act No. 112, and of the tax that, pursuant to its provisions, has been levied against plaintiff in error, is questioned on the ground of repugnancy to the commerce clause of the Constitution of the United States and the "due process" and "equal protection" clauses of the Fourteenth Amendment.
The act is entitled "An Act for an annual franchise tax on corporations doing business in the State of Arkansas," (Acts of Arkansas, 1911, p. 67). Its fourth, fifth, and sixth sections require each foreign corporation for profit doing business in the State, and owning or using a part or all of its capital or plant in the State, to pay "for the privilege of exercising its franchise in this State, one-twentieth of one per cent. each year thereafter upon the proportion of the outstanding capital stock of the corporation represented by property owned and used in business transacted in this State." On the other hand, Act No. 251, approved May 4, 1911 (Acts of Arkansas, p. 233), is entitled "An Act to provide the manner of assessing for taxation the property of railroads, express, sleeping car, telegraph, telephone and pipe lines companies." By its second section the franchises (other than the right to be a corporation) of all railroad, express, telegraph, and telephone companies are declared to be *361 property for the purpose of taxation, and the values of such franchises are to be considered by the assessing officers when assessing the property of such corporations.
The Supreme Court of the State, in its opinion herein, after reciting the pertinent provisions of the state constitution, went on to say (106 Arkansas, 326): "Our court has held that a corporation owes its existence to the State, and the right to enjoy this privilege is a subject of taxation, and that upon the power of the legislature to impose such a tax there exists no restriction in our Constitution. In the case of a foreign corporation, the tax or license is paid for the privilege of exercising its corporate powers in the State. Baker v. State, 44 Arkansas, 138, and cases cited. . . . (p. 327): In the passage of the act in question [Act No. 112], no doubt the legislature had in mind the fact that the right or privilege to be or exist as a corporation, although a matter of value to the stockholders of the corporation, is not an asset of the corporation and transferable as such, and that its value can not, under ordinary rules, be ascertained for the purpose of taxation as property, but since it is a privilege or right granted by the State, a franchise tax may be imposed upon this right or privilege for the purpose of raising revenue. We think it plain, then, under our Constitution and decisions, that the act in question is valid unless it be held a burden upon interstate commerce." And, after citing certain decisions of this court bearing upon the latter question, the court proceeded (p. 329): "In the case at bar the gross receipts from all sources of the railway company have not been used as a means for ascertaining the value of the property in the State. By the express provision of Act No. 251, enacted for the purpose of providing the manner for assessing for taxation the property of railroad companies, the right to be or exist as a corporation was expressly excluded from the items which go to make up the value of the property of the corporation. As we have *362 already seen, the right or privilege to be or exist as a corporation is the subject of taxation, and this right or privilege is not considered in fixing the value of the property of corporations under Act No. 251, the general tax act. Our State has fixed a franchise tax based solely `upon the proportion of outstanding capital stock of corporations represented by property owned and used in business transacted in this State.' The act in question seems to have been drawn with great care and with the evident purpose to exclude any contention that the tax was made upon interstate commerce. The framers of the act evidently considered the cases of Ludwig v. West. Un. Tel. Co., 216 U.S. 146, and West. Un. Tel. Co. v. Kansas, 216 U.S. 1, and therefore intended to pass an act that would not be contrary to the principles therein announced. We think it has done so. It will be noted in the Ludwig Case, the statute requires a foreign corporation engaged in interstate commerce to pay as a license tax for doing intra-state business, a given amount on its capital stock whether employed within the State or elsewhere, and the court held that on the authority of the Kansas Case, the statute in question was unconstitutional and void because it directly burdened interstate commerce and imposed a tax on property beyond the jurisdiction of the State."
Upon the mere question of construction we are of course concluded by the decision of the state court of last resort. But when the question is whether a tax imposed by a State deprives a party of rights secured by the Federal Constitution, the decision is not dependent upon the form in which the taxing scheme is cast, nor upon the characterization of that scheme as adopted by the state court. We must regard the substance, rather than the form, and the controlling test is to be found in the operation and effect of the law as applied and enforced by the State. Henderson v. Mayor of N.Y., 92 U.S. 259, 268; Williams *363 v. Mississippi, 170 U.S. 213, 225; Smith v. St. Louis & Southwestern Ry., 181 U.S. 248, 257; Stockard v. Morgan, 185 U.S. 27, 37; Reid v. Colorado, 187 U.S. 137, 151; Galveston, Harrisburg &c. Ry. v. Texas, 210 U.S. 217, 227; Western Union Tel. Co. v. Kansas, 216 U.S. 1, 27; Ludwig v. West. Un. Tel. Co., 216 U.S. 146, 162; Sioux Remedy Co. v. Cope, decided November 30, 1914, ante, p. 197.
We therefore accept the construction of Act No. 112, that we have quoted from the opinion of the state court, which is, in short, that it imposes an annual franchise tax upon the right to exist as a corporation or to exercise corporate powers within the State, the amount of the tax being fixed solely by reference to the property of the corporation that is within the State and used in business transacted within the State, and excluding any imposition upon or interference with interstate commerce. By this we understand that the franchise of a foreign corporation that is intended to be taxed is that which relates solely to intra-state business; and this exposition of Act No. 112 brings it into harmony with Act No. 87 (quoted in the prefatory statement) which requires foreign corporations to pay initial fees only for the privilege of doing intra-state business; and renders it harmonious, also, with Act No. 251, under which the franchise of corporate existence is excluded from the assessment.
And we proceed to consider whether, in view of the construction thus placed upon Act No. 112, the franchise tax imposed upon plaintiff in error pursuant to its terms runs counter to the commerce clause or the Fourteenth Amendment.
The tax, as will be observed, is not in any wise based upon the receipts of the railroad company from interstate commerce, either taken alone or in connection with the receipts from its intra-state business. Since, therefore, the amount of the imposition is not made to fluctuate with the *364 volume or the value of the business done, we are relieved from those difficulties that arise where state taxes are based upon the earnings of interstate carriers, as in Maine v. Grand Trunk Ry., 142 U.S. 217; Wisconsin & Michigan Ry. v. Powers, 191 U.S. 379; Galveston, Harrisburg & San Antonio Ry. v. Texas, 210 U.S. 217; Oklahoma v. Wells, Fargo & Co., 223 U.S. 298; and U.S. Express Co. v. Minnesota, 223 U.S. 335.
And we have no hesitation in overruling the contention that the tax is repugnant to the "due process" clause on the ground of being in effect based on property located beyond the limits of the State, as in Western Union Tel. Co. v. Kansas, 216 U.S. 1, 30; and in Ludwig v. West. Un. Tel. Co., 216 U.S. 146, 162; for this tax is measured by reference to property situate wholly within the confines of the State.
So far as the commerce clause is concerned, it seems to us that the principles upon whose application the present decision must depend are those set forth in Postal Tel. Cable Co. v. Adams, 155 U.S. 688, 695, where the court, by Mr. Chief Justice Fuller, said: "It is settled that where by way of duties laid on the transportation of the subjects of interstate commerce, or on the receipts derived therefrom, or on the occupation or business of carrying it on, a tax is levied by a State on interstate commerce, such taxation amounts to a regulation of such commerce and cannot be sustained. But property in a State belonging to a corporation, whether foreign or domestic, engaged in foreign or interstate commerce, may be taxed, or a tax may be imposed on the corporation on account of its property within a State, and may take the form of a tax for the privilege of exercising its franchises within the State, if the ascertainment of the amount is made dependent in fact on the value of its property situated within the State (the exaction, therefore, not being susceptible of exceeding the sum which might be leviable directly *365 thereon), and if payment be not made a condition precedent to the right to carry on the business, but its enforcement left to the ordinary means devised for the collection of taxes."
So, in Atlantic &c. Tel. Co. v. Philadelphia, 190 U.S. 160, the court, reviewing numerous previous cases, laid down certain propositions as well-established, and among them the following: (a) No State can compel a party, individual or corporation, to pay for the privilege of engaging in interstate commerce; (b) This immunity does not prevent a State from imposing ordinary property taxes upon property having a situs within its territory, although it be employed in interstate commerce; and (c) The franchise of a corporation, although that franchise is the business of interstate commerce, is, as a part of its property, subject to state taxation, provided at least the franchise is not derived from the United States.
Applying these principles, we have no difficulty in sustaining the tax in question as a legitimate imposition upon a foreign corporation with respect to its exercise of the privilege of transacting intrastate business in corporate form, the tax being based upon the amount and value of its property within the State. It is fixed at a definite percentage (1/20 of one per cent.) of "the proportion of the outstanding capital stock of the corporation represented by property owned and used in business transacted in this State," and the Act provides machinery for ascertaining the market value of the entire capital stock and striking a proportion between the value of the property owned and used by the corporation in the State and that owned and used by it outside of the State. In its essence the tax is not distinguishable from that which was sustained by this court in Western Union Tel. Co. v. Massachusetts, 125 U.S. 530, and in another case between the same parties, 141 U.S. 40. See also Pittsburgh &c. Ry. v. Backus, 154 U.S. 421, 430, 435; Indianapolis &c. *366 R.R. v. Backus, 154 U.S. 438; Cleveland &c. Ry. v. Backus, 154 U.S. 439, 444, 445; Western Union Telegraph Co. v. Taggart, 163 U.S. 1, 18; Western Union Tel. Co. v. Gottlieb, 190 U.S. 412, 424.
It is insisted that Act No. 112, as construed by the state court, in connection with Act No. 251, subjects the property of plaintiff in error to double taxation, and that this contravenes the constitutional guaranties respecting due process of law and the equal protection of the laws. No attempt is made to show that the classification of corporations adopted in Act No. 112 is not a reasonable one, or that in any respect corporations of the class to which plaintiff in error belongs are discriminated against in favor of domestic corporations, as was the case in Southern Railway Co. v. Greene, 216 U.S. 400. Under the first three sections of this act, each corporation organized and doing business under the laws of the State for profit is required to pay a tax of one-twentieth of one per cent. upon "that part of its subscribed or issued and outstanding capital employed in Arkansas," with an exception not now pertinent; whereas by the next three sections each foreign corporation for profit doing business in the State and owning or using a part or all of its capital or plant in the State is required to pay according to the same percentage "upon the proportion of the outstanding capital stock of the corporation represented by property owned and used in business transacted in this State." It is not contended that there is here any substantial discrimination. The gist of the criticism seems to be that the two acts in question subject the property of plaintiff in error, as well as that of all other corporations that are within the operation of those Acts, to double taxation, and that this is a denial of "equal protection" in favor of other classes of taxpayers. Reference is made to an extract from the opinion in the Adams Case (155 U.S. 696) where the court said: "Doubtless, no State could add to the taxation of property *367 according to the rule of ordinary property taxation, the burden of a license or other tax on the privilege of using, constructing, or operating an instrumentality of interstate or international commerce or for the carrying on of such commerce; but the value of property results from the use to which it is put and varies with the profitableness of that use, and by whatever name the exaction may be called, if it amounts to no more than the ordinary tax upon property or a just equivalent therefor, ascertained by reference thereto, it is not open to attack as inconsistent with the Constitution. Cleveland &c. Ry. v. Backus, 154 U.S. 439, 445." This, however, does not mean, as is contended, that because of the Fourteenth Amendment a State may not, in addition to the imposition of an ordinary property tax upon an instrumentality of interstate or international commerce, impose a franchise tax ascertained by reference to the property of the corporation within the State, including that employed in interstate commerce. The court was dealing only with the Commerce Clause, and the language quoted means that, 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 be 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; and that it is permissible to value the property at what it is worth in view of its use in interstate commerce, so long as no added burden is imposed as a condition of such use. This is evident from a reading of the context and from the reference made to the opinion in 154 U.S. at p. 445.
Nothing in the Fourteenth Amendment imposes any iron-clad rule upon the States with respect to their internal taxation, or prevents them from imposing double taxation, or any other form of unequal taxation, so long as the inequality *368 is not based upon arbitrary distinctions. Davidson v. New Orleans, 96 U.S. 97, 105, 106; Bell's Gap R.R. v. Pennsylvania, 134 U.S. 232, 237; Pacific Express Co. v. Seibert, 142 U.S. 339, 351; Adams Express Co. v. Ohio, 165 U.S. 194, 228; Merchants Bank v. Pennsylvania, 167 U.S. 461, 464; Magoun v. Illinois Trust & Savings Bank, 170 U.S. 283, 295; Armour Packing Co. v. Lacy, 200 U.S. 226, 235; Michigan Central R.R. v. Powers, 201 U.S. 245, 293.
Thus far we have dealt only with the authority of the State to levy a tax of this character, and with the mode in which the amount of the tax is ascertained. But the case presents another question that is more serious. By § 20 of Act No. 112 it is enacted: "In case any corporation shall fail to pay the franchise tax prescribed by this Act when it becomes due during the term of said certificate, the said tax commission shall cancel said certificate, and said corporation shall forfeit its right to do business in this State, in addition to the other penalties prescribed in this Act."
If this must needs be construed to mean that for nonpayment of the franchise tax a foreign railroad corporation engaged in business as a common carrier of intra-state and interstate commerce is to forfeit its right to do business in the State, not only with respect to intra-state but also with respect to interstate commerce, the effect would be to impose a condition upon its right to transact interstate commerce, and the act would be invalid as amounting in effect to a regulation of that commerce; unless, indeed, § 20 could be treated as separable. This result would follow from the principles laid down in Western Union Tel. Co. v. Massachusetts, 125 U.S. 530, 554; Leloup v. Port of Mobile, 127 U.S. 640, 644, 647; Western Union Telegraph Co. v. Alabama, 132 U.S. 472, 477; Allen v. Pullman Co., 191 U.S. 171, 179; and many other cases.
But the state court has not as yet construed the section *369 as calling for the forfeiture of the privilege of doing interstate business in the event of non-payment of the franchise tax; nor is the State here insisting upon such a construction. The present is an ordinary action to collect the tax as a debt, and not to forfeit the franchise for its nonpayment. Non constat but that the state court will hold, when confronted with the question, that the franchise to be forfeited pursuant to § 20 is confined to intra-state commerce. Such a construction is clearly foreshadowed by what the court has in this case held with respect to the general purpose of the act. And in exercising the jurisdiction conferred by § 237, Jud. Code, it is proper for this court to wait until the state court has adopted a construction of the statute under attack, rather than to assume in advance that such a construction will be adopted as to render the law repugnant to the Federal Constitution. Bachtel v. Wilson, 204 U.S. 36, 40; Adams v. Russell, 229 U.S. 353, 360; Plymouth Coal Co. v. Pennsylvania, 232 U.S. 531, 546. And see Ohio Tax Cases, 232 U.S. 576, 591. At present, therefore, we have merely to consider whether § 20 so clearly requires a forfeiture of the interstate franchise for non-payment of the tax in question that it is not reasonable to anticipate that the state court will put another construction upon it. And in doing this we ought not to indulge the presumption either that the legislature intended to exceed the limits imposed upon state action by the Federal Constitution, or that the courts of the State will so interpret the legislation as to lead to that result. No canon of construction is better established or more universally observed than this, that if a statute will bear two constructions, one within and the other beyond the constitutional power of the law-making body, the courts should adopt that which is consistent with the Constitution, because it is to be presumed that the legislature intended to act within the scope of its authority. United States v. Coombs, 12 Pet. 72, 76; Grenada County Supervisors *370 v. Brogden, 112 U.S. 261, 269; The Japanese Immigrant Case, 189 U.S. 86, 101. It hardly needs to be said that the Supreme Court of Arkansas recognizes and applies this fundamental rule of construction. State v. Lancashire Ins. Co., 66 Arkansas, 466, 477; Waterman v. Hawkins, 75 Arkansas, 120, 126; State v. Moore, 76 Arkansas, 197, 201.
It does not seem to us that § 20, when taken in connection with the context, requires to be so construed as to interfere with interstate commerce. The taxing provisions of the act apply to all corporations doing business in the State for profit, whether organized under its laws, or under the laws of other States, or of foreign countries, and entirely irrespective of the question whether they are engaged in commerce. Therefore it was natural that, in such a provision as is contained in § 20, language having upon its face a general scope should be adopted; but it need not be indiscriminately applied to all the several kinds of corporations that are subject to the act. The forfeiture in terms is of "the right of such corporation to do business in this State." This does not necessarily include the right to transact business that is done partly within and partly without the State. The section does not call for an annulment of the charter. That topic is covered by § 15 of the same act, which applies, however, only to corporations organized under the laws of Arkansas or of foreign countries, and not to corporations of other States, to which class plaintiff in error belongs.
In view of all these considerations, we ought to assume, until the State, through its judicial or administrative officers, places a different construction upon the act, that § 20 will be limited in its operation to forfeiting for nonpayment of the franchise tax only the privilege of doing intrastate business; or else that the section, being void for unconstitutionality, will be treated as severable from the other provisions of the act. Under either view it is obvious, *371 from what has been already said, that the tax does not amount to a regulation of or a burden upon interstate commerce.
Judgment affirmed.
MR. JUSTICE McREYNOLDS took no part in the consideration or decision of this case.
