domestic or foreign origin, it may be conferred upon such conditions, pecuniary or otherwise, as the State in its judgment may deem most conducive to its interest or policy. It may require the payment into its treasury each year of a specific sum, or may apportion the amount exacted according to the value of the business permitted, as disclosed by its gains or receipts of the present or past years. The character of the tax or its validity is not determined by the mode adopted in fixing its amount for any specific period or the times of its payment. The whole field of inquiry into the extent of revenue from sources at the command of the corporation is open to the consideration of the State in determining what may be justly exacted for the privilege. The rule of apportioning the charge to the receipts of the business would seem to be eminently reasonable, and likely to produce the most satisfactory results both to the State and the corporation taxed."

1

Whether telegraphic messages may be considered the subjects of interstate commerce might at first be questioned. Such, however, is in effect the burden of the decisions of the United States Supreme Court. These companies are in respect to the taxation of their receipts subject to substantially the same provisions as railroads. According to the decision in Telegraph Company v. Texas, any telegraph company accepting the provisions of Title 65, United States Revised Statutes, becomes an agent of the United States as regards Government business; and any State law imposing a tax on messages is void, both as to Government messages and to messages sent out of the State. In Ratterman v. Western Union Telegraph Company, a decision of general application to transportation companies was reached, to the effect that though a tax on gross receipts from both intrastate and interstate commerce is invalid, the tax is valid so far as it applies to the intrastate portion of those receipts.

To sum up, the legal status of the gross-receipts tax is substantially as follows: Domestic corporations may be taxed on their gross receipts regardless of the source of those receipts, provided they are not entirely the proceeds of interstate commerce. Foreign corporations may be taxed only on the intrastate portion of their receipts. The distinction from the legal standpoint arises out of the fact that in the former case the tax is a tax on franchise, and in the latter case a tax on business-i. e., a tax on interstate traffic-which is in violation of the interstate commerce clause in the Federal Constitution.

The receipts of the large transportation companies are to a large extent the proceeds of interstate traffic. Any transportation tax system which confines the incidence of a tax to purely intrastate receipts is in the main an inadequate one. As we have just seen, however, such is the necessary practice in the taxation of foreign corporations. As concerns the taxation of net income, it is probable that the question of the validity of such a tax would be determined upon different grounds.

C. DOUBLE TAXATION OF CORPORATION AND SECURITY HOLDER.

The simultaneous taxation of both corporation and security holder is one which may arise under competing authorities as well as under the same jurisdiction. It is a problem which may not be viewed from the standpoint of single groups of corporations (e. g., transportation companies, manufacturing corporations, etc.); from any ultimate point of view it must comprehend the entire field of investments. To tax both corporation and security holder, when a tax on investments is general, is clearly double taxation; but when a tax applies only to a special class of investments, the question can not be decided without examining into the incidence of the tax. Professor Seligman says on this point:

"If only one class of corporations is taxed, the purchaser of these corporate securities will escape taxation, because the amount of the tax is discounted in the depreciation of the security. For, let us suppose that a corporation previously untaxed has been paying 5 per cent dividends on its stock quoted at par. If a special tax of 10 per cent be imposed on these dividends, the stockholders will get only 4 per cent. But since by the supposition other classes of corporations, or at all events other noncorporate investments, are not taxed, the price of the stock will fall to 90. People who can get 5 per cent on their capital will not ordinarily consent to take 44 per cent. The original holders of the stock will indeed lose, but the new purchasers will not be affected, because the tax is capitalized and leads to a depreciation of the capital value of the stock. A dividend of $4.50 on stock costing $90 is as good as one of $5 on stock costing $100. A tax levied only on corporate profits, or only on some special classes of corporations, does not affect any one but those who become stockholders before the imposition of the tax. To

tax the new purchaser on his security would not in such a case involve unjust double taxation.

"There is one other condition under which the simultaneous taxation of the corporation and the security holder is not unjust. In the case of a stockholder we have seen that if the tax is general, it is unjust to tax both the corporation and the stockholder. In the case of a bondholder this would ordinarily be true, when the income tax on the corporation is, for instance, deducted from the interest of the bondholder as well as from the dividends of the stockholder. In some cases, however, it happens that the corporation is willing to assume the tax as a whole, and to count the tax among its fixed charges, declaring the coupons free from tax. In such a case it is really the stockholders who pay; for the interest on the bonds is fixed, and what is not deducted from the interest must be paid out of the surplus earnings, which would otherwise ultimately go to the stockholders. The bondholders are not reached at all by such a tax, except in the very indirect way that they may be exposed to an ultimate diminution in the security of their lien. But the tax as such does not strike them at all; their property or income in the corporate bonds goes scot free. An additional tax upon the bondholder would thus really not involve any injustice to them. Here, as well as in the preceding case, a study of the real incidence of the tax becomes important. What is apparently double taxation may turn out not to be such."1

Where, however, the practice of taxing all forms of business enterprises up to the limits set by their earning capacity prevails, an additional tax upon security holders would be unjust, upon the ground that the direct taxation of the total investment had already reached the taxable capacity of the individual sharers in that investment.

To the tax administrator, however, the fact which has greatest weight against the taxation of securities is the practical impossibility of reaching those securities for purposes of taxation. It would be needless to dilate upon the causes or character of this difficulty. It will be sufficient to state that the most prominent of the obstacles which arise in the administration of the general property tax spring from this source. The experience of all the States has made it clear that "property of this character will go into hiding, and that no penalties will prove sufficient to bring it out."

* *

4

In State practice the status of the taxation of corporation and security holder is a variable one. In Arizona and California, statute provision expressly declares this to be double taxation and forbids the practice; and in many other States the practice has been guarded against either by statute or by judicial interpretation. În Pennsylvania the attitude of the courts has changed since the earliest decisions on the subject were arrived at. In Lycoming County v. Gamble," it was held that "shares of stock and the capital stock of a corporation are distinct and different things,” and that, therefore, both were taxable. In Whitesell v. Northampton County, it was decided that "the corporation, as an artificial person, is taxable, and * the stockholders are also taxable personally for the shares of stock individually held by them. In Pittsburg, Fort Wayne and Chicago Railway v. Commonwealth it was held that "double taxation is not unlawful in Pennsylvania. But the tendency of the court on the question has changed. In Commonwealth v. Fall Brook Coal Company, for instance, the court held that a tax upon the capital stock in the hands of a corporation and a tax upon the owners of the parts or shares into which the capital stock is divided, upon their respective holdings, is double taxation, and will not be supported except by express enactment." And further, "where a railroad company has paid a tax upon its capital stock under the acts of 1889 and 1891, its shares are not taxable in the hands of their holders. Pennsylvania practice is now in line with this decision. In the early practice of Tennessee, as laid down in Memphis v. Ensley, a tax on the corporation did not preclude the taxation of the security holder also. The courts subsequently abandoned that position. The same change, either through statute provision or judicial decision, has taken place in a number of other States; as, for instance, in Indiana and in Illinois (State banks excepted.)

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In some States, on the other hand, double taxation of this type is still sanctioned. Iowa and Missouri, for instance, follow this plan, though making an

1 Seligman, Essays in Taxation, p. 105. For a full discussion of the question, see the same author's work on The Shifting and Incidence of Taxation.

247 Penna., 106.

349 Penna., 526.

466 Penna., 73.

5 156 Penna., 488. 66 Baxter, 553.

exception of manufacturing corporations, as do Louisiana, Maine, North Carolina, Wyoming, and other States with corporations generally.

Some States apply different rules to different corporations. Vermont, for instance, expressly exempts railroad stocks, and Kentucky stocks in telegraph, telephone, and express companies. Then, too, in some States (e. g., Louisiana, Maine, Minnesota, Kansas, and Rhode Island) certain property deductions are made in determining the taxable value of shares.

In Massachusetts a distinction is made between domestic and foreign corporations. The former pay a tax on capital stock as a whole, and shareholders are exempt. Resident shareholders in the latter are, as far as possible, assessed and taxed by the local tax officers. The Massachusetts tax commission of 1897 made the following comment on this system.

* * * "If all the States followed the Massachusetts method in taxing corporations and securities, it is evident that throughout the country all shares owned by persons living outside the State where the corporation was chartered would be doubly taxed; taxed first to the corporation in the State where organized, taxed second to every owner who lived outside that State. The Commonwealth by its own corporation tax has estopped itself from denying that its system of taxing shares involves double taxation.1

2

The courts of the United States were at first very leniently inclined in their decisions toward the double taxation of corporation and security holder; but that ground has since been abandoned. In Tennessee v. Whitworth, the Supreme Court held that double taxation is not to be presumed in the absence of special statutory provision to that effect. In New Orleans v. Houston,3 the court held that a tax on the holdings of shareholders paid by a corporation, irrespective of the dividends payable to the shareholders, is substantially a tax upon the corporation itself; and again, in the same case. "It is well settled by the decisions of this court, that the property of shareholders in their shares, and the property of the corporation in its capital stock, are distinct property interests;" but the right to tax both is not to be presumed unless such is the legislative intent, clearly expressed."

As regards the simultaneous taxation of bonds and of bonded debt, the United States Supreme Court, it will be remembered, has uniformly held (at least up to the Multnomah County case) that a tax on bonds, even when paid by the corporation, is a tax on the bondholder and not on the corporation. This principle is followed in the laws of Maryland and Pennsylvania. In Connecticut, on the other hand, where the tax is levied against the corporation on a valuation equal to the value of the capital stock and indebtedness, a tax on bonds, assessed against bondholders, has been declared not to involve double taxation.

The solution of the problem of how to tax securities is as involved as it is important. Upon the surface, the most practicable plan should appear to be the abandonment of the attempt to tax property of this type, and in its stead the following out of a plan to tax the corporation directly to the full extent of its taxable capacity.4

1 Report of Massachusetts tax commission of 1897, p. 79. 2117 U.S., 136.

3119 U. S., 265.

4 The discussion of this question by the Massachusetts Tax Commission of 1897, is eminently sane Among other things, the Commission says: "It is a large and difficult question of public policy and public expediency. It arises not only as to shares, but as to bonds, as to loans on the pledge of property outside the State, as to securities of various sorts. In our great federal union, with a Government partly national, partly State, we find vast masses of property owned wholly or in part, directly or indirectly, by persons living outside the State where the property is situated. În justice to individuals, in comity toward sister States, in the practical administration of the tax system, what should be our general position as to such property? * * *

"We are not prepared to recommend the entire exemption from all taxation of foreign stocks and other securities; but we are unhesitatingly of opinion that the present method of taxing them is bad in principle as well as ineffective in practice. * * *

"We believe that the proposed system of rigid enforcement by State assessment would not accomplish its object, and that, quite apart from the desirability of the end proposed, the result would be fruitless and disappointing. * * *

We can not conceive a system more demoralizing to the taxpayers, than that for collecting on securities, by rigid sworn returns, taxes of the present sort at the present rate. * * *

"The problem is, how to discover methods which are not punitive and of double effect in their mode of levy, which are practicable and smooth-working in their administration, and which shall secure as near an approach to justice as is attainable in view of the complex ownership of property in modern times." (Report of Massachusetts Tax Commission of 1897, p.80, et seq.)

CHAPTER IV.

SUMMARY OF EXISTING LEGISLATION.

A. RAILROAD COMPANIES.

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Of the 48 States and Territories, the tax systems of which have been outlined in the foregoing statements, 34 levy taxes on the basis of a cash valuation1 of property, or of property and franchise, as determined by a State board of assessment. In three cases (Ohio, Mississippi, and Virginia) this tax is supplemented by taxes on receipts, and in one case (Vermont) it is alternative with a tax on receipts. Twelve States levy taxes determined on the basis of gross receipts. In six of these States this tax is only supplementary to a tax levied on some other basis, and in one (Vermont) it is alternative with a tax on the cash valuation of property and franchise. In the remaining five States the tax on gross receipts is the main feature of the system. It might be added that in Vermont, where this tax is alternative with another system, railroad companies actually pay the tax on the basis of gross receipts.

New York levies a tax on capital stock according to dividends, supplemented by a tax on gross receipts.

Massachusetts levies a tax on capital stock at its market value, with deductions for property locally taxed.

Pennsylvania levies a tax on capital stock and bonded debt, supplemented by a tax on gross receipts.

Connecticut levies a tax on capital stock and total indebtedness.

Delaware levies a tax on capital stock, supplemented by a net earnings tax, a tax on passengers, and a specific tax on cars and locomotives.

The net earnings tax, as applied to railroads, is to be found in but a single State (Delaware), and there only as a feature of a wider system.

Three States and one Territory (Oregon, Rhode Island, Texas, and New Mexico) still cling to the primitive system of the general property tax, as applied to the taxation of individuals. In Texas, however, there is an additional State tax on gross receipts.

In those cases where franchises are taxed, capital stock, earnings, and indebtedness are considered, in different States according to different rules, in arriving at a cash valuation upon which to assess the tax.

All of the more progressive States have abandoned mere property valuation as the basis for the taxation of their transportation companies.

Generally, railroad property not used for railroad purposes or not situated on the main stem is locally taxed in the same manner and at the same rate as the property of individuals.

Where railroad property is equalized or assessed by State officials and the tax is computed and collected locally, the average value per mile of road is determined for each company. The value of the railroad property in any particular tax district is then determined on a pro rata mileage basis, and the tax is levied at the usual rate for State and local purposes.

Where taxes are levied on capital stock, debt, earnings, or rolling stock, and usually where levied on cash valuation of property, railroads partly within and partly outside of a State are assessed on the portion determined by the ratio of mileage of line within the State to total mileage of line.

B. TELEGRAPH COMPANIES.

Of those States where express provision is made for the taxation of these companies by State authorities, 27 levy a tax on cash valuation of line. Of these, California, Connecticut, Delaware, North Dakota, and Wisconsin arrive at this valuation on the basis of a certain fixed value per mile of wire; Idaho, Kansas, Louisiana, Michigan, Nebraska, New Hampshire, North Carolina, Oklahoma, South Carolina, South Dakota, Washington, and Virginia levy the tax on property

1 Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington West Virginia, and Wyoming.

2 Maine, Maryland, Michigan, Minnesota, Mississippi, New York, Ohio, Pennsylvania, Texas, Vermont, Virginia, and Wisconsin. 3 Mississippi, New York, Ohio, Pennsylvania, Texas, and Virginia.

valuation, generally determined on the mileage basis; Colorado, Florida, Iowa, Mississippi, Missouri, Tennessee, Utah, Vermont, and Wyoming levy the tax on a valuation of property and franchise. In Vermont this is alternative with a tax on gross receipts. Ohio levies a tax on cash valuation of line, which is virtually a capitalization of earning capacity (earnings are capitalized at 6 per cent).

In 13 States1 these companies pay a tax on gross receipts. In Louisiana, New Jersey, and Virginia this is called a license tax.” In West Virginia it is applicable only to foreign corporations. In Texas the tax is on the proceeds of separate messages.

In five States, Alabama, Mississippi, Montana, Tennessee, and Virginia, specific privilege or license taxes are levied. In Alabama and Tennessee this is levied at a certain sum per mile of line. This is also the case in Mississippi, except that a fixed sum is levied when the length of the line is in excess of 1,000 miles. In Montana this is a local tax levied on instruments of transmission.

In Arkansas, Kentucky, and Illinois, these companies are taxed on capital stock, and in Indiana on the capitalized value of capital stock and bonded debt, with property deductions. In Massachusetts (so far as concerns domestic corporations), in New York, and in Pennsylvania the provisions of the general corporation tax law are applicable.

In those States where there is no express provision for the taxation of these companies the property tax as applied to individuals is in force.

C. TELEPHONE COMPANIES.

The laws of 24 States provide for a tax based on cash valuation of property or of property and franchise. In California, Connecticut, and Delaware this valuation is determined upon a mileage basis. In Connecticut a valuation set on instruments is included. In Colorado, Kansas, Maine, Michigan, New Hampshire, South Dakota, and Virginia this valuation is a valuation of property generally determined upon a mileage basis. In Iowa, Tennessee, Utah, and Washington the tax is levied on the valuation of property and franchise. In Mississippi the valuation is graded according to the number of subscribers, and in Ohio it is a valuation determined upon the basis of earning capacity, as in the case of telegraph companies.

Thirteen States 2 levy a tax on gross receipts. In Louisiana and New Jersey this is called a "license tax."

In Florida, Georgia, Montana, Tennessee, Texas, and Virginia license taxes are levied on these companies. In Florida this is a graded tax based on the amount of capital stock. In Montana and Virginia it is levied on instruments. In Texas it takes the form of a specific annual sum to the counties. In Georgia there is a tax on instruments in addition to the annual license tax.

In Indiana these companies are taxed on a capitalized value of stock and bonds, and in Illinois on the basis of capital stock.

In Massachusetts, New York, and Pennsylvania these companies are subject to the provisions of that tax. In those States where the taxation of these companies is not the subject of express provision the general property tax applies.

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D. EXPRESS COMPANIES.

In 19 States these companies are taxed on their gross receipts. In Louisiana and New Jersey this is called a "license tax." In West Virginia the tax applies only to foreign corporations. In New Mexico it amounts practically to a tax on net receipts. In a number of these States, also, the tax is supplemented by the usual property tax, general corporation tax, or franchise tax.

In eight States-Iowa, Louisiana, Missouri, North Carolina, Ohio, South Carolina, South Dakota, and Virginia-a tax on each cash valuation is provided for. In Missouri the valuation is upon property and franchise; in Ohio upon capitalized earnings; in South Dakota earnings are taken into consideration, and in Virginia the valuation is on property.

Florida, Mississippi, and Virginia levy specific license taxes, and North Dakota a license tax graded according to population. Tennessee levies a privilege tax based on the mileage over which business is done.

1 Delaware, Georgia, Louisiana, Maryland, New Jersey, New York, North Carolina, Ohio Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia.

2 Alabama, Delaware, Louisiana, Maryland, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Vermont, and Wisconsin.

3 Connecticut, Delaware, Georgia, Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, North Carolina, Ohio, Rhode Island, Texas, Vermont, Virginia, and West Virginia.