Northwestern States Portland Cement Company v. Minnesota

PETITIONER:Northwestern States Portland Cement Company
RESPONDENT:Minnesota
LOCATION:S.S. Guadalupe

DOCKET NO.: 12
DECIDED BY: Warren Court (1958-1962)
LOWER COURT:

CITATION: 358 US 450 (1959)
ARGUED: Oct 14, 1958 / Oct 15, 1958
DECIDED: Feb 24, 1959

Facts of the case

Question

  • Oral Argument – October 15, 1958
  • Audio Transcription for Oral Argument – October 15, 1958 in Northwestern States Portland Cement Company v. Minnesota

    Audio Transcription for Oral Argument – October 14, 1958 in Northwestern States Portland Cement Company v. Minnesota

    Earl Warren:

    Number 33, T.V Williams, State Revenue Commissioner, Petitioner versus Stockham Valves and Fittings Incorporated.

    Mr. Johnson you may proceed?

    Ben F. Johnson:

    May it please the Court.

    I think it might help to start here with the nature of the Georgia tax.

    The Georgia tax is a — the Georgia Income Tax Act of 1931 as amended and the Georgia statute says that the taxes, the tax on net income, I’d like to read you the precise language of the statute if I may.

    The first section is the tax on individuals.

    A tax is hereby, now this is in the appendix of our brief page 57, a tax on individuals, a tax is hereby imposed upon every resident in this state.

    The tax can levied and collected and paid annually with respect to the entire net income of the taxpayer’s (Inaudible) at the time and upon having been non-resident with respect to his entire income, not here exempted, received by such taxpayer, from a proxy owned or from business cared on in this state can use its foreign rates.

    Now then the next section of that statute, which is set forth over on page three, because it’s more relevant to the question here than that, Section 92 3102 says every domestic corporation and every foreign corporation, shall pay annually an income tax, (Inaudible) to five and one-half percent —

    Felix Frankfurter:

    I’m sorry Mr. Attorney General, what page did you read?

    Ben F. Johnson:

    I’m reading now, I’ve just read about individuals.

    Felix Frankfurter:

    Yes I read that —

    Ben F. Johnson:

    Page 57 back, and now I’m back on page three —

    Felix Frankfurter:

    I beg your pardon, thank you.

    Ben F. Johnson:

    — dealing with the constitutional provision in the statute immediately involved, so that every domestic corporation and every foreign corporation shall pay annually an income tax equivalent to five and one-half percent of the net income from property owned or from business done in Georgia as defined in Section 92-3113.

    Now I simply observe at this point, that we tax income of residents and non-residents, if it’s received, derived from property owned or business done in Georgia, and we tax domestic corporations and we tax foreign corporations, on the income which is derived from property owned or business done in Georgia.

    Felix Frankfurter:

    Now whatever one may think about the Minnesota case that turns on the other statute as different in that Section 2 is just discussed.

    Ben F. Johnson:

    Clear and right to point, yes.

    William O. Douglas:

    Well what is — do you have a formula for apportioning?

    Ben F. Johnson:

    Yes, and that’s contained, I’m getting to that Your Honor.

    Now then —

    Charles E. Whittaker:

    Well, may I ask you General, is the word is used always (Inaudible) and its stock, resident then in Georgia, how the same tax with respect to local business as to (Inaudible)

    Ben F. Johnson:

    I think we’ve got to see this, and that is that, we may have a corporation that is in engaged in exclusively interstate commerce and yet nevertheless, some of its activities have taken place locally within Georgia, that is territorial within Georgia.

    Charles E. Whittaker:

    That’s not —

    Ben F. Johnson:

    Now that is — that’s not local business in the sense of your franchise tax, but that is local activity, which maybe receiving benefits and protections and opportunities from the laws of Georgia and from the Government of Georgia and the economy of Georgia, which developed.

    Charles E. Whittaker:

    But your own Supreme Court dealt it was not business (Inaudible), did it not?

    Ben F. Johnson:

    No sir, I don’t think so.

    Felix Frankfurter:

    Before you get to that question, if I may, Mr. Attorney General, since the phrase is from business done in Georgia, what the scope of that is with due regard to the Commerce Clause is a question of each particular case, is that right?

    In other words, there is no such trade exclusivity in interstate commerce or so on or domestic.

    There is a generalized trade, business done in Georgia and whether for taxing purposes or other Georgia legislative purposes, it is “Business done in Georgia”, involved with instruction not only of your local law, but of the limitations of your local law through the Commerce Clause, am I right about that?

    Ben F. Johnson:

    That’s the way I see it.

    In other words, to answer in part to your question, that is when our Court said that — they said this is an excise tax, they say just that, they say it’s in the nature of an excise tax.

    But now I say that they were not there giving a ruling or judgment of law as a matter of statutory construction, but they were there making a rule constitutional law, and as such were merely acting as an inferior court to this Court because this is the court that gives us those judgments with regard to constitutional law.

    Therefore, when they said, as in effect they said, that an income tax is a franchise tax, they were ruling not as a matter of statutory construction with regard to our legislature’s intent, they were saying irrespective of legislative intent, per se, constitutionally per se, that this is a franchise tax, and that, when they said that they were operating just as an inferior federal court and we are now here to get the last authority ruling with regards to whether or not an income tax is per se a franchise tax.

    Now that’s with regard to the interstate commerce question.

    Felix Frankfurter:

    Now let’s say that your Supreme Court, (Inaudible), your Supreme Court had said as the matter of construct, we do not think this is business done in Georgia, you couldn’t be here?

    Ben F. Johnson:

    I wouldn’t be here.

    Felix Frankfurter:

    And if we by any — if it should turn out that we sustain your court, on it’s view of the cons — of the federal — of the Commerce Clause, you could go back to your courts and then they could say what they say under the local statute (Inaudible) less of any limitation of the US Constitution, is that right?

    Ben F. Johnson:

    That’s right.

    Felix Frankfurter:

    All right.

    Ben F. Johnson:

    Now then —

    William O. Douglas:

    I still don’t see how (Inaudible) on the facts.

    Ben F. Johnson:

    Well I though maybe if we started with the nature and see that my statute is clear, they do have that little problem in that.

    Now to return to the facts and these facts, we never admitted that they were engaged exclusively in interstate commerce, we just said that the plaintiff characterized his activities to engage and include, and the Georgia Supreme Court said so, and therefore we will argue it that way.

    Felix Frankfurter:

    But your court – did your court in first instance make a finding of facts that they were exclusive engaged in interstate commerce, in your case, in the trial court, was there a trial court here?

    Ben F. Johnson:

    Yes sir, that —

    Felix Frankfurter:

    Did they make a finding that this (Inaudible) that the — that the activities and questions were exclusively in interstate commerce?

    Ben F. Johnson:

    Let me if I may, see just exactly what the trial judge did say there.

    William O. Douglas:

    The statute clearly makes that irrelevant?

    Ben F. Johnson:

    That’s right, in this regard and I think I would like to finish that about that statute and I’ll get to those facts.

    And I would like to say this — this other there because it’ll help us to sort of bring this thing along.

    First the point I wanted to make is the Georgia statute taxes the income of domestic foreign corporations alike.

    There is no question of discrimination about it in this case.

    They make no claim of discrimination.

    The next thing I’d like to say, and this is according to our Supreme Court, the Georgia statute purports to tax only the income derived from sources within the state, but it has no purpose to tax income from sources outside the state.

    And in order to do this it sets up a three fact formula, which is based on inventories, payroll and gross receipts.

    Now that’s not all that might be used, that’s the statutory formula and the Commissioner has authority to develop any other formula that more closely fits the particular facts of a particular case in order to bring about a fairer allocation, a fairer, a factor which more measure best than these passed upon the facts to fit the case.

    Now Stockham makes no claim in this case that – that their formula which was used in this case, taxed as income which was derived from sources outside of Georgia, except with regard to what was done at the home office there.

    Now, let me put that a little bit different.

    We will see in a minute that this — that these sale representatives in Georgia, traveling Georgia and in North Carolina and South Carolina and Florida, and so on.

    Ben F. Johnson:

    Now they are not saying at all that we are tying to tax income, derived from income producing efforts in North Carolina or South Carolina or Florida.

    They do of course say that we are trying to tax income which is derived in Alabama, because that’s where the home office is, and that’s where these contracts are accepted and the credit and so on, we will get back to that.

    In 1950, our income tax statute was amended to add this.

    Every such corporation, that’s in with respect of foreign domestic corporations, that’s right in behind that section, shall be deemed to be doing business within the state that engages within that state in any activities or transactions for the purpose of financial profit or gain, whether or not, such corporation qualifies to do business in this state, whether or not it maintains an office or place of doing business within a state, and whether or not such activity or transaction is connected with interstate or foreign commerce.

    Now that amendment, part of that amendment, the Georgia court had held, that our statute did not intend, as a matter of statutory construction, did not intend to tax income derived from exclusively interstate commerce, but from sources or activities in Georgia.

    So the purpose of this amendment is to exhaust the state’s constitutional power to tax income from Georgia sources, including income from exclusively interstate and foreign commerce, which is carried on within the state.

    Charles E. Whittaker:

    (Inaudible)

    Ben F. Johnson:

    Yes I think it was, I’m not too conversant with it.

    Now then, let me go back to the facts in our case.

    This was a Delaware corporation.

    Its main office was in Birmingham.

    Its factory, it’s only manufacturing plant was in Birmingham.

    It had an established scheme of distribution and that’s scheme was this, in four cities, other than Birmingham, it had warehouses and another seven — these of course were strategically located all over the United States, in another seven cities strategically located over the United States, they had what are called sales, service offices.

    Earl Warren:

    Offices?

    Ben F. Johnson:

    Offices, yes offices.

    Now then, I want to put this in, all orders which were received or accepted at the home office in Birmingham, and all shipments were remade FOB warehouse.

    Now then, I want to point out the differences in the Northwestern case, in so far as the facts are concerned, and then I’ll — because that’s fresh in mind and I — There are three main differences here, between our case, start from the statute, on the facts there are three main differences.

    First is that Northwestern had two salesmen and a secretary which was operating out of its Minneapolis — which was operating in, I should say and in and out I guess out of its Minneapolis office.

    And there were one to three owners that were operating in the state of Minnesota but not operating out of this office, they were operating of their home that’s in Northwestern.

    Our case we had — they had only one full time sales service representative that was stationed so to speak in this Atlanta office and then they had a full time secretary there and that’s — a difference in personnel.

    They had more personnel there than we did.

    Second is that their — these operators, salesmen whatever you call them, were confined to Minnesota whereas the sales service representative in Georgia also traveled in some in the surrounding states and the record shows that that in this he spent about two-third of his time traveling to these other states and about one-third of his time in the Atlanta office.

    The third difference is the volume of business, the volume of business which Northwestern got out of Minnesota went up to 48% of its total sales, but in our case it was only 1% to 2%, but in dollar terms that was a $150,000 to $300,000 worth of business.

    Now then as regards to due process, because I have got to show in order to win this case, I have got to show that these activities, I won’t call them local activities, these activities that took place in Georgia, even though they were wholly pursuant to interstate commerce, I have go to show that they were substantially enough to have received some of the opportunities and the benefits and the protections of the State of Georgia.

    Now then let me — I’ll say that that these differences that I have given you are really not material differences, because we think it is the quality of what Stockham was doing, the quality of Stockham’s establishment in Georgia and not the measurable aspects of it.

    I can illustrate that pretty simple, from the Northwestern’s case if you notice that one year they only have $10 tax and for the 10 — this is Northwestern, $10 tax and for the preceding 10 years that tax had run up to $8000 and for five years after that it again went up to $7000 or $8000.

    I don’t know why that happened, but it could have happened because they didn’t have much sales, but the record shows that its establishment was the same all during that time.

    Now you could take another illustration as I pointed out, Stockham we have three years involved here.

    The first year they had about a $150,000 of sales, the third year they had $300,000 which was about double.

    If it’s a quantitative thing at what point, and we are talking about jurisdiction to tax, at what point does jurisdiction of tax if it’s a quantitative thing.

    Ben F. Johnson:

    So I say it’s a qualitative thing.

    Now I like to say a bit about what we are not talking about.

    $300,000 of sales can be gotten out of Georgia on a number of different ways.

    They could have gotten $300,000 of sales out of Georgia by mail order business and we are not talking about mail order business.

    They could have had an occasional traveling salesman, go through there, and he may have been a good salesman and gotten $300,000 worth of business and we are not talking about that.

    As a matter of fact they may have had a proof of these traveling salesmen operating out of Birmingham and getting in there fairly regularly, but we are not talking about that.

    They may have even had an office in Atlanta, and this crew of traveling salesman may have used that office as a sort of mail drop, but we are not talking about that.

    So the question is what is the quality of Stockham’s establishment in Atlanta?

    Now when we speak to this, I think we are looking at the nature of what went on there.

    It’s substance that causal relationship between the activities that went on there and in these seven other places and the relationship of all of that is total activities.

    And I might say here that we are not talking about how Stockham might have acted, I mean how close it might have acted.

    I mean, instead of being expansive, it could have acted — stayed at home.

    Well we talk about how they did that?

    Now it is a fact in the record the Stockham had an office in Atlanta and this office was publicized as the office, as the Atlanta office of Stockham.

    They were listed in the telephone book.

    They were listed in the classified section under the (Inaudible) in city.

    They were — they sent out their letterheads and said that they had seven of these offices throughout the country and Atlanta was one of them and it was in all their literature.

    Now it was there as a part of a designed system of distribution, it was there permanently.

    It was there day to date.

    It was there year in year out since 1950.

    It was there, it was not there temporarily, it was not there transiently.

    It was there to compete with its competitors as the record says many of whom had inventory stocked of these very same goods in Atlanta.

    Charles E. Whittaker:

    (Inaudible) Section 9 (2) (c) 113?

    Ben F. Johnson:

    I think the sum total, the sum quality of it, I wouldn’t say that one factor — I would say this, that if they did have inventory there then that is an establishment of considerable quality because you get over when you peddle it, cases there almost — you see you are better.

    Felix Frankfurter:

    Did they have an inventory?

    Ben F. Johnson:

    No sir.

    Felix Frankfurter:

    They did not.

    Ben F. Johnson:

    But their competitors did.

    Felix Frankfurter:

    Yeah did they have a storeroom of samples.

    Ben F. Johnson:

    Not but they had a — they had all the catalogues, the literature.

    Ben F. Johnson:

    They had a secretary there who was in teletype communication with Birmingham.

    Charles E. Whittaker:

    (Inaudible), would it not?

    Ben F. Johnson:

    But it’s enlarged, — that concept of doing business if Your Honor please, and I think if your trade it all the way the back, it always has been in connection in due process and not in connection with interstate commerce.

    What I am saying is that, it was there to compete with competitors who were on the spot with their goods.

    It was there purposefully to get business.

    It was there with sufficient personnel to get the business and they wanted to get all the business they could get and they want to get in anyway they could get it.

    Now let’s see it another way; Stockham had no hold on its market through patterns on its products.

    It had no hold on its market through national advertising.

    It had no hold on these local wholesalers and jobbers by reason of exclusive dealership arrangement.

    Its product was a standard and common design, manufactured and sold by a number of competitors.

    Some of them as I said, had warehouse stocked right there in Atlanta.

    Its customers were independent wholesalers, independent wholesalers and jobbers who were free to buy or not to buy, to stock these goods or not to stock them, to push or not to push them.

    They were free to deal in competitive products and the record shows that their customers did carry one or more competing lines of the identical partners.

    The record also shows that Stockham did not seek to compete by price cut.

    Now that’s what I call a competitive and fluid, if you get what I mean, it was a fluid condition, a fluid market condition.

    They could get what business because they owned the spot at the right time to get it or it going somewhere else, that’s what I mean by fluid, sort of quick (Inaudible).

    You couldn’t fetch a thing on it unless you were right there, at the right time with the right kind of search because if you weren’t, it was going next door.

    (Inaudible)

    Ben F. Johnson:

    No, I wouldn’t say that, no.

    I am not trying to draw in an analogy here.

    As a matter of fact as I said that on the facts other than those three things and our name they were pretty much like.

    Now then what was Stockham’s response to this competitive condition?

    The stipulation tells, it said while not disregarding price as a factor Stockham sought in this competition to emphasize on the quality of its goods.

    Now this local establishment didn’t have a thing in the world to do with the quality of its goods, but it did have a function with regard to emphasizing first hand, face-to-face to these customers of theirs just what do you mean by quality pipe fittings.

    Second, and the stipulation goes on, Stockham saw in this competition to emphasize its good service to local wholesalers and jobbers.

    Now this good service is spelled further on in the stipulation.

    These — and in some detail, I hesitate to repeat, but it is fell out in considerable detail what they were there to do with regard to their customers and with regard to prospective customers.

    They were not at all instruments of emphasizing their good service and selling their good service but they were instruments of furnishing the service.

    They owned the stock.

    They were in direct communication, teletype communication with Birmingham.

    Ben F. Johnson:

    They could get those goods into Atlanta overnight by teletype and as almost as quickly as you could get them delivered from the competitor down the street with a stock of goods in Atlanta, they could get these goods out of Birmingham overnight, promise to deliver in the morning, because they had a man on the job right down the spot, they would expedite this thing, get it through and give these customers that good service that customers appreciate in tight place.

    William O. Douglas:

    Well, I still don’t get (Inaudible)

    Ben F. Johnson:

    Yes sir I’m — it’s all interstate commerce, it’s all interstate commerce, I am trying to show you that they had a — in quantity they had a substantial establishment there, quantity to note, but in the production of its income it was all in force.

    Charles E. Whittaker:

    (Inaudible)

    Ben F. Johnson:

    Sir?

    Charles E. Whittaker:

    It is – the statute does –-

    Ben F. Johnson:

    That’s what I am saying qualitative.

    Charles E. Whittaker:

    (Inaudible)

    Ben F. Johnson:

    That’s right.

    Now then the stipulation goes on.

    It says Stockham sought in this competition to emphasize a third kind, the development of a local demand for Stockham products through sales work among local architects, engineers, contractors, and others consulted and in a position to advise concerning the specifying the use of 5000 biddings including representatives of governmental and industrial use.

    Now this business of development a local demand, these local representatives were the chief actors.

    They could talk the technical language of architect and engineers and this is in the record and they could advise with them and pass on technical ideas.

    After all it’s the architect who writes up the specification and can specify Stockham products and therefore can control the products, which is going in to these businesses.

    Now it was also important that these wholesalers and jobbers know that this man was doing this local development, because every local wholesaler likes to know that his manufacturer is out selling his goods for him and preparing the market in preparing demand.

    So that was the third function which these local representatives were doing.

    They were going out there and building up a local demand than going to the local wholesaler and say look what we do employ, not taking orders that’s what was involved in the Northwest solidly, they weren’t taking any orders.

    If they got any orders, they would simply relay them into Birmingham.

    If they got a local architect who wanted the product, he would reaffirm to a local wholesaler or jobber.

    Felix Frankfurter:

    Suppose and IBM – suppose (Inaudible) IBM go around your state or any other state and demonstrate great value of these new electrical typewriters, make no (Inaudible) but just create a proper atmosphere and (Inaudible) have that wonderful machine.

    Ben F. Johnson:

    I wouldn’t say that any one of these factors all by itself established a quality —

    Felix Frankfurter:

    That’s what I said — you would —

    Ben F. Johnson:

    No sir.

    Felix Frankfurter:

    No it’s the totality of it.

    Now just I can get one thing more (Inaudible), the stipulation goes on to say this, that Stockham relied on, that Stockham relied on the personnel efforts of its sales service representatives who were stationed in these established sales — they relied on them.

    Now that if Your Honor pleases is a good summation of the facts and I suppose that we would conclude at 4:30 and I just leave it, it’d be better than starting with something else.

    Earl Warren:

    Yes, it’s 4:30, now we’ll adjourn.

    Ben F. Johnson:

    Thank you.