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AGO 1951 No. 011 - April 12, 1951
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Smith Troy | 1941-1952 | Attorney General of Washington

CONSTITUTIONALITY OF APPROPRIATIONS ‑- TAX BILL.

The form of the bill including general appropriations and a corporation tax is constitutional, but the validity of the corporate franchise tax is uncertain.

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                                                                   April 12, 1951

His Excellency
Arthur B. Langlie
Governor
Olympia, Washington                                                                                                Cite as:  AGO 51-53 No. 11

Dear Sir:

            This is in answer to your verbal request for our opinion as to the constitutionality of Substitute House Bill No. 1 of the 1951 Extraordinary Session.

            It is our opinion that the form of House Bill No. 1 meets constitutional requirements, but that the constitutionality of the tax included in the bill is uncertain.

                                                                     ANALYSIS

            An evaluation of the constitutionality of Substitute House Bill No. 1 requires the consideration of various aspects of the measure.

            The first of these is whether the fact that general appropriations have been combined with a tax act renders the bill unconstitutional.  On this subject we gave an opinion to the Speaker of the House of Representatives, dated April 4, 1951 [[Opinion No. 51-53-4]], to the effect that the combining of these items in one bill does not render it unconstitutional, since the legislature chose in this case to legislate upon the broad general subject of the support of the state government, and our Supreme Court has held that the legislature is at liberty to determine the breadth of the subjects upon which it will legislate and may combine sub‑subjects under one comprehensive title so long as they are in any manner related to each other and germane to the general subject.  A copy of that opinion is attached hereto in lieu of a more detailed discussion of  [[Orig. Op. Page 2]] that subject in this opinion.  From the authorities cited in that opinion we believe that if Substitute House Bill No. 1 were tested in the courts, it should be sustained as against any attack based upon a claim that it violates section 19 of Article II of the State Constitution which requires that no bill shall embrace more than one subject and that shall be expressed in the title.

            The next question which might be raised is whether in the passage of this bill it was so amended that its scope and object were changed in violation of section 38 of Article II of the State Constitution, which reads:

            "No amendment to any bill shall be allowed which shall change the scope and object of the bill."

            Our Supreme Court in a long line of decisions has held that in determining the constitutionality of an act it will not go behind the enrolled bill filed with the Secretary of State to impeach the validity of the law, and it will not examine the legislative journals or the legislative history except for the limited purpose of determining the meaning of ambiguities in the statute.  In the case ofState ex rel. Reed v. Jones, 6 Wash. 452, 34 Pac. 201,23 L.R.A. 340, our Supreme Court said:

            "* * * Upon principle, then, in view of the division into departments under our form of government, each of equal authority, one department cannot rightfully go behind the final record certified to it or to the public from either of the other departments.  And the judicial department is no more justified in going behind the final act of the legislature to see if it has obeyed every mandatory provision of the constitution than has the legislature to go back of the final record made by the courts to see whether or not they have complied with all constitutional requirements."

            That decision has been affirmed by numerous subsequent decisions of our Supreme Court, includingState ex rel. Dunbar v. State Board, 140 Wash. 433, 249 Pac. 996;Morrow v. Henneford, 182 Wash. 625, 47 P. (2d) 1016; and most recently,Casco Company et al. v. Public Utility District No. 1 of Thurston County, 137 Wash. Dec. 726 [[37 Wn. 2d 777]].  Thus, unless it should appear upon the face of the enrolled bill that it was amended in such manner as to change its scope and object, the Supreme Court would not inquire into anything that occurred in the course of its passage.  It has, in other words, left entirely  [[Orig. Op. Page 3]] to the legislature the enforcement of section 38 of Article II.  In the present case there is nothing upon the face of the enrolled bill which would indicate any violation of that section.  We do not believe that the constitutionality of the measure could be successfully attacked upon that basis.

            It has been suggested that the constitutionality of the tax provided for in the bill is imperiled by the credit provision in section 38 (h), which reads:

            "The amount of tax payable under this chapter by any corporation for any fiscal year shall be reduced by a credit equal to fifty per cent of the amount of the business and occupation tax paid to this state by it with respect to such fiscal year."

            This credit is, of course, available only to those corporations which pay business and occupation tax and is not available for the payment of other taxes, such as, the public utility tax.  We do not believe that the fact that this credit is available to some corporations and not to others affects its constitutionality if the tax is valid at all.  If the tax upon corporations is an excise tax, that is, a tax upon the privilege of doing business rather than a tax upon property, the legislature has an extremely broad discretion in selecting the subjects of the tax and need not follow a pattern of uniformity.  In the case ofState ex rel. Stiner v. Yelle, 174 Wash. 402, 25 P. (2d) 91, our Supreme Court, speaking of an excise tax, said:

            "This being an excise tax, the legislature, under the 14th amendment to our state constitution, has very broad power, and we cannot interfere with that power except for arbitrary action, clear abuse, or constructive fraud appearing on the face of the act or from facts of which we may take judicial knowledge.

            "'A very wide discretion must be conceded to the legislative power of the state in the classification of trades, callings, businesses or occupations which may be subjected to special forms of regulation or taxation through an excise or license tax.  If the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the law.'  Brown-Forman Co. v. Kentucky, 217 U.S. 563."

             [[Orig. Op. Page 4]]

            The extent to which this discretion of the legislature is allowed was expressed by our Supreme Court in the case of Puget Sound Power & Light Company v. Seattle, 117 Wash. 351, 201 Pac. 449, adopting the language of Chicago & Northwestern R. Co. v. State, 128 Wis. 553, 108 N.W. 557, where the Wisconsin Supreme Court said:

            "* * * 'The discretion of the legislature in this field is so broad that it is not competent for the court to mark the constitutional limitations of it other than at the farthest one might go without transcending all reason.'  * * *"

            Another expression of our Supreme Court on the breadth of the legislative discretion in selecting the subjects of an excise tax is found in Texas Company v. Cohn, 8 Wn. (2d) 360, 112 P. (2d) 522:

            "A state legislature has very broad discretion in making classifications in the exercise of its taxing powers.  A classification of commodities, businesses, or occupations, for excise tax purposes, under which the classes are taxed at unequal rates, or one class is taxed and another is exempted, will be upheld as constitutional if it is not arbitrary nor capricious and rests upon some reasonable basis of difference or policy.  The difference between the classes need not be great.  It may consist of physical and chemical dissimilarity of commodities or difference in the character or manner of their uses.  Classification may also be permissible if it is reasonably related to some lawful taxing policy of the state, such as greater ease or economy in the administration or collection of a tax, the selection of a fruitful source of revenue with the exemption of sources less promising, or the equalization of the burdens of taxation.  If any such reasonable basis for the classification exists, or conceivably may exist, then the circumstance that there is competition between a commodity or business which is taxed and some commodity or business which is not taxed, does not materially affect the validity of the classification."

             [[Orig. Op. Page 5]]

            To the same effect seeGruen v. State Tax Commission, 35 Wn. (2d) 1, 211 P. (2d) 651.

            Thus, since the legislature has almost an unlimited discretion in determining the subjects of excise taxation and is not required to levy excise taxes uniformly, we see no constitutional objection to permitting those taxpayers who pay business and occupation taxes to credit the amount of their payments against the corporation franchise tax and to deny a credit to payers of other types of taxes, provided that the corporation franchise tax is an excise.

            This leads to the consideration of whether the corporation franchise tax is valid at all.  The answer to that question must depend upon whether it is an excise tax.  Our constitution in Amendment 14, requires that all taxes shall be uniform upon the same class of property.  This has been held applicable to all ad valorem or property taxes but not to excise or privilege taxes.  The last expression of our Supreme Court on a tax similar to this was directly contrary to the constitutionality of this type of tax.  In the case ofPetroleum Navigation Company v. Henneford, 185 Wash. 495, 55 P. (2d) 1056, our Supreme Court held that a corporation franchise tax measured by its income was a tax upon property and since it did not apply to all taxpayers uniformly, was unconstitutional.  In so holding, the Supreme Court said:

            "The determinative question is whether the tax imposed is an excise or a property tax.  The 1935 act imposes a tax, measured by the corporation's net income, for the privilege of exercising its corporate franchise in this state, or for the privilege of doing business in this state, in addition to annual license fees.

            "The same question was presented in the case of Aberdeen Savings & Loan Ass'n v. Chase, 157 Wash. 351, 289 Pac. 536, 290 Pac. 697, 71 A.L.R. 232.  In that case, this court held that the 1929 enactment providing for a tax of five per cent upon the net income of banks and financial corporations was a property tax.  The 1929 act contained a recital that the tax was 'for the privilege of exercising its corporate franchise within this state.'

             [[Orig. Op. Page 6]]

            "Since the act imposes a property tax, it is subject to the uniformity clause of the fourteenth amendment of the state constitution.  Aberdeen Savings & Loan Ass'n v. Chase, 157 Wash. 351, 289 Pac. 536, 290 Pac. 697, 71 A.L.R. 232;Burr, Conrad & Broom v. Chase, 157 Wash. 393, 289 Pac. 551;Culliton v. Chase, 174 Wash. 363, 25 P. (2d) 81;Jensen v. Henneford,ante p. 209, 53 P. (2d) 607.  The property of the respondent may not be subjected to a tax not imposed upon the property of copartners and individuals.  Burr, Conrad & Broom v. Chase, supra."

            That case was decided by a six to three decision of our Supreme Court.  As may be seen from the quotation, this was not the first time that our Supreme Court had held that a tax upon the privilege of exercising a corporate franchise in this state measured its net income was a property and not an excise tax.

            In the case ofAberdeen Savings & Loan Ass'n v. Chase, 157 Wash. 351, 289 Pac. 536, 290 Pac. 697, a similar result had been arrived at likewise in a six to three decision.  Our Supreme Court in the case of Jensen v. Henneford, 185 Wash. 209, 53 P. (2d) 607, held that a tax upon the privilege of earning income was a property tax and rendered unconstitutional a personal graduated income tax.

            In the case ofJensen v. Henneford, 185 Wash. 209, 53 P. (2d) 607, the dissenting opinion of Judge Blake pointed out that the Supreme Court had held in the case ofState ex rel. Stiner v. Yelle, 174 Wash. 402, 25 P. (2d) 91, that the business and occupation tax which was upon gross income was an excise tax and was valid, and the same result was arrived at in Supply Laundry Company v. Jenner, 178 Wash. 72, 34 P. (2d) 363, and the dissent argues persuasively that there is an inconsistency in the holdings of our Supreme Court on this matter of what constitutes a tax upon property.

            In the case ofAberdeen Savings & Loan Ass'n v. Chase, 157 Wash. 351, 289 Pac. 536, 290 Pac. 697, our Supreme Court in holding the corporate franchise tax invalid relied to a large extent upon the decision of the Supreme Court of the United States in the case of Quaker City Cab Co. v. Pennsylvania, 277 U.S. 389, 72 L.Ed. 927, which had held unconstitutional a Pennsylvania tax upon the net receipts of corporations.  But in the case ofTexas Company v. Cohn, 8 Wn. (2d) 360, 112 P. (2d) 522, our Supreme Court held that the decision in the case of Quaker City Cab Co. v. Pennsylvania had been  [[Orig. Op. Page 7]] greatly weakened by subsequent decisions and declined to follow it.  Since the Supreme Court decided thePetroleum Navigation Co. case its personnel has changed entirely except for one judge.  It is possible that a newly constituted court might take a different view of the matter.

            Although the only direct holdings of our Supreme Court relative to the validity of a corporate franchise tax based upon net corporate income are directly against the constitutionality of the tax provided for in Substitute House Bill No. 1, we believe that a persuasive argument may be made to induce the court to depart from its previous decisions and hold the act constitutional.  While we regard the constitutionality of this tax as uncertain, we would by no means say that it might not be sustained if presented to the Supreme Court.

Very truly yours,

SMITH TROY
Attorney General

LYLE L. IVERSEN
Assistant Attorney General

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